Competing on price or value: Which offers the best opportunity for profit?

Many processors and mold manufacturers get caught in the low-price trap and are forced into defending their price without data to back up why their price is the best value for the money.

While emulating Wal-Mart in some operational aspects might be a good thing, processors and mold manufacturers often get caught in the low-price trap that is probably only good in the retail setting. News flash: There are no Blue Light specials in processing or mold manufacturing.

So, if price isn't the best way to compete and capture new business, just how can processors and mold manufacturers get the price they need to remain profitable? At the recent annual convention of the American Mold Builders Assn. in Las Vegas, NV, Stephen Rose, practice lead, automotive and commercial with Kotler Marketing Group, spoke to attendees about what it takes to defend their price to an OEM community that is very price conscious.

 

Building a good defense

"In today's purchasing world, the knowledgeable buyer is history," Rose explained. "Most buyers that buy molds know nothing about moldmaking. They are given a price objective and they could be fired for failing to meet that objective, which is why most do everything they can to squeeze value from the supplier at the lowest price."

In fact, Rose pointed out, purchasing organizations attend day--long seminars on how to squeeze suppliers, defeat them, and get what they want. "They've raised the level of their game," he added.

The primary problem is that when most suppliers are called into a buyer's office to present their proposal for a program, they "talk, talk, talk" about how they are ISO and TS certified, how good their quality is, how efficient their manufacturing process is, and on and on.

Rose witnessed this a few years ago when invited to spend a week at General Motors' Warren, MI plant to watch how the purchasing game was played.

"These were good suppliers, they supplied a lot of value, but were led like lambs to the slaughter by these savvy purchasing agents," said Rose. "They didn't get the work."

The supplier who did get the work, however, had a different tactic. It was Autoliv Inc., a global manufacturer of automotive safety systems. "The Autoliv representative talked about data and metrics," Rose said. "He brought proof in the form of hard data to prove what Autoliv's advantages were as a supplier to GM, and they awarded him the business."

Rose then offered attendees three ways to help them avoid the low-price trap by identifying the value their company offers:

1. Present the data about your benefit claims. Most suppliers don't have data and today's purchasing people need it to support the claims. "Forget about becoming friends with the purchasing agent. They don't have time and it doesn't matter," Rose stated. "Today's purchasing agent has the attitude, 'Don't bother us unless you have important information to share.'"

2. Equip the buyer with a business case of the benefits of spending his company's money with you rather than on the lowest bidder. "You have to help the buyer justify spending more on you. You have to provide him with the information, because the buyer will be challenged on his decisions," Rose said. "From the buyer's viewpoint, it's not his job to do the supplier's math. It's the supplier's job to provide incontestable data that the benefits the supplier provides are worth the extra money."

3. Differentiate your company-and quantify that differentiation with data. Most purchasing agents believe that suppliers are all the same, and in today's environment, when OEMs are consolidating their supply base and focusing on supply chain management, they want fewer and fewer suppliers. Suppliers must show through data how their company is not just another supplier, but is capable of providing benefits to the OEM that can't be attained elsewhere.

"If you give a buyer zero data from which to make an informed decision, they will choose price," Rose said.

 

Changing your model

Most processors and mold manufacturers base their pricing on their costs, Rose pointed out. That model needs to change to one in which the supplier understands its value, and what its offering is worth to the OEM customer. Then offer more value and focus less on being the low-price bidder or on matching the competitor's bid. The reality is that OEMs don't care about the supplier's costs; they are only interested in the value that the supplier provides.

The offering is about more than just the mold, Rose suggested. It's about the complete service offering-a value proposition. "Suppliers need to look at all the elements of their offering and determine the key benefits to the OEM," Rose stated. "Then do the math for the buyer."

For example, if your benefit is labor savings, multiply the number of activities in the manufacturing process by the amount of time saved per activity by fully loaded cost per hour, which will render the amount of labor savings. "Quantify the value of what you're offering," stressed Rose. "That's your value."

He defined value as equal to the sum total of the technology, services, and strategic benefits customers receive, expressed in monetary terms, in exchange for the price they pay.

Defending your price isn't difficult if you can quantify your value and benefits to your customer. A 2009 survey of 200 automotive suppliers performed by Kotler Marketing Group found that 16% (the "frequent discounters") reduced their piece part price 100% of the time. On the other hand, 9% (the "price defenders") never reduced their price. Additionally, 3% of the price defenders always got a premium for their parts; 10% got a premium 75%-97% of the time; 16% got a premium 50%-74% of the time. However, 22% never received a premium for their parts-they were always the low bidders.

"There was a significant difference in the business case made by the price leaders who offered their value with data vs. price laggards," Rose said. "Frequent discounters document their internal costs 77% of the time to justify their higher price. Pricing leaders document their value 72% of the time to justify their price."

One of the most common mistakes that weakens a supplier's negotiation position is revealing its internal cost structure. "It puts the focus on you and your price, and from then on everything will be about you," Rose explained. "The guys that can quantify their value to the OEM and put the focus on the OEM go to the head of the list and win the business."

 

Five habits of effective price defenders

In his presentation to the American Mold Builders Assn. in March, Stephen Rose provided convention attendees with these five must-follow practices:

1. Broaden the picture. While the mold is the core product, what are the other products and/or services and value offerings you bring to the OEM that you can talk about? Talk to the OEM buyer about total value realized, and focus on the supplier. "Broaden the discussion to more than just the metric of the price of the mold," said Rose. "Talk about value."

2. Get outside of purchasing. Understand who the other stakeholders are at the OEM and call on them-engineering, quality, manufacturing/production, and so on. "The gatekeeper is purchasing," said Rose. "Purchasing is afraid you'll learn something they don't want you to know." If purchasing doesn't want you to call on others in the organization, find a way around it, such as telling the buyer that you need to talk to engineering about a dimension on the drawing in order to provide better information.

Whom you call on in an OEM's organization makes a difference. "Frequent discounters" spend more time with logistics and documenting their internal costs to justify a higher price, explained Rose. "Pricing leaders call on C-level executives in manufacturing, engineering, and other top tier managers and executives so they will understand the metrics of the supplier," he added. "They call on more departments to make their business case. However, most supplier companies do not reward this critical behavior; 81% have no reward to their salespeople for calling on all these other stakeholders."

3. Use the right sales tools. Have a fallback position. Here are some examples.

  • Give volume discounts. "If I get the whole package instead of just one mold, I can give you a break," suggested Rose.
  • Offer rebates. Typically purchasing doesn't like this one, since you're telling your customer, "If our business increases from you, I'll give you a rebate."
  • Try a quid pro quo. "If I give you a discount, you'll pay me up front," Rose suggested. "If we don't do this we're not being very smart."
  • Suggest product line segmentation. If they don't like the price of the mold, offer them a lower level of quality-a mold that can meet the price they are willing to pay.
  • Un-bundle your services. The quoted price is for the mold only-no engineering changes, no maintenance, no mold testing, or qualifying. "Being a 'naked mold' provider is more risky, but it's something to carefully consider," he noted.

4. Be able to say 'No.' If all else fails, "Just say no," stressed Rose. "'No, I cannot do what you're asking me to do!' Then shut up. The worst thing you can do after saying 'no' is speak. Make the 'no' work for you. Let them come back to you."

5. Audit the value delivered. After the sale, go back to the customer and audit your performance and the performance of the mold. How did you do? "This allows for new discovery with this customer," said Rose. "It helps build trust, provides knowledge, gives you the chance to find new selling opportunities, and earns you a customer from which you can get references."

The bottom line, according to Rose, is, "Understand the value, sell the value, and then audit the value."

 

Comments (0)

Please log in or register to post comments.
  • Oldest First
  • Newest First
Loading Comments...