By Jens Hentschel, Founder, THE FIVIS PARTNERSHIP
Many sales teams are being asked by their B2B customers to reduce prices to support them during these difficult economic times, a pattern that is all too familiar for many sales teams. This article proposes an approach on how suppliers can respond to this procurement tactic and how sales organizations can move the dialogue back to a value-adding conversation with the customer and their professional buying team.
“Never let a good crisis go to waste.” The quip Winston Churchill formulated in the ‘40s has become a business management mantra. Any economic downturn is used as an excuse to optimize company cost structures and to improve inefficiencies. The COVID-19 health crisis turned economic crisis is no exception.
The resulting actions by many companies and their respective procurement functions will make many B2B suppliers feel like they’re living through “Groundhog Day,” receiving yet another request to support their customer during these unprecedented and extremely difficult times.
If you are in B2B sales, you either have been – or soon will be – contacted by your customer’s procurement team asking for help or – to put it more bluntly – for money.
Why your customer asks for money
Let me be clear: This time around, we are indeed in an extreme situation with end-consumer demand tumbling fast, corporate investments on hold and world trade under extreme scrutiny. Value chains and supply chains are disrupted, and “cash is king” more than ever before. In these circumstances reducing costs fast is for some businesses a matter of life or death. Every stone needs to be overturned to see how the cash burn rate can be contained and how cost can be reduced fast.
Such price reduction requests from your buyers will follow a standard trajectory, namely:
(1) Savings and cash-flow targets will be defined by your customer’s CFO and passed onto his or her procurement function for execution.
(2) The existing supply base will be grouped into categories depending on their contractual value to the business.
(3) Suppliers will then be approached and asked to lower prices immediately by a certain percentage and/or to increase payment terms by X number of days.
The size of these requests will be based on the classification category the supplier falls into and will often be accompanied by direct or indirect threats to reduce contracted volumes or contract lengths, as well as suggestions to restrict access to future business opportunities in case the supplier does not swiftly support the customer demands.
While aggressive tactics like these might be merited under certain circumstances, they more often risk causing serious harm to customer-supplier relationships by destroying trust that’s been carefully developed over the course of years. This can endanger supplier collaboration on new product development, on supporting future market expansion plans or mitigating tight supply situations, leaving the buyer’s business at a competitive disadvantage and resulting in lost sales and lost market share in a worst-case scenario.
Despite these significant risks, the approach has become a regular occurrence of many procurement organizations, who apply these tactics on a regular cadence – crisis or not.
How you should respond to the requests to cut prices.
So how should your sales team react to these cost-cutting requests by your customers and their buying teams? These aren’t easy conversations to have, but there are ways to manage these exchanges that can actually allow you to benefit from this buying tactic.
First and foremost, maintain an open dialogue with your customer – even if they have decided to engage in these rough cost-cutting tactics. Your instinct will be to respond tactically. Resist this temptation in favor of maintaining an open and consultative posture vis-à-vis your customer.
Equally important: Before you respond to your customer’s request for “help,” map out how you will structure your response. In these situations, it is crucial that your communications be clear and concise. The following five steps are designed to help engage your customer in discussions that divert their attention away from pricing and toward discussions about how and where you can offer meaningful help to your customer in these difficult times.
Step 1: Care about your customer.
This may sound straightforward, but it is the most commonly neglected area by many sales teams, especially in high pressure and extreme situations. Caring means building a thorough understanding of your customer’s end-to-end value chain, starting with your own supply base all the way up to your customer’s customer and the end consumer.
Ask yourself: Where in the supply chain is value added or lost? What combined or independent actions by you, your co-suppliers or even your competitors could lead to improved efficiencies for the customer? How can you help realize these efficiencies? What savings could be derived by optimizing your supply chain, e.g. through adapting the minimum-order quantities, by elaborating improved forecasting mechanisms or other creative ideas? What are your customer’s total-cost-in-use elements that you could work on without decreasing your per-unit prices?
Do not expect your buyer to know the ins and outs of the value chain! For any efficiencies you identify, estimate their value and determine what support you would need to implement them.
Step 2: Compete for your business and understand your level of competitiveness.
Many suppliers believe firmly that they are strategic to their customers. Sorry to break it to you, but in many cases this is not the case. In reality, your buyer has specific expectations of you depending on the spend category they’ve put you in, and nothing is more counterproductive than misalignment between you and your customer on this front.
That is why it is of paramount importance that you clearly identify how and where you fit into your customer’s supply chain. A good approach is to self-apply the tools your buyer is using to categorize you – like the Kraljic matrix. .
Once you have determined the supplier category you’re in, you will be in a much better position to understand your customer’s needs and expectations – and, as a result, how you can help them with their current predicament. Take your findings and start over at step 1, readjusting your proposal(s) to reflect your competitiveness and strategic position.
Step 3: Continuously improve
It may seem like an obvious point, but it’s an area I found most sales teams underperforming during my procurement career. Simply put: Do not wait for your buyer to request price cuts. Rather, proactively suggest interventions and efficiencies in your supply chain that can anticipate and even mitigate your buyer’s problems. If you regularly showcase an understanding and support for your customer’s business challenges, you will be much less likely to fall under the scope of a tactical cost cutting program in the first place.
In case you have been lagging behind in this area, take this opportunity to announce (or reiterate) your commitment to continuous improvement in this regard and try to lay out a multiyear plan to contribute to your customer’s competitiveness moving forward. Keep the focus on the measurable value you bring to the partnership. Every crisis will come to an end eventually, and your customer wants to make sure they’re doing business with suppliers who contribute end-to-end value.
Step 4: Communicate clearly, proactively and regularly
Understand your individual buyers’ challenges and how you can contribute to keeping their internal stakeholders happy. During a price-cutting exercise, your customer’s CFO and CEO might be your procurement counterpart’s most important stakeholders. Manage your communication approach with an eye to supporting your buyer’s efforts to communicate internally, e.g. by providing your buyer with valuable market information on your input price developments in a format that their CFO can understand. This will help your buyer to better position opportunities and risks with regards to these cost-cutting efforts.
Map out which stakeholders your buyer and your organization need to influence, and create an action plan that showcases your commitment to helping your customer’s organization. Who is important? Who is influential? Figure 3 shows a simple stakeholder assessment tool that can help clarify your communication approach.
Step 5: Define your goals
This may feel like an obvious point, but in my experience it’s another area suppliers tend to overlook, namely: What do you want to get out of this customer relationship? What does success look like to you? In the absence of clarity, your buyer will just assure you care only about increasing their margins – which, to them, will offer the perfect justification for demanding price concessions. To avoid this, provide them with your short- and long-term vision and seek to get them excited about the future value you plan to co-create together.
In my many years as a procurement professional I did, unfortunately, have to engage in many cost-cutting exercises. And one thing I noticed is that those suppliers that followed these five steps tended to come through these programs much better than the ones that either fell in line and reduced their prices or those that took a more confrontational approach.
Jens Hentschel is founder of THE FIVIS PARTNERSHIP. Before that he served in a variety of senior, buy-side leadership and director roles at companies including Procter & Gamble and KFC. This article originally appeared on LinkedIn on August 17, 2020. Learn more about FIVIS at https://www.fivis.io/ Contact Jens Hentschel at https://www.linkedin.com/in/jenshentschel/