Pricing Integrity and Discounting

In my short time at Broadvox, I have seen more requests for discounts than at any other business that I have worked. One reason is the number of orders we take in each day, the other is a lack of understanding of our value proposition. Also, I suspect that because the industry is made up of so many different kinds of players, ILECs, CLECs, facilities based carriers, resellers and such, customers believe that we are willing to discount to get business.  So how do we, and I mean all of us in the IP community, maintain our pricing in the face of this kind of competition? The answer is rather simple but difficult to implement. It requires that we teach a customer our value proposition and walk away from bad business. Maintaining pricing integrity is the responsibility of both the seller and the buyer. Yes, the buyer has a role to play in this as well.

Twenty-five years ago, I was a product manager for Ericsson. My specialty was switching systems. At the time Ericsson , NEC, Siemens and others were investing heavily to penetrate the RBOC networks with Class 5 switches. The money being spent was enormous but the carrot was to take a significant percentage of the business away from AT&T and Nortel. After much effort, our switches were selected by US West. I was chosen to join the negotiating team to finalize the procurement arrangements. Of course, the purchase was in the millions of dollars so the effort was well orchestrated by both Ericsson and US West. After a couple of days negotiating and compromising on various elements of the work to be done, pricing became an issue. The US West procurement officer made it clear we needed to reduce our price in order to conclude these talks favorably. We retreated to our hotel, spent several hours sharpening our pencils, and developed a new price. The following day we presented the price to a very skeptical US West.

"Is this really, your best price?" he enquired.

Without hesitation, we nodded affirmatively, well, all but one. The one was our leader and he was wondering if this was going to cost us the opportunity. He was sorely tempted to adjust the pricing downward again.

The procurement officer asked him directly, "Is this your best price?"

Although slow in coming, finally our leader said, "Yes."

A sly smile came to the face of the officer as he explained then the negotiations were over. He was prepared to recommend purchase of the systems as laid out in our proposal with the new pricing delivered that morning. I was very curious to understand what had just happened. Moreover, being the youngest in the room, I was not shy and asked for an explanation. The answer has stayed with me for nearly three decades.

While getting the best price is important, if it means that a supplier is not going to have enough margin to properly engineer, install, train, support and continue product development, then it is a bad deal for the customer. US West wanted its vendors to be healthy. They should provide competitive pricing but they also needed to provide superior products and service. If they forced a vendor to sell below an acceptable margin, then the vendor would have to cut costs somewhere. And that cost cutting would negatively affect the delivery of products and services to US West, which in turn would negatively affect their customers.

Too many of our customers and partners do not realize that we establish prices and commissions with their best interests in mind. However, it is incumbent upon us to explain it in terms that they can appreciate.

On Friday, I will address how to explain it and the value proposition.