A little while ago we were analysing the pricing strategy of a manufacturing business that sold to industry through a variety of large national distributors. They told us that they went to great lengths to stay sweet with the purchasing directors of the three or four large chains that serviced their market. They agreed to large double digit rebate discounts and lavished corporate entertainment on these important individuals including treating them to a champagne lunch at international rugby matches.

One of the things we do when we get digging into the commercial affairs of a client is to perform a little test we call Switch Point Analysis. We carefully consider everybody in the supply chain – end-users, influencers, specifiers and various people working in distribution – and ask ourselves could this person decide to switch our product for that of the competition or vice versa? … if so what is likely to make them do that? …and what role does price play (if any) in their decision?

The unfortunate thing we found (or fortunate depending on your viewpoint) when we looked into this for this particular client, was that the purchasing directors that they lavished all this attention upon were very unlikely to influence their market share. They were always going to dual source their type of product and from their lofty tower in head office they had no way of controlling the amount sold of each vendor’s goods.

We became increasingly convinced that the day-to-day decision about who would get the market share was in the hands of the fork lift truck drivers at the distributors’ branches around the country and that the most likely criteria for their choice would be something like: whose product was closest to the door.

Our advice was to ease back on the rebate agreements, make excuses and not go to the rugby, buy a box of baseball caps to distribute to the fork lift truck drivers and persuade them to put the product near the door for their convenience.

The Moral of the Story is: That purchasing people want you to think their power to decide the fate of your business is second only to that of the almighty. Stop and think about it for a moment and you will realise that there is nearly always someone else choosing whose product to buy and it is very… very seldom on price.

Do you remember the scene in the movies when the hired assassin opens the brown envelope and takes out a complete dossier on his next target?

Now I am sure that none of you have ever wanted to bump off any of your customers – no matter how difficult they are and no matter how little they pay. However there is something to be said for going into negotiations with all the facts at your fingertips.

A little while ago we completed a project which involved three senior directors going out to the market to present a new pricing system that we have helped them develop. The end result was that ten specific customers would end up paying quite a lot more. Seems they had been underpaying for the service they had been getting for years.

The culmination of our process was a full day and a half of training for the directors in question. We presented them with a complete dossier on each customer drawn from their own data and external sources. Each dossier included:

1.    A copy of the new price list (printed nicely and laminated so it looked like it wasn’t negotiable)

2.    Notes on the way the pricing mechanism works including some calculated examples

3.    A set of notes from the training sessions we had run explaining how to present the prices at this stage and how to answer common objections

4.    A history of the customer’s trading over the last three years showing ratios and trends indicating that their business had cost more to service

5.    A financial model showing how the new charges would affect their costs based on recent months’ activity

6.    A copy of their forecasts for their activity compared with actuals showing how hopeless they were at helping us plan the capacity to service them

7.    Details of the customer’s business with his marketplace – his overall strategy and performance, the price of his products, his approach to market etc.

8.    Details of the current relationship with the customer from the people at the sharp end including their quirks and how they make life difficult

9.    A list of all the little favours that were done for the customer at no charge (including all their cock-ups that we helped brush under the carpet)

10.A set of carefully thought through arguments supported by statistics justifying the cost increase and showing how they could work with us to save costs in the future by changing their behaviour

There was around £4m of profit either way riding on the outcome of these meetings. I can’t remember anyone being more thoroughly prepared.

The moral of the story is: Why would you go into major negotiations that could earn you or cost you millions without doing everything you could to prepare?