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A Profitable Shift in Focus

One of our clients—an engineering-oriented company, whose products include all the bells and whistles that its engineers could pack in—was losing ground to several Chinese firms that had begun offering a stripped-down version of its product for a fraction of our client’s price.

In negotiations with its customers, our client tried to explain that, as the customer grew, it would need to buy many more of the Chinese products.  Because of the extra features, the customer would have to buy far fewer of our client’s products to get the same functionality.  This would mean lower total overall costs.  The Procurement VP, who was clearly rewarded on minimizing total current outlay and not on lowering total lifetime outlay, continually demanded that our client match that low Chinese price, and didn’t want to budge from that position. 

In response, we advised our client to deactivate all the advanced features in their product, and sell it as a “stripped-down model” at very low margin that would be cost-competitive with the Chinese models.  When the customer grew and needed to expand its network, it would then have to purchase those advanced features. They would have to negotiate to get access to them—at more attractive margins.  But, at that point, purchasing these additional features even at high margins would be better than its no-deal option of purchasing another slew of the Chinese products.

In other words, our client turned the Procurement VP’s price-focused tactics against him by meeting his customer’s interests of minimizing current cash outlays—while securing a higher-margin growth path for the long term.  Our client followed this strategy with a number of customers, simultaneously increasing margins while becoming the market share leader in its product category.

By not getting bogged down by price, our client reframed the deal and ended up in a more profitable situation than if he would have otherwise.


David A. Lax and James K. Sebenius are the authors of 3D Negotiation – Powerful Tools to Change the Game in Your Most Important Deals (Harvard Business School Press, September 2006). For more information see their book website www.3dnegotiation.com and their business website www.negotiate.com.

Adapted with permission from Harvard Business School Press from 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals by David A. Lax and James K. Sebenius. Copyright 2006 David A. Lax and James K. Sebenius. All Rights Reserved.

 

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February 2007