Price Transparency In Negotiations

“I need you to break this price down for me.”, “What is behind this price.”, “Please show me the cost build up.”, “Please provide full price transparency.” If you’re a salesperson you’ve heard this request or some request of this question more times than you care to count. If you’re a procurement person, this is a part of your daily repertoire. You expect price transparency. Why is price transparency such a hot topic? Why do procurement people need to know what the build up is? Why are sales people so protective of it? Are price, cost, and value the same things?

Procurement Perspective
Procurement people are designed and trained to be analysts. Good procurement people need to know what’s behind the price. Why? Because they believe that what makes up the price generally determines the value that the company that they are working for is receiving. “What am I paying for?” Is ultimately the question that they are asking. It’s not enough for them to do market bench-marking to determine who is most competitively priced, they need to know that even if the product is competitively priced that they know what they are paying for. In many cases, procurement people require full price transparency on the product or service.

For example, its not uncommon for a procurement person to ask the salesperson of a pump to break down the price into the following categories:

  • Materials
    • Steel
    • Plastic
    • Rubber
    • Other Materials
  • Labour
    • Direct Labour
    • Indirect Labour
  • Overhead
  • Shipping
  • Margin

And then, even after the salesperson has provided these things, a good procurement person will do research on each sub section to determine whether they are being overcharged and request the salesperson to reduce pricing accordingly or tie raw material costs and sometimes even labour costs to indices to maintain objectivity in price changes.

Procurement people look within the price to determine value. Of course, salespeople could always choose not to provide this information, but that rarely happens, because they’ll get the following line or some version of it: “All of your competitors have provided this information.” And so essentially they get pressured into revealing the info they don’t want to disclose.

The definition of “value”, “price”, and “cost” is probably the largest worldview difference between salespeople and procurement people. Generally (I said generally, so don’t send me angry emails saying, “I don’t think that way!”) speaking, procurement people believe that the value of a product or service lies in the buildup of the price. Whereas salespeople believe that the value is what the product/service delivers and price is therefore largely irrelevant as it is determined by what the market can bare. But are either of those the true value?

Sales Perspective
“The price is the price.”, “Why do you need to know what’s behind the price.”, “No you cannot have the buildup of the price.” These are all thoughts a salesperson has thought. When a procurement person starts questioning the price, generally (see there it is again), salespeople start to get very nervous and defensive. This is because they believe that their margin and revenue is in jeopardy. Rightfully so. It is. Procurement people will grind on the build up if they feel they are being overcharged and so it’s natural for a salesperson to get nervous about sharing this information.

Salespeople believe that the value of a product or service isn’t determined by the buildup of the price but in what that product or service does for the customer.

And here we come to a conundrum. If procurement people believe that the value of a product or service is determined by the buildup of the price, and salespeople believe that the value of a product is determined by what that product or service does, then how do we collectively (as sales and procurement people) move past this issue or at least work with it in the future?

Recommendations
This is a much bigger issue than one blog post can solve, and I’ll be digging into this topic on a future podcast, but I do have a few recommendations:

Procurement People

  • Focus on ROI – Procurement people, get your heads focused on ROI as well as of price vs. cost. Look, I’m not trying to minimize the value of a good grinding negotiation, nor am I saying that you shouldn’t be questioning the price, but I am saying that you need to be more strategic in your approach.
  • What is true value? – What is the true value that the product/service makes? Now sure, maybe you manage the MRO category, and this doesn’t really apply much to you, in that case, yes, you’re going to be stuck in a lot of negotiations on price. But other than this category (and sometimes even in this category) you can get a lot more strategic about how you purchase.
  • What Value Do You Deliver? – The value you deliver to the organization isn’t just the cost reduction or avoidance that you generate. It’s also in the risk you reduce, the stability you create, the timeliness of the contracted product or service, and ultimately the ROI that the product or service generates. If you can focus your discussion with the sales person in determining what actual ROI is being delivered, then you’ll come a lot further determining true value.

Salespeople

  • Learn to Talk About Value! – Salespeople, please learn to talk about value! I’ve heard hundreds (perhaps thousands) of sales presentations focus on features and yet they barely scrape the surface of benefits. In fact, poor sales presentations may actually be my biggest pet peeve. Seriously,….practice your presentations. Because your sales meetings suck!
  • What ROI Does Your Product/Service Deliver? – Step 1 – Figure out what benefit your product or service provide to the organization buying it. Seriously, I can’t count the amount of times a salesperson has no idea how their product/service will benefit the org I’ve worked at. Step 2 – What ROI does it truly deliver? Technical features are great, but honestly, procurement people just don’t care. They don’t care about the latest feature on your product. They care only whether it adds value and if it costs more money. Sounds harsh, but it’s true. Procurement people care about the following (order dependent on the org they are working for): Safety, Risk, Cost, Quality, Speed of Delivery, and ROI.
  • Get to Know the Procurement Person – Ask open ended questions! Find out what’s important to the procurement person and to the org they are working for and to the business user of the product or service that you’re selling. You don’t have just one stakeholder and you’re not selling to just one stakeholder. Take the necessary time to establish what’s actually important to the various stakeholders involved (and ultimately who the most important stakeholder is). Once you’ve determined this, then you can speak to the value that you product or service provides to each of the stakeholders by order of what’s most important to them.

Price transparency is a HUGE topic and we’ve only scratched the surface, but ultimately I think both sides of the table need to focus more on real value (ACTUAL ROI) than anything else. Start thinking about how you engage in your discussions around price vs. cost. vs. value. They’re not the same things and yet we use them seemingly interchangeably.