Never Negotiate Price
by Tom Pryor
a. Okay, but this time only.
b. How about 5%?
c. I’ll be glad to lower the price. Just tell me what you don’t want us to provide you.
The
correct answer is "c" according to sales trainer and author Tom Hopkins.
He says,
"If you agree to lower your price by 10% without reducing your
product content or service level, the customer will not trust you." If you
agree to reduce your price, three
things typically happen:
1. Your profit drops.
2. The customer kicks themselves for not asking for an even lower price.
3. Both you and the customer become frustrated.
I'll gladly reduce your price by 10%. Just tell me what you don't want us to do for you." This Tom Hopkins advice has worked for thousands of companies, including my own. To make his negotiating method work, you will need one key thing…a good understanding of your product and service costs. Activity Based Costing (ABC) is being used by many organizations to provide that understanding.
The example to the right depicts how to use ABC for sales negotiations with a customer. The basic principle of ABC is rooted in three words... products consume activities. In service organizations, the three words are…services consume activities. Increasingly, ABC is being used by both manufacturing and service organizations to support customer profitability analysis… customers consume activities.
Many organizations are using ABC to support improved methods of pricing. Wells Lamont, a glove manufacturer owned by The Marmon Group, has created a customer profitability report for each of their top 25 accounts. The ABC reports show product groups purchased by each customer and profit at each level. According to Jim Smith, the head of ABM for The Marmon Group, "These reports assist the sales staff in under-standing where the profits are actually generated and equip them with information they need to discuss issues with customers."
Owens & Minor, a $3 billion wholesaler and distributor of healthcare products, is using ABC for CostTrackTM, a fee-for-service program. Owens & Minor is separating the "cost of the products" provided from the "cost of the services" provided the customer. Among the many benefits Owens & Minor has experienced with their ABC-based pricing system:
s Improved profit margins on existing customers through
service enhancements, not service cutbacks.
s A clear view of non-value added activities to reduce costs.
s Improved customer satisfaction, because customers understand the factors that cause their fees.
Conclusion
You cannot successfully negotiate something that you don’t understand. Without ABC, manufacturers and distributors cannot fully understand the cost of what they are providing the customer. And without ABC-based pricing, customers cannot fully understand what they are buying. Make ABC a part of your organization’s sales plan and fact-finding this year.
Recommended Next Steps
1. If your organization has not implemented ABC, call us at ICMS to purchase a Self-Implementation ABM Toolkit, ask about our very popular ABM Boot Camp, or visit our new on-line ABM training site: www.LearnABM.com.
2. If your organization has already implemented ABC, but you need ABC coaching or training, visit www.LearnABM.com or call us at 1-817-475-2945 to discuss your needs.
3. For a more comprehensive understanding of ABC/ABM, order a copy of "PRYOR CONVICTIONS: 31 Insights into ABM".
If this article has inspired you and your organization to cut costs this year, call us at 817-475-2945, or e-mail your needs to tompryor@icms.net.
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