Updated: Sep 29, 2021
Tough negotiations are at the heart of many B2B transactions. Based on price alone, negotiations for the most advantageous deals define the supplier-customer relationship. Such negotiations, where customers try to beat down suppliers’ prices as much as possible, lead to an adversarial relationship between companies. The suppliers, in these cases, in turn, further press their vendors for the lowest possible prices to maintain their margins. This unleashes a cascading spiral where price becomes paramount, leading to commoditisation of all procurements. What gets lost in the process is the incentive to innovate or provide higher quality products and services. A study has attempted to establish that this is not a sustainable strategy in the current climate.
According to the study, the solution is to replace price with value in the equations with both customers and vendors. It advocates the practice of value quantification, that is, placing a monetary value on all direct and indirect benefits that the customer derives from the product or service. Here is an example to demonstrate what quantification of value means:
Let’s say that both Company A and Company B manufacture industrial bearings. Company A charges Rs 100 per unit, while Company B charges Rs 150 per unit. Company B’s product is of a higher quality than Company A’s product. In a typical negotiation between a customer and Company B, after hard bargaining, the final price would likely settle at Rs 120 per unit, which would hurt Company B’s margins and profitability. If Company B disagrees with that price, the customer will go with Company A.
However, if Company B follows a strategy of value before price, they can show the customer that paying Rs 150 is a smart move because of the higher product quality. Because their bearings are of higher quality, they last longer, are more reliable, can be installed faster, and have lower lubrication costs, among other benefits. If the customer opts for Company A’s cheaper but poorer quality product, they would have to spend Rs 300 in replacements, energy costs, inventory costs and lubrication costs to get the same level of performance from the bearings that Company B’s bearings provide.
The premium of 50% that the customer pays for Company B’s product, thus, becomes an investment in Rs 300 worth of savings. The customer ultimately pays Rs 150 instead of Rs 400. This quantification of benefits can help the customer choose Company B’s superior product despite the higher initial price, which benefits both the customer and Company B.
This is the strategy followed by SKF, the company that the study focuses on to illustrate the process of value quantification. SKF charges a premium for its products but is able to maintain a high market share because of the clearly defined higher value that it provides. SKF also places value before price strategy when selecting vendors, considering the value a supplier brings to the table instead of merely the price of its products.
Figure 1 and Figure 2 present the new paradigms of B2B buying and selling best practices, distinguishing them from old practices. In a rapidly changing business and economic atmosphere, where organisations are moving away from the conventional model of meeting shareholder expectations to a “softer” and more holistic model of making a difference in the world, adopting the new value-based best practices is the most effective way forward for B2B companies.