According to the Corporate Executive Board (CEB), buyers are 57% through their buying process (gathering information and determining specifications and requirements) before reaching out to suppliers. The remaining 43% of the buyers’ time is devoted to the RFP process, selecting the supplier, and haggling over price. The underlying assumption is that all suppliers are alike and all solutions are similar. So, the only issue is which supplier will provide the good or service at the lowest possible price. That is haggling.
Here is the problem: sourcing managers and selling teams buy into the assumption that they are haggling when in fact they should be negotiating.
There is a critical distinction between negotiating and haggling.
Haggling: If you are a Monty Python fan, there is a funny haggling scene in the Life of Brian in which a bazaar stall owner tries to teach the buyer how to bargain for a fake beard. Bargaining is great for one off transactions because the buyer feels s/he has made an advantageous purchase at less than the usual cost.
Negotiating: When people negotiate they’ve come to an agreement. In anything but a one off transaction, and especially in complex sales, negotiating is far more effective than haggling because it encompasses more than just the price.
The CEB noted that buyers want to be engaged in a more meaningful conversation about their needs, and are eager to learn how they can improve their gross profitability. But here is the irony. I know buyers who are irritated by sales people who want to sell to them. So, why is there a disconnect?
Sales people are buying into the price only conversation and engaging in a haggling conversation. Haggling is a poor substitution to a robust conversation about what a customer can and should do to increase gross profitability.
According to Professor Henke, Oakland University, there is a casual and statistical relationship between good customer-supplier relationships and a 40% increase in customer gross profitability. There are two factors that contribute to improved gross profitability.
- Price concessions
- Non-economic value
Good relationships lay the foundation for meaningful price concessions. More importantly, good relationships also pave the way for other non-tangible benefits such as innovation, new technology, better customer service etc.
The strength of long-term relationships depends on an equal balance of power. Negotiating, not bargaining or haggling, creates a level playing field in which parties can discuss price concessions and non-economic factors that can improve customer profitability. Haggling limits the conversation to a tug-of-war over price only.
The next time you talk to your sourcing or sales team, encourage them to negotiate with their long-term partners and avoid bargaining or haggling to meet their needs. They will not only meet the customer’s stated financial goals on cost, but they will also find creative ways to increase customer profitability.