Procurement departments are responsible for more and more purchasing. Most organisations are consolidating and organisationally aligning their finance, legal/risk, and procurement functions. And, with the end of this business cycle in sight, expect even more pressures on pricing.

So, how do you make sure that you don’t starve? Based on our work with over 100 companies, negotiations are most successful when eight principles are rigorously followed.

Know what value you deliver and communicate that value. Understand clearly what incremental value you’re offering compared to competing products. How do you do that? Start by identifying the elements that provide value. For example, does your offering:

    1. Lower costs?
    2. Lower risks such as product performance reliability or problem resolution?
    3. Increase your clients’ ability to use your product to generate revenues?

To the extent that you can, quantify, quantify, quantify. Lever your data so that you can clearly demonstrate to procurement the value that your product or service offers.Link your value message specifically to what each stakeholder perceives as to what constitutes value. Don’t just rely on the sales organisation to deliver the message or collect feedback from clients as to what they perceive to be your value message.

Understand the decision process. Who’s making the decision? What criteria are they using and what’s the relative importance of each? For example, you’re facing a price buyer if you’re selling commoditised goods such a cleaning solutions or dressing gowns to hospitals. There’s no point to talking about value nor other differentiating attributes. Value buyers seek growth and cost savings. Selling new diagnostic kits to hospitals that are more accurate and provide cost savings will likely provide you with access to end-users and the discussion is likely to be centred more around price/value options. Partners are more interested in building a relationship and the procurement group is less involved, playing more of an administrative and transactional role. For example, the introduction of new immuno-oncology medications in institutions such as the Mayo Clinic, is likely to involve physicians who are looking to work with the supplier to improve treatment options.

Invest in pricing analytics.  There is a flood of data being generated. Setting the best prices is not a data challenge, it’s an analysis challenge. So, the key is to invest in creating the ability to develop insights form that data. McKinsey points out that the use of data such as won/lost analysis can provide such effective results as “dynamic deal scoring”. McKinsey further notes that such analytics leads to individual deal guidance that yield increases of four to eight percentage points in return on sales in the tech industry based on its own experience (1). You can be sure that if your competition isn’t using analytics, they soon will.

Be creative. To the extent that you can, provide options during the initial response or follow-up discussions. Possible options include bundling services with products such as offering problem resolution levels; product bundles; pricing structure alternatives such as spreading payments over time, or adjusting the offer so that associated costs can be taken from operating budgets rather than capital equipment.

Understand the value of a contract to you. Typically, during the course of negotiations or preparation of responses to RFPs, companies get caught up in incremental concessions they perceive as being needed to win contracts. But, how much should you discount? Is there a point below which you’re not or shouldn’t be prepared to go? Again, quantify. For example, if you think that winning the contract will provide the opportunity to sell more products into a customer, what could be the incremental sales and what would be the probability of gaining those revenues or margins? This then needs to be translated into price concessions.

Provide negotiators with clear pricing guidelines. Based on the estimated value your offering provides, customer price sensitivity, and your objectives, specific pricing levels need to be provided. This includes initial pricing offers, target prices, and walk-away prices. More companies are providing their sales teams with tools that provide these prices, based on the specifics of contracts being negotiated.

Align negotiating strategy across executive, sales, pricing teams. Make sure before you enter negotiations, that goals and decision-making protocols and procedures during the course of negotiations are understood.

Create a culture of confidence. It’s important that your negotiators understand that procurement also faces pressures. They don’t want supply disruption, and quality issues may destroy more value than can be obtained by some price savings. Your team needs to understand those drivers and that negotiations are supported by a clearly messaged value proposition, an organisation that has alignment, and well-defined pricing

Bottom line: While procurement’s hunger is growing, understanding what procurement likes and how your offering feeds that need as well as how much you need to give (price concessions), means that you can get to keep some lunch.

References: (1): McKinsey & Company, McKinsey Journal. June 2014. Using big data to make better pricing decisions.