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How do you negotiate with a client that thinks you’re a commodity service provider?

Mike Lander, chief executive of Piscari and ex-procurement director, has spent his career honing his own, and others', negotiation skills. In this column, he'll share his advice on how to negotiate more profitable deals – especially with procurement.

I was talking to a client last week and they said to me: “We’ve got a significant problem negotiating a deal with one of our new clients, they’re treating us like a commodity supplier and discounting our price massively. Any suggestions?”

I hear this a lot from SMEs when they face seasoned negotiators, often in big/enterprise companies.

In this article I’ll cover:

  • An example of how this problem is addressed in a different sector, IT hardware sales

  • Practical tips and steps to help you avoid this negotiation trap

An example of how to avoid the commodity trap

Back in the late noughties, I worked with a lot of IT product/service companies (I was a sales director for one) that sold into financial services. A good friend of mine was a sales leader back then, so I asked him: “Tony, what did you do to stop the margin squeeze on products and services?” These were some of his answers, which I’ve augmented with my own experiences:

  • Take the risk of price increases (due to fluctuating silicon prices, for example) away from the client by offering a fixed price guarantee for 12 months up to a specified volume of product

  • Run a pilot, FoC, to ensure the hardware and logistics works seamlessly prior to ordering, provided they sign an LoI to proceed with you subject to success based on agreed criteria

  • Agree to hold 50% extra stock of agreed spec machine (at no cost to the client) that they can buy over 12 months at a pre-agreed fixed price. This mitigates the risk of technical failures caused by manufacturers changing component specifications

  • Pre-configure desktops to a standard build off-site, making it more of a plug-n-play solution

  • Offer to take packaging away on delivery and take the old hardware off their hands FoC and dispose of in line with computer recycling and data-cleansing policies

  • Integrate a white label ‘buying portal’ so that users can easily order pre-agreed items and then you arrange config/fulfilment in the background

  • On-site break-fix/replacement services, with different service levels at premium prices

  • Bundling remote diagnostic and maintenance into the deals as a managed service

  • Providing finance/rental deals as alternative commercial models

  • Provide asset management services

  • Co-create a Total Cost of Ownership (TCO) model to demonstrate full-life costs

These are just a few of the ways IT companies started to get around being called ‘tin shifters’ and become more value-adding suppliers.

Practical tips to maintain your price points in the face of clients treating you as a commodity supplier

So, as agencies, what can you learn from the IT sector to counter these ‘commodity’-type discussions/negotiations?

  • Map out the value chain of activities for your agency’s service, end-to-end, from a customer’s perspective

  • Then identify the big pain-points for your customer and the estimated costs of that pain. Don’t break down your pricing into those value chain activities!

  • Start to build a TCO model with your client by splitting all their costs into different buckets (you could present it as a waterfall diagram) to help them build the business case to work with you. For example:

    • Associated people costs (theirs and yours)

    • Disruption/switching costs (downtime, loss of traffic, errors, relationship changes)

    • Training costs

    • Hardware/software/systems

    • Re-work costs

  • Educate your client about the supply market and associated risks with low-price providers – become the trusted advisor.

  • Listen to their key criteria for supplier selection. What’s really important to them? What’s gone wrong in the past?

  • Offer to provide dashboard reporting FoC for 12 months with APIs that allow the client to integrate them into their environment. If they want to keep it after 12 months, they pay a pre-agreed fee for a 36-month contract

Ultimately, your goal is to move the conversation away from commodity features into how you understand and solve their business problems in order to deliver outcomes/targets.

Conclusions

Calling something a commodity makes us all think of a race-to-the-bottom on pricing. It doesn’t have to be that way. Your job is to explain to the client, using data and insights, why this isn’t a commodity service.

We can always learn from other sectors about how they solve similar problems by getting creative. I hope the insights and practical steps help you the next time someone says to you: “Isn’t this just a commodity service these days?”

If you have any comments or questions about anything in this article, I’d love to hear from you. Drop me an email.

Mike Lander is the chief executive officer and founder of Piscari, which empowers agency leaders with better negotiation skills and insights into how procurement professionals work.

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