Chapter 15
The West: Price => Value-AddBe Strategic, Think Scenarios
The supreme art of war is to subdue the enemy without fighting.
—Sun Tzu, The Art of War
The Discounting Game (Don't Go There—Compete on Value)
Western companies try to maintain a global pricing and margin strategy, which is a major challenge in some geographies; we struggled with this particularly in the Asia Pacific region, with its extreme discount levels. The West is often reluctant to recognize that price is the major differentiator in many markets. Total cost of ownership (TCO) propositions don't fly with many customers. And the pricing models or discounting levels of many new entrants are so flexible that they can accommodate the pricing sensitivities of any market.
The ongoing question and challenge for us was, “How do we balance the need to maintain margins globally against the reality of what some customers are able and willing to pay, particularly given the low-cost options being offered by emerging competitors?” Insisting that we maintain our standard margin levels meant risking market-share loss or even being shut out of new markets in emerging countries.
The answer is always something in the middle: Offer discounts while also protecting your price by selling the added value of your product. Know what makes it worth more than that of your competitors, present those points to your customer, and ensure that these differentiators are relevant to your target customer. Hamburger buns with sesame seeds are irrelevant to vegetarians, but calling them veggie-burger buns will capture their attention.
The one rule we repeated over and over again in our deal support engagements was:
Never compete with China/emerging competitors on price; they will almost always win. Emerging competitors often compete on price as a market penetration strategy. As stated earlier, when new entrants have average products and little to no brand equity, they will offer prices that are hard to resist to entice customers to take a risk with their companies and to try their products.
An established supplier with a proven product and a known brand should be aware of this tactic and should avoid getting into the price game with the new entrant when defending its position. Perpetually going back and forth on pricing leads to a deep discounting race to the bottom, and no one really ends up winning in the end. The one party who might benefit is the customer, if he ends up getting his branded solution (your offer) at a greater discount than you had originally intended to offer. But even then, the customer might lose out on some of the added benefits that an established supplier might have offered if she didn't have to compromise on price. Customers can end up losing some of the value-added services that suppliers may eliminate in order to make up for the margin deterioration.
The key is to know your value relative to your competition's, establish your discounting thresholds/boundaries, and defend your position based on your value-add and your whole offer—in other words, know all that you bring to the table, not just your price.
In one instance an emerging-market customer admitted to us that he really wanted to choose our solution and not the Chinese supplier's competitive offer, and asked if we could come down in price just a little bit more. He did not necessarily want us to match the competitor's price, but getting a little bit of an additional break helped him feel better about selecting our known brand and quality solution.
Learn How to Position Your Premium Pricing
It is easy to suggest not submitting to discounting pressures and to hold on to your premium price because you have so much more to offer, but it is easier said than done. Here are some approaches to consider.
Think Big Picture and Longer Term
Focusing on the big picture and the long term is important in the new global competitive environment, particularly when you're competing for emerging-market business. But how do you do this? Six recommendations for making this shift follow.
- Know your customer. Ensure the offer is relevant to your target customer. As mentioned before, one big mistake that Western companies make is their one-size-fits-all attitude when pitching their solutions to prospective customers. Because it's worked before, they think it will work again.
It is essential to identify what is important to your customer segment and then customize and target your pitch—your whole solution—to address its priority wants and needs. Emerging-market customers don't need a Cadillac if they have yet to learn how to drive.
- Articulate your whole offer. Solely playing the discounting game is not a winning tactic. So, how do you maintain your premium-price position and still win the deal? Chinese companies' solutions will almost always be lower in price than those of Western companies. Remind the customer how much more you bring to the table (see Chapter 17, which discusses positioning the whole solution). By articulating a value-add that is relevant to your customer you may bypass the need for additional discounts, or you may identify additional ways to protect your margins by shaving off parts of your offer that are not requirements, thereby enabling the justification of a discount. Examples of pertinent value-adds that can be compared to those of the new entrant competitor may include the history of your company, successes with similar customers, headquarters support, the global reach of support teams, knowledge base (accumulated number of years of expertise), competence of your staff, local R&D and training facilities, and awards.
Ask customers to evaluate the TCO if they were to select the cheaper China solution and to consider the Chinese company's potential to support future upgrades.
- Get clear on their ability to pay. There is often a dance around the pricing, so it is helpful to understand customers' true capacity to pay. Find out if they have a budget, and if so, if there is a certain date by which it needs to be spent. Moreover, find out if they have sources of financing or whether they are eligible for other funding options.
- Take a partnership approach and get creative. Once you know what they have to work with, you can take a partnership approach and create solutions that work with their budgets, instead of getting into the discounting game. Identify exactly what customers need and what budget they have and work the deal around these elements. You might also help them find and secure the financing or funding, depending on how important this account is to you. Maybe your company has a strategic financing division? Or perhaps your company has access to third-party financing and can secure the loan for the customer. (Of course, there are many issues to consider in pursuing this option.)
- Establish new business models. Establishing new business models that focus on showing that you are in it for the long haul with strategic customers is critical for succeeding in the new global competitive environment. More details on this will be covered in later chapters.
- Ensure an apples-to-apples comparison; know your competitor. Sometimes when the deal is too good to be true or the competitor's pricing is especially aggressive, the competitor is likely substituting lower-end products for the same solution. In the networking industry, for example, we've seen lower-end routers being positioned for core networks. And naturally, the less robust product is going to allow for lower pricing. This is where knowing your competitors' products and what they are pitching is really important. Set your customers up for success by informing them about hidden elements and any potentially negative consequences of choosing your competitors' products; demonstrating that your competitors' pricing is in fact not competitive or comparative will help you justify the pricing of your offer.
Defend Your Value-Add
Defend your value-add. Don't be shy to stand your ground and push back.
Verify that your company is indeed your customer's supplier of choice. In other words, confirm that he really does want you, and that price is the only obstacle to closing the deal. Realize that buyers always like suppliers to feel as if they are in a competition with other sellers, whatever the true ranking (or status) of a supplier's position might be.
Use polite questions when saying no to their requests for better pricing. These may include inquiries such as:
- “We've spent a lot of time discussing how to solve your problem with our solution and have explained our positioning. Has anything changed?”
- “Is there anything you would like us to remove from the solution offered?”
These kinds of statements remind the customer of the value-add of your solution and help reinforce why your premium price is justified. It shows that your pricing was well thought out and based on value, and that your pricing is not simply based on being responsive to competitive pressures. Additional negotiation tips include:
- Negotiate only with decision makers (identify who they really are).
- Any preliminary discount offered to non–decision makers (influencers) becomes a starting point for the real negotiations with decision makers, but such offers may be necessary to keep you in the running and in a dialogue with the potential customer.
- Try asking for something from the buyer before giving another discount or financial trade-off. Again, this reinforces the value of your overall solution and the justification of your price point.
Sell Like a Company, Not Like a Business Unit
Sync up your company strategy across the different divisions. Behave like one entity, not a bunch of siblings with rivalries. Be one team with one vision.
Upon identifying what is important for your growth and long-term survival, commit to your long-range strategy. Be ready to take some short-term hits/pain in the name of the bigger picture.
Many Western companies are siloed into business units, each of which is compensated independently on its sales. Usually individual units are not encouraged to operate holistically across different divisions with one customer. As described earlier, however, if individual units were rewarded for working across profit centers, more opportunities could be created by providing broad-based solutions to customers, and cash-cow products could compensate for the lower margins of new product placements. Customers will feel better as you consider their needs in a more integrated and comprehensive manner, and you will establish stronger partnerships and strengthen entrenchments at the customer site. When revenues are considered more broadly across the company, it also enables you to make stronger pricing proposals.
Get Creative and Think Holistically Early in the Negotiation
Cross-company collaboration also includes bringing in the finance departments sooner rather than later in the deal-making process to assist with deal structuring, term negotiations, and so on. If these departments are involved up front in the pre-sales pitch and negotiation phases, more time is available to come up with creative pricing and financing solutions. This is a much better option than throwing together a last-minute response to a discount request from a sales rep at the make-or-break moment in the deal-making process. Innovative financial solutions are becoming instrumental to commercial deals.
Usually discounts and financing are considered separately during deal negotiations and offer pitches; however, combining the two components together often creates a positive outcome for both the supplier and for the customer. Demonstrating the overall financial gain and other advantages to a customer will oftentimes win the deal. Requests for additional discounts are sometimes the result of stress regarding payment—however, if the supplier can offer financing solutions, it may address at least part of the demand for additional discounts.
Price According to Customer's Propensity to Pay
Sometimes it's not just about positioning your premium offer. Just because your product is rich in features and certain market segments in developed markets may have a propensity to pay for them doesn't mean other markets will care, regardless of how much of a discount you may offer them.
When customers are not interested in a premium offer and they only need a bare-bones product with basic functionality, price point is particularly important. To that end it is critical for you to accurately discern where your customer is along the product adoption lifecycle and to identify the price that particular customer would be willing or able to pay.
Once you have these pieces of information you can either modify your product to fit your customer's needs at a lower price point, or you can identify what your customer values most and modify your pitch and holistic offer to include and address his desires and needs (and not just what you think should be valued). This exercise might involve anticipating his future feature requirements and justifying additional capability based on that.
Remember too: If you are selling and competing in a less differentiated product arena, price is an important decision factor, particularly with respect to commoditized products.
Offer Financing Options as Differentiators
Yes, assisting your customers with paying for your products is a growing trend. Look at the risk/reward equations, your new market-penetration ambitions and market-share goals, and whether in the mid-to-longer run you can actually afford not to capture the market segment that needs this kind of help. A short-term loss or risk may result in longer-term gains.
Creative Financing Models
Chinese competitors have often offered customers exceptional financing options that Western companies believed they could not match.
However, while frequently it may appear that financing terms and funding options offered by Chinese competitors are extraordinary, they are not always as out of reach or challenging to replicate as you might think. When you read the fine print, they are generally replicable to some degree by Western companies. The Chinese are shrewd business people; transactions are well thought out. There is usually a return in some way or another, whether in the medium or longer term.
Be clear on identifying your strategic accounts and assessing their importance to your company; that is, know your must-win battles. Identify what the payment/acquisition barriers might be for these accounts and how you can help. Educate your financing department on the importance of success in this new geography of emerging markets, and explore creative options.
Some ideas for facilitating such financing might include: creating a special slush fund for new market development where new lending rules apply to your strategic opportunities, encouraging your finance group to adopt a different risk/reward model, and involving third-party financiers and using your company's credit backing to secure loans for select customers in order to off-load the risk to lenders.
You could also offer operating leases to strategic customers—leasing agreements treated as operating expenses (OPEX)—or provide deferred payment plans. In addition, you could offer financing that relies solely on cash flow from the project instead of any additional capital outlay or specific project financing.
The World Bank Group and Other Development Bodies
Another financing strategy could be to acquire funds designated for emerging markets from international development banks or bodies. There are many funding instruments available for emerging-market countries, particularly instruments targeting public sector (government) accounts. By tapping into these options for your prospective customers, you may facilitate the closure of a deal simply by acting as a knowledgeable intermediary and bridging the handoff. This strategy may require you to dedicate a business-development resource to manage and mine these opportunities or at least to incorporate that responsibility into someone's job duties. The return on this resource investment may just come back multifold if you close just one deal a year based on the financing you acquire from one of these funding sources.
Some development organizations that support regional projects send out regular notifications of the types of projects and contracts being offered. You could designate a business-development person in your organization to receive these emails and to identify projects that are relevant to your business. Examples of relevant projects might include road infrastructure build-outs, technology/networking build-outs, and the like. As a point of interest, the U.S. Commercial Service hosts seminars that assist companies in identifying emerging-market opportunities.
Here is a sample of banks and other organizations that offer funding or financing:
- The African Development Bank (AfDB)
- The Asian Development Bank (ADB)
- European Bank for Reconstruction and Development (EBRD)
- International Monetary Fund (IMF)
- Inter-American Development Bank (IDB)
- Overseas Private Investment Corporation (OPIC)
Appendix A includes a partial list of organizations that are involved in supporting development and/or job creation, providing training, promoting U.S. exports, or all of the above. The following provides an overview of the mission and products of some of these organizations:
- Bilateral development agency
- Products
- Training grants
- Feasibility studies
- Orientation visits
- Export credit agency; helps U.S. companies to sustain and create jobs by financing U.S. exports
- Products
- Loan guarantees
- Credit insurance
- Working capital for exporters
- Soft loans and grants to governments
- Mission
- Public sector reforms
- Infrastructure development
- Poverty reduction
- Health care
Suppliers that are able to secure grants or financing sources from third parties such as the USTDA can make access to training funds conditional upon customers choosing their solutions.
Two methodologies that might be used to secure funding/financing options from a development organization are presented next:
- Reactive: Follow the money.Review the projects list from the regional representative of an organization.
- Identify existing projects at the International Development Banks; for example, the World Bank or the AfDB.
- Obtain guidance on country or project prioritization based on available funded projects.
- Proactive: Find the money.Identify projects applicable to you and match your customers.
- Secure offers from investment banks to support a customer's projects.
- Engage customers in requesting assistance from donors—help design the project.
A success story: In LATAM, one company created a pipeline for three years into the future and hired staff to handle it!
Combat Unfair Pricing
Your company can take action by engaging the U.S. Commercial Service, or its equivalent in other countries for support in identifying unfair trade practices. Unfair trade practices include selling products or services below cost or giving them away for free, influencing an RFP after it has been issued, or inserting needless requirements that allow a particular supplier a monopolistic advantage.