Tuesday, March 22, 2011

Features and Benefits

A number of years ago I had the opportunity to read a sales training book that was created by Xerox. I believe that Xerox still sells sales training courses today. The key thing that I learned was as part of the selling effort the sales person’s goal was to try to convert their product’s features into benefits that the Customer values. The theory is if a customer sees a benefit from the product that provides value, the customer will be willing to pay for those benefits.

There are basically two types of Supplier’s that exist.  There are Suppliers that try to differentiate themselves from their competition so they aren’t directly competing. There are also Suppliers that are focused on competing based upon price.  Supplier that want to differentiate themselves from other Suppliers to reduce competition will try to:
·      Offer products with unique features that other Suppliers don’t have.
·      Offer a service with unique features.
·      Manage service and support differently.

Sales people are trained to work with potential customers to try to understand the customer’s needs and motivations for making the purchase. What problem does the customer have that they need to fix? As part of that activity what they are also doing is trying to understand whether any of the unique features of their product or service that are things that the customer needs or wants.  If the customer needs or wants those unique features, the Supplier knows that either they won’t have competition because that’s what the Buyer wants, or they know that the Customer sees benefits and value in those unique features for which they can charge a premium versus the competition.

The impact of the Supplier knowing that you need or want their unique features will affect your negotiation in a number of ways.  First they may simply refuse to enter into a cost based negotiation for commodities that may traditionally be negotiated based on cost.  For commodities where negotiation may be based more on value, its much harder to use value equivalence to drive pricing down as no other competitor is offering the same value as they don’t have the same features providing the same benefits. What you wind up doing is value equivalence where you may be able to identify the premium you are being charged for those unique features, but if they know the benefit you will get from them, and that outweighs the price premium, you probably won’t be successful in getting them to reduce their price. The best way to protect against this is to simply make sure that you don’t let the Supplier know whether you need, want or will benefit from any unique features that they offer.

If they become aware of the fact that you need or want the features that are unique to them, the best tactic that you can use is what an IT friend called the CIO crank. It applies to any function or business and requires the involvement of the financial approver. The simple fact is that every purchase, especially major purchases, is an investment. Every investment competes against other investments in both the business and company for funding. The sales person may know that they potential users or business may feel they need or want their product and may see benefits from purchasing it. What they don’t know is all the other problems or needs the financial approver has that require investments and the relative priority between them.

The financial approver (such as the CIO) can simply tell the Supplier that while his people feel that they need or want the product with functionality that the Supplier has to offer, when they compare the return on investment from the Suppliers product versus other investments they need to make to solve other problems they have a problem. That moves the competition away from the Supplier’s direct competitors where they know where they stand, to competing investments where they don’t know where they stand, especially from an ROI perspective. This sends the message that they need to improve the price or proposal or the purchase itself may not be made. It can also send the message that they company may be willing to purchase something that doesn’t have the same functionality simply because the premium they want for their product may be better spent on other investments they need to make.  The goal is to create uncertainty that they will get the business because its uncertainty that drives the fear of losing the business which helps drive pricing down. 

This won’t work if a Supplier has excess demand and can easily walk away from the sale.  I also wouldn’t use it frequently as that’s something that would get around in the Supply base making it less effective. However when it is used it may be more effective as its not the Procurement negotiator who is paid to drive costs down telling them, it’s the Manager of the Business who can decide whether to fund it or not.

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