Many sales teams are asked by their B2B customers to reduce prices to support them during these difficult economic times. A pattern that is all too familiar for many sales teams. This article proposes an approach on how suppliers can respond to this procurement tactic and how sales organizations can move the dialogue back to a value adding conversation with the customer and their professional buying team.
“Never let a good crisis go to waste.” What Winston Churchill formulated in the 40s, has become a business management mantra. Any economic downturn is used as an excuse to optimize company cost structures and to improve inefficiencies. This is not going to be any different this time around in the current COVID19 health crisis, turned economic crisis.
The resulting actionism by many companies and their respective procurement functions will unfortunately translate into the infamous ground hog day for many suppliers and B2B sales organizations, receiving yet another request to support their customer during these (again) unprecedented and extremely difficult times.
If you are in B2B sales you either have been or will surely be contacted shortly by your customer’s procurement team asking for help, or more bluntly put, money.
Why your customer asks for money.
Let me be clear, this time around we are indeed in an extreme situation with end consumer demand tumbling fast, corporate investments on hold and world trade under extreme scrutiny. Value chains and supply chains are disrupted, and “cash is king” more than ever before. In these circumstances reducing costs fast is for some businesses a matter of life or death (i.e. bankruptcy / chapter 11). Every stone needs to be turned to see how the cash burn rate can be contained, and how cost can be reduced fast.
Such price reduction requests that you are about to, or have already received from your buyer follow normally a standardized process: indiscriminate savings and cashflow targets are defined by the customer’s CFO and passed onto their procurement function for execution; the existing supply base is grouped into categories depending on their contractual value to the business; the suppliers are then approached through letter or email, in which they are asked to lower prices immediately by a certain percentage and/or to increase payment terms by x-many days. The respective amounts are based on the classification the supplier falls into. The request is often underpinned with direct or indirect threats by the customer to reduce contracted volumes or contract lengths, as well as suggestions to cap access to future business opportunities in case the supplier does not support the customer demands swiftly.
An aggressive buying tactic indeed. It might be merited under certain circumstances but most often it bears extreme and undeniably risks to the buyer’s organization. It is an approach that can seriously harm supplier relationships and destroys trust that has been carefully developed over the years. It can endanger supplier collaboration on new product developments, on supporting future market expansion plans or tight supply situations, leaving the buyer’s business at a competitive disadvantage, resulting in lost sales and lost market share in a worst-case scenario.
Despite these significant risks, the approach has unfortunately become a rather inflationary mannerism of many procurement organizations. They apply these tactics on a regular decadence with their supply base, real crisis or not.
This trend (or abuse) is further aggravated by an ever-expanding consulting industry specialized in delivering short term cost optimizations to their clients through offering these tactical supplier cost cutting programs. The latter are independently managed with little to no direct input from the client’s buying team. These engagements are based at times on questionable gain share agreements under which no consultancy fee is charged, but a certain percentage of the generated savings are kept as renumeration. 50% of the realized savings is not an uncommon to be retained by the consulting firm. It is no surprise that these programs can become addictive to certain companies within your customer portfolio, pressured to deliver against short term money saving goals, in spite of the risk of jeopardizing medium to long term supplier relationships.
How you should respond to the request to cut prices.
The question you and many other suppliers are being faced with is hence: “How should our sales team react to these cost cutting requests by our customer and their buying team?”. A tough call indeed, but there is no reason to be discouraged. There are ways on how you can manage this situation that will allow you to actually benefit from this buying tactic.
Maintain an open dialogue and structure your response.
The first and probably most import point to consider is to maintain an open dialogue with your customer even if they have decided to engage in such a program, managed by their own buying team or through a consultancy firm. We all have the tendency to respond tactically when faced with an aggressive tactic ourselves. Nevertheless, this approach in most cases will only result in a lose-lose outcome and hence should be avoided by maintaining an open and consultative spirit vis-à-vis your customer.
Equally important, before you respond to your customer’s request for help focus your thoughts on how you will interact with them and how you structure ‘the what’, the content you will relay to the buyer. In these situations it is crucial that your communication is concise and to the point. Beating around the bush and incoherent messages will only be seen as further justification to the buyer of being on the right track with their aggressive procurement approach.
The following five steps will provide with this important focus. They outline to you some key concepts to maintain an engaging dialogue with your customer, aimed to deviate their attention away from their initial focus of a per unit price discussion, discounts, etc., to a genuine and engaging conversation about where you can offer meaningful and sustainable help to your customer during these difficult times.
It is best to prepare these five steps thoroughly before you interact with the buyer following their cost cutting request. Script your communication approach and write down your points along these 5 elements, showcasing that you are fully invested in the relationship and that you have understood their underlying business challenges.
Step 1: care about your customer.
The first step sounds rather straight forward but is the most common area that is neglected by many sales teams especially in high pressure and extreme situations. Caring means to build a thorough understanding of your customer’s value chain, end to end. Map out all stages starting with your supply base, your operations, all the way up to your customer’s customer and the end consumer. Where is value added or lost throughout the network? What combined or independent actions by you, your co-suppliers, your competitors could lead to improved efficiencies on the customer’s side? How can you help realizing these efficiencies? What savings can be derived by optimizing your supply chain, e.g. through adapting the minimum order quantities, by elaborating improved forecasting mechanisms, etc.? What are your customer’s total cost in use elements that you can work on without decreasing your per unit prices? The opportunities are endless and at times even more significant than initially anticipated. Do not expect your buyer to know all ins and outs of the value chain themselves. You might possess those important insights that could trigger ideas and projects your customer might not have even thought of. List and prioritize your findings. Estimate values behind it and determine what support would be needed on your side and the customer’s side to implement these efficiencies fast. Present and communication areas that can be timely implemented and that require minimal input from the customer first before you delve into the more complex projects.
Below, an example of a value chain map.
Step 2: compete for your business and understand your level of competitiveness.
Many suppliers believe firmly that they are strategic to their customers. In many cases this is unfortunately not true. There is nothing more counterproductive in your engaging conversation with your buyer than being misaligned between your perception and their reality. Your buyer has specific needs depending on the category you fall into as a supplier. If you are non strategic and start offering leading innovation you might lose your buyer early on in the conversation. Instead, you showcase that you actually have not understood your customer’s needs. It is hence tremendously important that you clearly identify what it is that you contribute to your customer’s business to be able to assess how you can help them most. Ask yourself: Are you a strategic supplier to them or rather a replaceable commodity? How do you perform compared to your competition? A good approach to structure your thoughts is to apply the tools that your buyer would use to answer these questions. One of these tools is the Kraljic matrix that is used by many procurement teams to determine supplier categories and to derive their respective needs and sourcing actions. Apply it yourself and understand your competitive position. Take your findings back to step 1 and readjust your project list to reflect your competitiveness and your strategic level, seen from your customer’s point of view.
Below an example of a Kraljic 2×2 matrix with its four supplier categories and respective buyer assessments and actions.
Step 3: continuously improve.
Again, one of these points that you probably can fully relate to as a supplier but another area where most sales teams have underperformed from my personal experience in my procurement career. Do not wait until your buyer is requesting price cuts from you. Provide ideas and projects on a regular basis (during quarterly review meetings for instance) that ideally anticipate and address their challenges. Suggest proactively interventions in the value chain and your supply chain. If you showcase a continued understanding and support for your customer’s business challenges you will be less in scope to make part of a tactical cost cutting program in the first place. In case you have been lagging behind in in this area, treat the dialogue that you are about to embark on as an opportunity to lay out a multi-year plan on how you will assure your customer’s competitiveness moving forward. Announce (or reiterate) your commitment of your continuous improvement plan during your response meeting with your customer. Expand on the needs you have identified under step 1 and stress the measurable value you can create in the partnership. Every crisis will come to an end and your customer wants to make sure that they have only the strongest partners on their side than continuously contribute to build value end to end.
Step 4: communicate clearly, proactively and regularly.
Understand what your individual buyer’s challenges are and what stakeholder they need to keep entertained, informed, happy, etc. During a price cutting exercise, the customer’s CFO and CEO might be the most critical stakeholders that your procurement counterpart might need to communicate with. Manage your communication approach in a way to support your buyer’s efforts. E.g. provide your buyer with valuable market information on your input price developments in a format that their CFO can understand. This will help your buyer to better position opportunities and risks with regards to these cost cutting efforts.
Map out clearly which stakeholders your buyer and you as an organization need to respond to and derive an action plan that showcases your commitments to thrive your responsiveness to your customer’s organization. Who is important? Who is influential?
Below a simple stakeholder assessment tool that help you to drive further clarity of your communication approach. Who are your buyer’s key stakeholders and what are the actions you can drive to support your buyer to keep them engaged and satisfied?
Step 5: define your goals.
What does winning look like for you? Know what you want to get out of this customer relationship. This might be a straightforward point but from personal experience, again, many suppliers tend to lack clarity vis-à-vis what success looks like to them. In case the buyer needs to guess your goals then most likely they fall back onto the notion that you are only keen on increasing your margins. This is the perfect buyer justification to push through a price cutting exercise without losing a second thought on it. Be clear on what winning means to you and your organization in the relationship with your customer and transparently share it with your buyer in your response. Provide them with your vision short to long term and excite them about the future relationship that will create value for you and your customer.
In my many years as procurement professional in which I unfortunately needed to run similar cost cutting exercises on numerous occasions I have noticed that those suppliers that follow these five steps, retaining the dialogue around value and relating to my underlying business issues, “survived” these programs much better than those that merely followed suit and reduced prices, no questions asked, or those that engaged in a confrontational lose-lose game.
The five steps are just a small snapshot of what you can do in response to a price reduction request. These are though the essential five steps to structure your thoughts, and to plan your communication approach with your buyer. Walking your buyer through how you care, how you compete, how you continuously improve, how you respond and what winning means to you, will lead to a more meaningful dialogue around what you can achieve together as partners during these difficult times.
When the relationship with your customer needs some tough love.
Not every buyer will be willing to listen to your collaborative message track and project plan. Some of them will have outsourced their tactical cost cutting program to the aforementioned consulting firms and might deny all direct contact requests.
If direct dialogue plays out to be difficult, a counter tactical approach is required. Your advantage in this case? You know exactly what your counterparts wants! Short term savings. Cater to this singular requirement and suggest a price model to your customer that creates short term savings, but increases prices shortly thereafter. This solution caters to the KPIs of the consultants that have a 3-6 months horizon at most and which will be long gone when the price increase will materialize. Yes, you might incur a hit to your cashflow but you are able to keep the account.
Also ask yourself, what is the baseline that the consulting firm is targeted against? Current contracted price? Previous 12 months average? A budget? Depending on this metric your contributions might be actually more cosmetic than you initially think. Your price cut might not even be a reduction at all.
Furthermore, do the consultants necessarily know the real market price of your product or service? What market benchmarks do they most likely use? Showcasing a savings versus a (published but inflated) market index might be already enough for you to comply with their demands.
Stay collaborative.
Obviously, this approach is a tactical move from your part and little satisfactory when the relationship to your customer should be value focused. A suboptimal game that will benefit only the consulting firm in the end, but sometimes there is no other option but to counter your customer’s buying tactic in an opportunistic way yourself. Wait and seize another opportunity to bring the relationship back onto a collaborative track and push continuously for an open and value adding dialogue that will create a true win-win business relationship. Whenever your customer and their buyers are ready, make sure that you have prepared the aforementioned 5 steps to engage them in a value adding dialogue.
Written by Jens Hentschel, founder of THE FIVIS PARTNERSHIP and inventor of FIVIS, the model that helps you build customer centric B2B relationships.
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