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White paper · Optimise · 13 min read
Sources: Pricing Insight diagnostics, case studies and the Pricing Periodic Table, CXO Edition. The ranking is from Pricing Insight's own diagnostic work and has not been independently audited. The 3 to 5 times rule is a rule of thumb, applied in this paper to illustrative figures. The Fletcher Insulation result is realised and annualised. No figure here is a benchmark for another business.
A sales team holds a price above a rival's only when it can state, in the customer's dollars, what the customer gets for the difference. Most cannot. In the diagnostics Pricing Insight has run across several sectors, a gap in pricing capability, a commodity mindset and weak competitor intelligence appeared in every business measured, and weak value articulation appeared in six of eight. This paper sets out what a value case contains, the arithmetic that makes it large enough, what must be in place before a discount is offered and the negotiation skills that carry the case into the room.
The question this paper answers
How does a sales team hold a price above a rival's in a negotiation, and which skills does it need to do it?
Value selling is usually taught as a sales conversation, and negotiation as a separate skill for the end of the deal. Professional buyers do not separate them. A buyer measured on savings treats every value claim as an opening position, and a seller who has not priced the value gives it away in the first concession. The two skills are one: the value case sets what the seller can ask for, and the negotiation skills decide how much of it is kept.
The paper draws on Customer Value Discovery, the negotiation workshop and the Pricing Periodic Table. Three companion papers go further on the skills: Sales Negotiation Skills for B2B Sellers Facing Professional Buyers, Negotiation Training for Sales Teams and Customer Value Discovery.
01Professional buyers compare invoices, so a value claim has to be priced
Procurement has replaced relationship buying in most B2B categories. A buyer who is measured on savings against last year's price treats value language as a claim to be tested, and an adjective such as quality, service or partnership costs the buyer nothing to dispute. Three signs show that a business has slipped into a commodity mindset: sales staff give different reasons why customers should buy, services such as delivery, advice and quoting are given away free, and nobody tracks competitor prices.
Once adopted, the mindset spreads through how quotes are written and who is hired, and it is slow to reverse. A seller who matches a rival's quote without showing the value set the customer's new reference price, and the next negotiation starts lower. The capability gap behind this is specific. In the businesses measured, staff asked for three things: training in selling on value, a clear statement of how the business differs from its rivals, and competitor intelligence they can use at the quote.
02The invoice is one of four prices a customer pays
Four prices, and the buyer is briefed on one. The invoice price is what is paid at purchase. The operating price covers energy, labour and consumables in use. The repair, replacement and disposal price covers maintenance, callbacks and the cost of switching supplier. The risk price covers what the customer loses when supply, the product or technical support fails. Procurement negotiates the first. A value case is written in the other three.
In an illustrative case, our offer is A$11,000 and the alternative is A$10,000, so our invoice price is A$1,000 higher. Over five years the customer's energy costs A$6,000 against A$8,000, repair, replacement and disposal A$1,000 against A$2,000, and downtime A$4,000 against A$12,000. The customer's total cost is A$22,000 against A$32,000. The customer is A$10,000 better off, ten times the invoice gap, and a seller who can show that case does not need to discount.
A simple test shows whether a team can build this case. Ask each account manager to state the cost of downtime or failure for their three largest customers, in dollars. Where no figure comes back, there is no value case to bring to a negotiation, and the team's pricing is set by the rival's quote.
03A value case has to be three to five times the price gap
Pricing Insight's rule of thumb is that holding a price A$1 above a rival's takes A$3 to A$5 of extra value shown to the customer. A buyer will test any figure a seller offers and discount part of it, and a case several times the gap still has some of the gap left once it has been tested. On a quote of A$2,000 against a rival's A$1,800, the gap is A$200, and the case needs A$600 to A$1,000 of value in the customer's own costs.
A held price recurs. The same value case serves every later quote to the customer group, so one piece of work protects the price on each of them. In an illustrative business with A$50 million of revenue, holding 1 per cent of price is worth A$500,000 a year of EBIT, with volume, costs and rebates unchanged. The arithmetic is simple and the sums are large, which is why a team that gives the 1 per cent away in routine concessions seldom sees it leave.
04Six things must be in place before a discount is offered
Discounting before these six are in place trades away value the business has not yet measured. Each has an owner and each maps to Pricing Periodic Table elements.
| In place before discounting | What it looks like | Elements |
|---|---|---|
| 1. A value proposition for each customer group | One page that states what the group buys, how the business differs from its rivals and what that is worth | 01 Vp, 02 Df |
| 2. A value case for key accounts | Built from the customer's own costs and tested with the customer's finance team | 03 Vq |
| 3. All four prices discussed | The invoice, operating, repair and replacement, and risk prices raised in every key-account conversation | 05 Dr, 29 Vs |
| 4. The margin cost of each concession | Calculated before the concession is offered, and shown to the seller | 32 Nu, 36 Cn |
| 5. Value tools owned centrally | Calculators, case examples and proof points held by the business, so they stay when sellers leave | 30 Vt |
| 6. Competitor prices on key value items | A short list of items tracked and recorded, so a rival quote can be checked | 41 Ci, 47 Ps |
Exhibit 1. Six things in place before discounting, and the Pricing Periodic Table elements behind each. Source: Pricing Insight diagnostic method.
05Seven negotiation skills carry the value case into the room
A value case only holds if the seller can use it under pressure from a trained buyer. Seven skills do the work, and each produces something written that is used in a live negotiation.
| Skill | What it looks like in the room | Elements |
|---|---|---|
| 1. Ask before telling | Customer Value Discovery: 22 questions in five steps, so the seller learns what downtime, failure and delay cost the customer before quoting | 03 Vq, 29 Vs |
| 2. Quantify in the customer's figures | The difference stated in dollars the customer's finance team can test, using value tools the business owns | 03 Vq, 30 Vt |
| 3. Know what a concession costs | The extra volume or margin a concession needs, worked out before it is offered | 32 Nu |
| 4. Trade every concession, price last | A give-get list priced by Finance, with payment terms and service level before price, and an end date on each concession | 36 Cn |
| 5. Hold a written walk-away | An opening, a target and a walk-away set before the meeting from the full cost of serving the account, with the approver named | 35 Wa, 39 Ka |
| 6. Answer the buyer's tactics | A written response to each common tactic, such as the rival quote and the switching threat, rehearsed aloud before the meeting | 34 Ng, 37 Bt |
| 7. Take the case to the person who lives with the result | The value case put to the site manager, plant manager or owner, as well as to procurement, with the cost of failure in their own figures | 05 Dr, 39 Ka |
Exhibit 2. Seven negotiation skills and the Pricing Periodic Table elements behind them. Source: Pricing Insight negotiation workshop and Customer Value Discovery.
A hospital tender used as a training case shows the effect of the seventh skill. One bidder led with being 8 per cent cheaper. The other priced a lower re-admission rate inside the hospital's own budget and won at about a 3 per cent premium. The case is a training case, with no client result behind it.
The skills are taught on the team's own accounts, in role-play against the tactics a trained buyer uses, through Negotiation Training & Value-Based Selling. The first output of the program is a written plan for each key account, approved before the meeting and reviewed after it. For the full set of skills and the arithmetic behind each, see Sales Negotiation Skills for B2B Sellers Facing Professional Buyers.
06Three kinds of work, in order
Value selling is built in a fixed order: the decisions first, then the structures that carry them, then the weekly routines that keep them in use.
| Kind of work | Owner | What is decided or built |
|---|---|---|
| Strategy: three decisions | Chief executive | Choose the customer groups the value case is built for first. Decide what is charged for and what is included, for example delivery, advice and quoting. Make training a condition of holding discount authority. |
| Structure: three designs | Sales director and pricing manager | Map and score value through Customer Value Discovery. Build value propositions and value tools the business owns. Set the list of key value items and the competitor price record. |
| Operations: three routines | Sales managers | Measure each seller's skills baseline. Practise on live deals. Close the loop with customer feedback on what the value case got right. |
Exhibit 3. Strategy, structure and operations for value selling. Source: Pricing Insight diagnostic and capability work.
07Businesses that built value cases
Seven published cases show value cases built and used. Each is labelled realised, capability built or identified, as the case study states, and none is a benchmark for another business.
| Client | Result as published | Status |
|---|---|---|
| RBM Plastics | Value case result as published in the case study | Realised |
| Devro, food manufacturing | Higher price increases negotiated in Australia and New Zealand after Customer Value Discovery; not quantified in dollars | Realised |
| Stryker Medical | Capability built, as published in the case study | Capability built |
| Adelaide Brighton | Capability built, as published in the case study | Capability built |
| Fletcher Insulation | 250 basis points of gross margin, about A$2.25 million of annualised EBITDA | Realised |
| Tradelink | A$10.8 million of annualised margin | Identified, not realised |
| Staples | A$6.8 million of EBITDA within 12 months | Realised |
Exhibit 4. Seven published cases and their status. Source: Pricing Insight case studies.
08The Pricing Periodic Table elements that negotiation skills build
The Pricing Periodic Table has 61 elements in nine domains, grouped under three pillars: Value, People and Structures. Value selling and negotiation skills build ten of them, shown in gold: 03 Vq Value quantification, 29 Vs Value selling, 30 Vt Value marketing and sales tools, 32 Nu Commercial numeracy, 34 Ng Negotiation skills, 35 Wa Walk-away and alternatives, 36 Cn Concession planning, 37 Bt Buyer and procurement tactics, 38 Pv Price-increase negotiation and 39 Ka Key-account negotiation plans.
Nine more are outlined because the skills depend on them and other work builds them: 01 Vp Value proposition, 02 Df Differentiation, 05 Dr Delivery reliability and value at risk, 28 Cc Commercial capability and training, 40 Dd Deal desk and negotiation governance, 41 Ci Market price intelligence, 47 Ps Price position and key value items, 53 Sx Charges for services and extras, and 61 Da Discount authority and controls. A trained seller holds a walk-away only if discount authority and a deal desk stop the same discount being approved elsewhere, which is why negotiation skills seldom work alone.
What is the 3 to 5 times rule in value selling?
It is Pricing Insight's rule of thumb that holding a price A$1 above a rival's takes A$3 to A$5 of extra value shown to the customer. On a A$2,000 quote against A$1,800, the A$200 gap needs A$600 to A$1,000 of value in the customer's own costs.
What are the four prices a customer pays?
The invoice price, the operating price in use, the repair, replacement and disposal price, and the risk price of failure or delay. Procurement negotiates the first, and a value case is written in the other three.
What is Customer Value Discovery?
Pricing Insight's method for finding what a product is worth to a customer. It uses 22 questions in five steps and scores the supplier against its main competitor, then turns the largest differences into figures the customer can test. It is set out in the white paper Customer Value Discovery.
How does a business know whether its product is a commodity?
Ask customers to score the business against its main competitor on each value frame, then convert the differences into dollars. Where customers see real differences and the team still prices as if there were none, the commodity belief sits with the team rather than the customer.
Where should a business start with value selling?
With two accounts. Build the value case from each customer's own costs, take it into the next negotiation, and compare the outcome with an account negotiated the usual way.
09How Pricing Insight helps
Value selling is built in three stages, each drawing on evidence from the client's own accounts. Negotiation Training & Value-Based Selling is the service that teaches the seven skills on the team's own key accounts and the negotiations coming up, and Pricing University teaches the method and the arithmetic. Pricing Insight has completed 160+ engagements, and price optimisation programs return between 5 and 10 times their cost in year 1.
Diagnose
Where value is stated and where it is not, how sellers describe the difference between the business and its rivals, and the discounts given in recent negotiations, through the Strategic EBIT Opportunity & Risk Diagnostic.
Optimise
Value cases for key accounts, key value item lists and competitor price records, with the EBITDA Improvement Program setting the fair prices each negotiation is measured from.
Transform
Sellers trained in the seven skills on their own accounts through Negotiation Training & Value-Based Selling, with discount authority and training linked through Pricing Capability & Governance.
Can your sales team state, in dollars, why a customer pays more for your product?
A first conversation establishes how this applies in your business and whether a diagnostic is warranted. Ron Wood, +61 410 534 099. Or see Negotiation Training & Value-Based Selling.
Ron Wood is the Founder and Managing Director of Pricing Insight, an Australian pricing strategy consultancy he established in 2007. He has worked in pricing for 30 years, first as a pricing and commercial manager in consumer goods, building materials and capital equipment, and since then across 160+ engagements in Australia, New Zealand, South East Asia, India, the United States and the United Kingdom. He also founded Pricing University and is the author of the Pricing Periodic Table, CXO Edition.
To discuss how this applies to your business, contact Ron Wood or call +61 410 534 099, or email info@pricinginsight.com.au.
The capability ranking and the diagnostic frequencies are reported by Pricing Insight from its own diagnostic work and are not independently audited. Fletcher Insulation and Staples are realised results as published; Tradelink is an identified opportunity and has not been realised; Devro is realised and is not quantified in dollars; Stryker Medical and Adelaide Brighton are capability built. The four-price example, the 3 to 5 times arithmetic, the A$50 million revenue example and the hospital tender are illustrative or training figures and are not client results. Results are as reported by Pricing Insight and have not been independently audited. No figure in this paper is typical or guaranteed.
