I’ve been updating my training course on sales negotiations this morning and it has got me thinking about the process some more. My general view of negotiations is that if you have reached this stage of the sales process, you have done your job well. While the deal may not be closed, your customer almost certainly wants what you have to sell. Why would they bother to negotiate with you if they did not want your product? Negotiation takes time and money. No one has enough of both of these to waste just to irritate a supplier. So, congratulations, you have a deal!
There is a saying that I came across that summarises this paragraph in a single sentence. It states:
People will not negotiate with you unless they believe that you can help them or hurt them.
Simply, if there is not something in it for them, then they will not get involved. So, if your customer is negotiating, then you know that they want your solution. If you have done everything well up to now, the rest of the sales process should be easy. However, it is not always the case. Procurement may get involved!
Many companies have a procurement department that is responsible for buying products. Indeed, I know some companies where the Economic Buyer is not allowed to discuss the price of a product; this must be done by procurement. This is to avoid the possibility of bribery and corruption so is a reasonable practice for the customer. However, it introduces significant complications for the sales person and often for the Economic Buyer.
Procurement’s role seems to be to acquire the solution at the lowest cost and with the least commitment on their behalf. They are not the end user of the solution so frequently do not understand the value of the solution. So, when you have spent all of your time selling value, all of a sudden you are dealing with a group who are just focussed on price. It is very difficult to avoid this scenario if it is the practice within your customer; all you can do is to minimise the impact.
To do this, you have to be absolutely sure that you understand everything that is driving the customer to buy your solution and what value they will derive from it. If negotiations get difficult, you can keep focussed on the value and use the knowledge that you have about the customer to dictate terms. In the end, procurement will be forced to consult with the economic buyer who will hopefully understand the value and reasons for your offer.
The other preparation that you should do before negotiating with procurement is to look at the deal from their perspective. To that end, it is highly worthwhile reviewing the Kraljic Portfolio Purchasing Model. This comes from a paper by Peter Kraljic in September 1983 in the Harvard Business Review called “Purchasing Must Become Supply Management”. (https://hbr.org/1983/09/purchasing-must-become-supply-management.)
The paper was designed for purchasers to maximise supply security and reduce costs, by making the most of their purchasing power. In doing so, procurement moved from being a transactional activity to a strategic activity. As a result, it is extremely useful for sales to understand the analysis to understand how it is being used “against you”! While the model involves four steps for procurement, only the first is particularly relevant for sales.
Each solution that a customer buys will be classified according to whether it is a supply risk or has a profit impact.
Supply risk is high when the item is a scarce raw material, when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.
Profit impact is high when the item adds significant value to the organisation's output. This could be because it makes up a high proportion of the output or because it has a high impact on quality.
Each product is then classified as either
Strategic - a high profit impact and a high supply risk.
Leverage - a high profit impact but a low supply risk.
Bottleneck - a low profit impact but a high supply risk.
Non-critical - a low profit impact and a low supply risk.
The activity of procurement will then vary depending on how each product is classified. It is well worth trying to understand how your product fits within the matrix before you negotiate so that you can anticipate the approach that procurement may take and how to respond to your best advantage.
If you are interested to know more about this, you can read my eBook about it, here, or sign up for a training course here.