Take the advice from the Hitchhiker’s Guide to the Galaxy and “Don’t Panic”. Although it is a difficult position, it is far from impossible. All is definitely not lost. In fact, if you are able to answer most of the following questions with a “Yes”, you might even end up being grateful that your customer gave you this wonderful opportunity.
Firstly, have all the suppliers received this request?
Is the customer just shaking the tree to see what falls out? You can usually tell from the non specific nature of the content. Or by asking one of your customer contacts or a fellow supplier.
Are you a small supplier to them?
We know the customer is big for you, but are you big for them? As a rule of thumb, you are becoming small if you represent less than 5% of your buyer’s spend.
Ironically, the smaller you are, the more power you have. As the bigger you are, the more visible you will be. This initiative will keep your customer very busy, so the buyer will need to focus their resources where they will derive most benefit.
Can you play for time?
It is quite likely that their initiative will eventually run out of steam, as the practicalities begin to hit home. Most of the suppliers will respond in the negative or not at all. You should respond and after leaving it for a couple of weeks, do so in writing.
Your letter should not acknowledge or refer to their letter in any way. It should just be a regular customer relationship type of letter. It should emphasise the strength of the relationship and the benefits the customer is deriving from you (we’ll come back to this later).
If you are then subsequently invited to a meeting, sound keen, but subtly avoid for as long as possible.
Are you the lowest cost supplier?
Salesmen think that buyers have the easiest job in the world. They believe that buyers line up all of these poor salesmen and then beat them with a stick until only one remains standing! As an ex-buyer, all I can say is, “if only…”
That said, if what you are selling can effectively be seen as a commodity, then you deserve to be standing in that line. If your product or service can easily be replaced by a competitor’s, then to succeed you need to be the lowest cost supplier. If you are, you will be that last man standing. If not, you need to have added value.
Are you invaluable, irreplaceable?
How important to them are you?
These price reduction initiatives are very unpopular with many of the customer’s department heads. So, are these influential stakeholders reliant on you? How much do they need you? Are you, for example, involved in any co-development? A key question here is, is the customer selling to its customers only on price, or also on quality, reliability, flexibility, branding, speed to market, innovation, etc? If one of the latter, are you supporting them with this? If so, the stakeholders’ own objectives will be threatened if valued suppliers like you are kicked out.
How much choice do they have?
How many suitable suppliers are there out there to replace you? How complex/unique is what you do? Are the customer’s requirements/specifications industry standard or based on yours? Will a significant investment be required by the incoming supplier? Does the customer have sufficient expertise to identify alternative suppliers?
How easy is it to introduce a new supplier?
How difficult will a transition be? This will of course affect their cost/benefit analysis. How long will a full transition take and how much risk is involved? How much information is required to manage this change and how much of this is actually held by you? Is the supply chain long or complex? Does the customer have a complex supplier approval process? Changes will require organisational support. Do they have the required resources?
Have you convinced your customer that you are invaluable, irreplaceable?
As perception is reality, you need to get your selling hat back on. And it should be much easier to sell this time round.
Selling is about identifying needs, then showing benefit. As this is your key customer you should know their needs by now. But have you shown benefit? At this point, you should do this in two ways.
Firstly speak with all the customer’s (non-purchasing) people you know. Pump them for information, remind them how they individually benefit from the relationship (embellished pick ‘n’ mix from the previous section), tell them it looks like you’re going to be kicked out of the business and state that you’d love to reduce your price, blah, blah, but are already offering your lowest price. Objective is to get these stakeholders selling for you, which will hopefully stir things up a little. This is called “back- door” selling and it is every purchaser’s nightmare.
Secondly, write to the buyer. As mentioned before, your letter should not acknowledge or refer to their letter in any way. It should just be a regular customer relationship type of letter. You should emphasise the strength of the relationship and the benefits the customer is deriving from you (again, embellished pick ‘n’ mix).
When you speak to customer’s people and write to the buyer, emphasise the points where you know you are strong relative to the competition. This helps condition them regarding selection criteria in case there is a future tender process.
Can you afford to lose this customer?
You need to know whether you can find other customers for their orders. Do you in fact just have a lazy dependency on them? How much margin are you making from them? Do they offer you other benefits, such as an association with a high profile name; good publicity; opportunity to grow; access to knowledge; strategic fit to your business; etc. These would all make the relationship more valuable to you. If this is after all such a crucial customer to you, you should secure a long term contract, which is discussed below.
Other than price, are there other important things you want from this relationship?
If there are, would you exchange them for a limited price reduction? Well, now is the time to ask for them! As this letter has gone out, you can safely assume that the buyer is going to be measured on their short-term savings. As very little else has value for them, they’ll gladly give stuff away to achieve these short-term savings. So, get bargaining. ”If you can do this, this and this, then we could possibly reduce our price by 3%”. The only question is, what is it that you want from them? Long term contract (as mentioned above), shorter payment terms, marketing benefits, less frequent orders or deliveries, more regular orders, longer lead times, more accurate forecasting. The choice is yours…
Would you benefit from sending a similar letter to any of your suppliers?
Don’t make the same mistake of carpet bombing your suppliers. So, which ones? Easy! Choose the suppliers who would answer “No” to most of the previous questions! And drop the line in “our key customers are demanding large price reductions…”. Though forget to mention that you not going to give them one.
Lastly, are you brave enough to go back to your customer with a price increase?
Justify with a change in product/service offering, that was either necessary or preferably beneficial to them.
Though, it might be wise to leave it a few months…
And!
If you have yet to receive such a request, are you ready for one? For all your key customers, make sure you can answer most of these questions with a “Yes”. If not, feel free to contact me to see if you need some assistance.
Sean Sidney, Negotiation Specialist (Sean@SeanSidney.co.uk)
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