HOW TO DEFEND YOUR PRICE IN FRONT OF THE CUSTOMER
In times of crisis like COVID-19, reliable cost management processes are required. Suppliers who restarted production with changed capacities are forced to consider and recalculate additional cost factors and changed circumstances. Reduced production and purchase quantities usually lead to renegotiations with customers. Questions regarding cost transparency and negotiation management should be clarified in advance: Under what conditions is the production profitable? Which strategy should be employed in (re)negotiations? Many sales professionals worry that if they share their cost structure with customers, then the buyer will use it against them to negotiate the price down.
So why would you want to share your costs with the customer?
In many industries – including the automotive industry – price transparency (including cost breakdown) has become a requirement that needs to be considered in new business. This requirement can be used to improve cost transparency and customer satisfaction and to build a trusting relationship. It can also increase the potential for future opportunities. For example, it could lead to consideration of opportunities like receiving future inquiries, engaging in new pre-development work, and possibly even be- coming a target supplier for further production (to avoid an open market test).
We have identified four steps that will help you when it comes to re-defending prices to the customer and conducting negotiations on eye level.
Step 1: Believe in your pricing strategy
If you do not believe that you priced your product fairly and reasonably, how can you expect your prospect to believe your price is fair and reasonable? You can’t. However, it’s important to spend time developing a strong pricing strategy that includes your customer ‘s value perception and your competitive position. You must also under- stand your expected costs, and how much profit your company needs to make on a specific product. Then you can derive the price with confidence.
Step 2: Understand your true product costs
Errors in pricing are all too common, generally due to errors in costing. We see this commonly in large companies which are still using complex spreadsheets to build costing models. Your company must develop internal expertise in defining the product cost structure. This means considering the cost of purchased parts, material, labor, overhead, etc., – the cost must include every item at a detailed level. This is much easier to accomplish with an enterprise-class costing system, which tracks a level of detail (and applies version control) that is virtually impossible with spread- sheets.
Step 3: Collaborate with your customer
Best practices in pricing include discussing cost transparency with your customer in advance of submitting a cost breakdown. You should have a pre-agreement on the cost breakdown that you will be submitting, including the format, the assumptions, and which reasonable surcharges may be allowed. Know the customer, know how they are going to use the cost breakdown, understand how they are going to estimate and analyze your quote, and know what will happen if you do or don’t supply the cost breakdown. Having this understanding should greatly alleviate concerns to discuss about costs. In other words, make the buyer earn your cost transparency with a quid pro quo. For example, you could offer cost transparency, not just to renegotiate existing contracts. You could use the discussion to obtain an RFQ for a new vehicle coming to market or be involved in early discussions about a new product. Be creative and generate a win-win situation for both parties.
Step 4: Explain your price openly and with confidence
Once you believe in your pricing strategy and have pre-agreement on the cost break- down, you are in a really good position to defend the price. Now you can begin to legitimate your price. Explaining to the customer that you believe the new price is reasonable for x, y, z reasons. It is also the right time to compare your product’s features and benefits with those of the competition to show why you are offering the better choice. Provide the cost breakdown with an explanation to help your customer under- stand your costs.
This approach makes it possible to use cost breakdowns to protect profit margins in- stead of making them an additional burden in a crisis like COVID-19. If minimum requirements cannot be met, there is not only the risk of further losses during the crisis. At the same time, the opportunity to position the company for potential new business is missed.
Contact
Rüdiger Stern
President for North America, FACTON Advisory Board, Society of Cost Engineers