Relationship Selling Isn’t Dead

We’ve talked a lot lately about the rise of the economic buyer.  Customers are getting increasingly cost and hopefully value sensitive.  That makes a lot of sense given these tough economic times.  One of the implications of this is that traditional relationship selling is possibly dead.  If you are a “next new thing” manager jumping from thought to thought trying to figure out the world of business, maybe it is.  But for the rational, balanced manager, relationship selling is certainly alive and well.

This article talks about how McDonald’s Corporation, the $25 billion purveyor of burgers and fries, treats it suppliers.  In one word: well.  This was part of Ray Croc’s original vision: “none of us is as good as all of us”—their suppliers are part of “all of us”.  Today, MacDonald’s suppliers arestill  viewed as “strategic partners” and part of a three-legged stool of strategy that includes customers and franchise operators.

They work with their key suppliers without contracts on a simple handshake.   As you would expect, trust is a key component of that relationship—and it is mutual trust.  Everyone works for the betterment of the customer, the franchise and the company.  Suppliers are shown the long term strategy of McDonald’s  If a supplier comes up with a new innovation like the McCafe’ program (gourmet coffee), they are expected to share it with other suppliers, aka competitors—unheard of in most businesses.

Yes, there is a flip side to this—suppliers are expected to provide safe, high quality food at competitive prices—no gouging a loyal customer here.  MacDonald’s want suppliers that are well run, have a management succession plan and are financially healthy.  The procurement people at McDonald’s know this and manage their supplier base accordingly.  They know that putting a purchase out to bid undermines the trust and the willingness to share so they just don’t do it.

No, Relationship Selling isn’t dead, at least at McDonald’s it isn’t.  Suppliers to McDonald’s fill what we call the Scout scenario—that is they are supplying a loyal customer that wants quality, cost effectiveness and great business operations from their suppliers.  Those suppliers have to be lean, cost effective and always looking for ways to do it better for their customer.  Not the traditional model of loyal customers but certainly a better one.

From: Supplying the Golden Arches by Lisa Arnseth in Inside Supply Management, October/November 2011 pp. 34-37

http://www.ism.ws/pubs/ISMMag/ismarticle.cfm?ItemNumber=21980

Procurement: Kings or Jokers

I just got off the phone with the person who heads up business development in our company—by the way, she is also the President–a position she deserves and earned with hard work.  She was speaking with a procurement person from one of our potential clients.  This is a firm that has a new product that is critical for their success going forward and they have important work that needs to be done associated with that product.  The real client has been trying to get the project going for the past month.  As is often usual, procurement is handling the paperwork.  It has taken this guy two weeks to respond to phone calls and e-mails and he finally agrees to a phone call and one of the first things out of his mouth is “you guys are going to have to sharpen your pencil”.   Really?

Our President gave him a good description of what his options were with regard to budget and scope and that we weren’t in the business of sharpening pencils.  She is a very classy person, much classier than me.  Here is my answer: who the hell died and made you king?  You have no idea who we are and what we do and you tell us that we have to “sharpen our pencil” to do business with you?  Here’s what I know: you have no choice in the matter.  We have been selected to be a vendor by people more senior than you.  You have so far been unprofessional and delayed the implementation of an important project for your firm.

The real story is much worse.  By your delaying, be it due to unprofessionalism or a false sense of importance,  you have moved your firm down our list of pending project starts.  If we have resources, you’ll get them but if we don’t, you’re going to have to wait in line until they become available—which I hope is a long time.

We have firms that we have great relationships with.  We even have great relationships with their procurement people.  When they have a need, we meet it.  We work weekends, we travel for long distances for long periods of time.  We get up early, we stay late.   The firms that use procurement people who think they are kings and try to push us around rarely end up on the list.

You see those guys aren’t kings, they are really jokers.  Our job is to figure out their game and play by our rules and not theirs.  When they play their games, if we do our jobs right, the only people they really hurt are other managers in their own firm.  When those people find out the damage the jokers are doing, if they get their just deserve, their next stop will be the circus—-where they become clowns.

Will Guarantees Blunt the Buzz Saw?

At least one pharmaceutical company has enough confidence in its drug to offer a guarantee. Reacting to a new law in Germany which gives insurance providers the ability to negotiate for lower drug prices (what took them so long?), Roche is offering a guarantee on its $6,000 per month cancer drug, Avastin.

This is a terrific response to the increasing downward pressure on drug prices and one that might actually work. Struggling to get listed on increasingly price sensitive health carrier drug formularies, pharmaceutical companies have had to rely on discounts for even tier one brand name drugs that offer lots of patient advantage. It’s a bit of a desperation move—you’re damned if you do with lower prices, and you’re damned if you don’t with lower sales. It has really been a no win situation for them.

This new tactic is creative and banks on the ability of the drug to dramatically shrink tumors within a relatively short period of time. One medical expert didn’t like the promotional aspects of the guarantee citing that what they really need is solid evidence. That’s not true. There is plenty of solid evidence that many drugs reduce medical costs and save lives. That hasn’t stopped the insurers from putting the pharmaceutical companies through the price buzz saw of procurement.

The guarantee is a way of making a promise of the results to physician, the insurer and especially the patient. It’s a way of showcasing the value that Roche believes the drug has. It’s a way for them to put some money behind the promise of value. And, it’s a way to blunt the discounting demands of the insurer. If they want lower prices, no problem—no guarantee. This sets the table for a better poker game at least.

It remains to be seen if this relatively new tactic will work—it will take some chutzpah for Roche to stick to their guns and their strategy. We wish them well.

From: “Keeps Cancer in Check or Your Money Back” in Bloomberg Businessweek, November 21, 2011

Don’t Do More of What’s Not Working

Gerhard Gshwandtner is the founder of Selling Power Magazine.  In a recent blog, one of his readers aks whether it’s a problem that his close rate has dropped by 50%.  Of course it’s a problem but it’s not the problem that the reader thinks it is. 

I can see the reader pounding his sales guys to find more business to quote on.  The opportunities they find are the ones they have no chance of winning–they are fulfilling the Rabbit position I talked about in my last blog. 

If something isn’t working, the trick is to figure out why and change the way things are being done.  In difficult economic times, salespeople have to get smarter at what they do, not do more of what hasn’t been working.  Trolling for RFP’s is easy–developing trusting relationships and value takes a lot more work—and has a lot better results if you know that’s what your customers want.

Do You Have the Winning or Losing Hand?

The toughest challenge that business-to-business sales professionals and leaders face today is the battle against lower-priced competitors bidding alongside your offer. Top it off with a procurement specialist handling the deal rather than the user. Procurement professionals have gained significant stature in their companies based on their cost cutting success during the recent Great Recession. How you deal with that will probably determine whether your business thrives or dies.

Yes, the big guys seem to have all the advantages. They use their scale and marquee to squeeze the little guy. Vendors are not as powerless as it may appear. In fact, vendors have a number of tricks and tactics available to fight back, protect their margins, and keep the business. Negotiating in these is customer situations is not be a surrender. Remember, the bigger they are, the bigger their appetite. They may be as desperate as you are.

In the face of relentless calls for concessions by increasingly powerful companies—insert name of your least favorite multinational corporation here—sales leaders have responded by mindless discounting, hoping to make up any losses through higher volume. Unfortunately, discounting is a fool’s response. Those who live and die by discounting don’t live very long. The name of the game today is maintaining margins. To do that, you’ve got to outplay the economic buyer.

Sales professionals labor under the assumption that all the power is on the other side. That’s because the inevitable response is price discounting. Discounting becomes an addiction that actually undermines the long-term health of the business. It decreases profits and erodes the quality of customer relationships. The sad fact is that this happens even in organizations that provide significant value to their customers. This value is overlooked, underestimated, or flat out ignored when, in fact, it is the key to breaking free of the conventional wisdom of discounting.

To the extent sales professionals believe they must trade margins for revenues, they undermine their success and train their customers to expect a price concession each and every negotiation.

Consider the position of the Advantaged Player—that salesperson is at the negotiating table with a customer. There are probably other players and the buyer spends a lot of time talking about how their prices are much lower than the Advantaged Player. In fact, there may be some yelling going on about how our Advantaged Player has to lower prices in order to close a deal. Does he have to? Nope—it’s all a poker game. In fact, the more yelling that occurs, the worse the hand—for the customer. The Advantaged Player has the winning hand. He doesn’t have to discount, he just has to play the game and close the deal.

Compare that to the position of the Rabbit—that is the salesperson who is added to the bid list to drive the price of the Advantaged Player down. The Rabbit has no chance of winning the business. They have no contacts with the real decision maker and no chance to sell value. The Rabbit has the losing hand and is better off just not playing the game, especially if the time needed to prepare a bid is more than two minutes. It’s just a flat waste of their time.

If you understand your position in the game, you can play the game better—walking away from the table if you have a losing hand but out-bluffing the customer if you have the winning hand. It’s not that hard and it’s a heck of a lot more fun.

How Do Salespeople Feel About Your Prices

Here’s an assignmentfor you.  Go sit down with a few of yoursalespeople and ask them how they feel about your pricing.  Bring a pad of paper and write down  a reminder to shut up when they give their answers.  Don’t get defensive.  Ask the question, then shut up and listen to the answers.   How are you reacting to this assignment?  Do you think it’s BS?  Are you afraid of asking the questions because you know what the answers will be?  Or, are you afraid of what the answers will be?

Most salespeople hate dealing with pricing.  They know that, for the most part, prices are based on internal cost calculations that have little to do with either true costs or  the competitors in the market place.  They know that a lot of discounting is done and they want a piece of it.  What’s the bottom line?  They have absolutely no confidence in your prices.  None.  That makes them clear prey to customers who ask for lower prices.  Be they dealing with  procurement people or the economic buyer, salespeople who don’t have confidence in price and/or are afraid to support those prices because they know they aren’t “accurate”  are going to give excessive discounts each and every time.

Your job as a pricing manager is to not only price products, it’s to understand the environment within which those prices are executed with customers.  If you don’t do that, you are failing in your job.  If you have no view of that or just can’t control it, your executives are failing in their jobs.  That disconnect actually leads to more discounting because there is nothing to support the prices that you do create.  Bottom line: it’s a joke–a sad one.

It all starts with the basic question:  how do you feel about our prices.  It’s a question that needs to be asked and answered to begin to heal the widening chasm between strategic and tactical pricing–by the way, tactical pricing is all about salespeople.  It’s a chasm that rarely gets talked about in the conferences and the white papers but it perhaps the most important element of pricing because it is where the real value is either captured or gets left on the negotiating table for customers to enjoy.

How you feel about asking the question points to both the path you should be thinking about as as a pricing professional.  It points to the
solution that all of us in the firm should be talking about: improving both profits and revenue because, after all, those are the two most important things we work for.  And, if we can work more closely with sales to understand how they feel about pricing and why that’s important, we begin to work collaboratively with the two most important elements of the success or failure of the firm.

Cheers from Australia

Netflix and Shock Pricing

Shock pricing is ricing which shocks your customers. Since it occurs in both B2B and B2C environments, it’s worthwhile to discuss.  Shock pricing can occur when  customers are shocked at the initial price, such as what occurs when we walk into a fancy restaurant (at least when I walk into a fancy restaurant).  It also occurs when customers are shocked at a price change that occurs—such is the case of Netflix.  Here, the customers are all nice and comfortable with whatever prices you are charging and blammo, you change the price dramatically and they are shocked.

Initial price shock is often due to poor information—customers don’t do their homework.  They are misinformed on prices of a particular venue.  Suppliers can do things to help customers frame the particular prices they are charging by comparing the products or services to other equally high value offerings.  The sad fact is that the customer is either going to get over it and purchase or they will just walk away and look for something more in their price range.

Shock pricing occurred when Apple, after having the iPhone in the market for two months, decided to drop it’s price  from $599 to $399.  Yes, everyone was shocked and they did issue some credits to some of the earlier customers but heck, they sold 108 million units in March of this year, so we could say that everyone recovered from that shock quite nicely, especially Apple.

Shock pricing occurs when production costs increase dramatically.  Since those cost increase happen to most competitors and customers do expect dramatic cost increases to be passed on, those kind of shocks are expected and part of doing business.  Will B2B customers admit it?  Of course not, but that is the great game that procurement plays.

Shock pricing can also occur, more often in the B2B space when a supplier suddenly recognizes that they are losing their shirts on a product or customer and it’s smarter to either exit.  When properly positioned as a problem that the supplier regrets and done well, customers get over their initial shock and, believe it or not, often stay with the supplier.  We have seen this occur frequently in the past year with products and services that range from commodity electronic
components to high value professional services.  Yes, it does take some planning and you will have to take some heat, often blistering, from the customer.  But
you would be surprised how customers respond—they generally want to keep doing business with you.

Shock pricing often occurs in the B2C space due to greed and/or stupidity.  I think that’s the case of Netflix.  Their CEO , Reed Hastings blamed the price
increase on the cost of having to deliver the DVD’s by mail.  Everyone knew that was BS.  The 60% increase for the individual components of their once combined streaming and DVD shipping was either due to greed or an over reaction to a slight slippage of margins.  Their quarterly revenue was still up due to
growth in streaming but their quarterly margins had slipped from 8.6% to 7.6%.  That 7.6% was still up almost 10% from the prior year.

That is the type of poorly understood and poorly justified shock pricing that pisses customers off.  And rightly so.  No one wants to be taken advantage of and
Netflix clearly took advantage of it’s customers.  I am still a Netflix user and hope they get this mess straightened out.   I just purchase the streaming and tend to switch to DVD rentals when we need to catch up on shows that they don’t stream.  So, for now, the price increase hasn’t impacted us.

Several years ago our local newspaper, The Boston Globe dramatically increased their subscription rates.   I had been a long time user but know that
this shock pricing was due to a declining subscriber base and not so quickly declining cost structure.  That one got me square in the pocket book so I cancelled my subscription.  They have subsequently called with all sorts of offers but all to no avail.  I even looked at their recent streaming offering but decided that pricing slightly lower than The Wall Street Journal was just another chance to rip people off.   Plus I can get most of my content from other sources now.  Thus is the risk of shock pricing.  If, as is the case here, it is in the declining phase of the life cycle it actually accelerates the decline!

Shock pricing for the wrong reasons alienates customers and can cause them to switch to other sources or just stop using the service.  There has been lots of comment on the 600,000 customers Netflix has lost as a result of their shock pricing but that is only 2 1/2% of their subscriber base—certainly something that they can survive if they recover.  So far, they have done little to do that but this certainly will be a fun one to watch.

Apologies for the limited postings over the past two months.  Lots of travel but the good news is that the new book is taking form and is going through it’s rounds of edits.  Look for it in the spring.

Fight for Price?

Here’s a question for you.  When you set a price, are you willing to fight to get that price?  If not, then you are wasting your time setting price.  Pick a price and then negotiate it away—if you are going to spend your time negotiating price, then it doesn’t make anysense at all to spend a lot of time setting it–heck, use a dart board.   The point is that if you aren’t willing to fight inside your company to convince others why your price is the right one, then you have failed as a Pricing Professional.

By the way, along the way, spend a bit of time getting your resume ready.  Because if you aren’t willing to fight for your price, then you aren’t willing to fight for your profits either.  And, without profits, your business is going to fail.  It may take a while, but sure as the sun will come up this morning, your business is going to fail and you’ll be out of a job.

Here’s the next question: are your salespeople willing to fight for your price?  This is the more important question.  If salespeople aren’t willing to fight for
your price, then your most important job, even more than setting price, is to find out why.  If you’ve got the Brass to go ask the question, you’ll find out that there is a host of reasons.  Some of those reasons will be valid, some won’t be.  Your next job will be to dig beneath the surface and find out the real reasons.

That digging takes time and patience.  I once saw a situation where there was a lot of talk around improving pricing performance but there was also a whispering campaign to gain market share–that was in a mature market.  It was no wonder the salespeople were driving down price—they weren’t willing to fight for price because fighting for the order was more important.  That happens when there are sales goals to meet too.  But, it also happens when
salespeople don’t have great relationships with or really understand their customers.

I just read a terrific book: Sales Eats First by Noel Capon and Gary Tubridy.  It is a simple book based on research with some of the top global companies about how they have evolved their sales function to be more effective for customers, salespeople and the firm.  In the book, I was struck by how the  five things that
they are recommending doing are all designed to give the salesperson a better understanding of how customers value a seller’s products and services.  And, the advice gives them confidence and makes the salesperson more willing to Fight for Your Price.

If your salespeople aren’t willing to fight for your price, then your most important job is to give them the tools and understanding they need to prepare for that battle because that’s the most important battle being fought in your company–the battle for profits.  In business today, it’s all about linkages within and outside of the firm.  Pricing links with sales and sales links with customers.  And that final linkage is the most important one of all.

An Apology That Needs Apology

Further to my comments on how Netflix and it’s CEO Reed Hastings is snatching defeat from the jaws of victory with their bumbline moves and announcements as they sputter along the highway from DVD’s to full line streaming of video, there is a great post from good friend John Kador about Hasting’s apology.  John was the editor on our last book.  He also is the author of Effective Apology, a terrific book on apology.

I learned a long time ago that when you screw up, you apologize.  Period.  You don’t blame anyone else.  You don’t try to pretty it up.  You don’t mince words.  You just look someone in the eye and say you’re sorry.  And, you’ve got to bury the ego and really mean it.   Senior executives especially seem to screw this important skill up all the time.

In his blog, John provides a great evaluation of Hasting’s blunders and it’s a worthwhile read for all of us.  Learning about effective apologies would help many of us improve our credibility with co-workers, employees and customers alike.

Be well.  And I really mean it!

An Open Letter to Reed Hastings, CEO of Netflix

Dear Reed:

Thanks for your e-mail.  As a seasoned pricing professional, a somewhat loyal customer of Netflix, and owner of Netflix stock, it is with some concern that I read your note.

By splitting the DVD and Streaming business you are going to make it more difficult for me, loyal customer, to manage my own needs for content.  Let me explain that.  Both my wife and I work.  We also travel and don’t have time for regular TV.  Nor do we watch enough to justify investment in technology to record nor do we want to waste the time watching commercials.  For years, we used Netflix DVD rentals as a way to get access to the 5-6 shows we loved and watch them conveniently.  We started Netflix streaming last year and were quite happy with it until werealized that there were some shows that the most recent DVD release weren’t available for streaming.  No problem, we were just getting ready to switch our plan to include both streaming and DVD’s.  I’m worried that the new program is going to complicate things to the point that we’ll be forced to search around and find the content elsewhere.

As a stockholder, your comment that you won’t do any more price changes indicates that you don’t understand the power of pricing.  Of course people will complain when you change your program and pricing—that’s part of being a consumer.  Get over it and realize that price change is a natural process of handling diffusion of changing technologies.  Those prices should change as your offering and its value changes with the needs of your customers, especially your loyal ones like me.

Another thing—forget your costs.  Your cost model has nothing to do with what you should be doing now.  Yes, you have a huge fixed cost from the DVD operation but that cost is sunk—get over it.

Your job is to understand the changing needs of your customers and evolve your business model to meet those changing needs.  Offering the bundled package of DVD and streaming was great and part of that process. Until you get full access to timely content, people like me are going to want to have both.  Your job is to manage a business that will have its feet in
both technologies for a while and evolve the offering and subsequent pricing model to meet the needs of an expanding global market of consumers like me.

What you have done is shown another knee jerk reaction without really understanding the big picture.  Come on, you are a smart guy. You have smart people working for you.  You should be able to figure thisout.  So far, you haven’t and I’m getting frustrated as a customer, an owner and, oh yea, as a pricing professional.

Reed K. Holden

Founder & CEO, Holden Advisors Corp.

35 Forest Ridge Suite 160

Concord, MA  01742

978-405-0020 x1030

http://reedholden.wordpress.com/

mailto:rholden@holdenadvisors.com

www.pricingwithconfidencebook.com

www.holdenadvisors.com

From: Reed Hastings, Co-Founder
and CEO of Netflix [mailto:info@netflix.com]

Sent: Monday, September 19, 2011 5:43 AM

To: Reed Holden

Subject: An Explanation and Some Reflections

Dear Reed,I messed up. I owe you an explanation.It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do. So here is what we are doing and why. Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies. I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service. So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently. It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming. Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready. For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you. I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly. Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions. Respectfully yours, -Reed Hastings, Co-Founder and CEO, Netflix p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

This message was mailed to [rholden@holdenadvisors.com] by Netflix.SRC: 1577.0.US.en-USUse of the Netflix service and website constitutes acceptance of our Terms of Use and Privacy Policy. (c) 2011 Netflix, Inc. 100 Winchester Circle, Los Gatos, CA 95032, U.S.A.