Tell us about yourself and your role with Holden Advisors

I’m the President & CEO at Holden Advisors, where we specialize in B2B pricing strategy and the implementation of that pricing strategy.   In my role, I’m responsible for the P&L, our team and our clients.  I also participate as a senior leader on our pricing engagements and as a negotiation coach for our clients’ particularly challenging deals.

Why do so many manufacturers and system integrators struggle to maintain pricing power even when demand for technical expertise remains strong?

They’ve been told for so long by the market that they are a commodity, they start to believe it.  There are two main factors at play:

1. Manufacturers understate their value.  In the B2B space, I’m defining value as increasing their customer’s revenue, decreasing their costs and/or mitigating their risk.  In my conversations with manufacturers, too many believe that they are similar to their competition and therefore should charge a similar price.  The issue comes when one competitor lowers their price, the others feel like they have to too.  Before long, it's a race to the bottom and pricing power has eroded.  A 40-year veteran system integrator came up to me after a recent presentation and told me his pricing strategy was to price just a little bit lower than the competition. After discussing his value, he began thinking that he was leaving money on the table.
2. Procurement (aka Sourcing) organizations have a mandate: Get the lowest price possible for quality goods and services.  They have a variety of techniques in their playbook, and one of them is to convince suppliers that they are a commodity, the same as everyone else.  Manufacturers provide myriad services outside their core products and services and seldom price for them.  Examples include providing onsite engineers, strategy guidance and benchmarking.  Not to mention enhanced service like faster delivery and favorable payment terms.  Procurement pretends not to recognize many of these services, and manufacturers end up with increased cost to serve without the increased revenue to show for it.

At the recent CSIA conference, you spoke about pricing and negotiation strategy for system integrators. What were the biggest challenges attendees said they were facing in today’s market?

Almost everyone was concerned with their cost-plus pricing strategy.  Meaning, they figure out their cost to serve, add a margin, and that’s their price. Right now, AI is putting a major hole in that pricing strategy. As manufacturers and systems integrators gain efficiencies using AI, they're caught in a dilemma. Those efficiencies are decreasing their operational costs, so should they lower their prices? At the same time, buyers are aware that operational costs are going down, and they are demanding discounts.  It's hard to grow revenue if your price is solely associated with cost and not with your value.

Likewise, many of the attendees struggled with quantifying their value.  They knew deep down that they were helping their customers increase revenue, decrease costs, and mitigate risk, but they didn't know how to quantify it.  Making this situation worse, a recent Holden Advisors study found that 93% of sellers struggle with accurately quantifying and defending their value.  That means that the home office has trouble putting numbers to their value, and their salespeople don't know how to talk about it.  A tough recipe for success.  One technique I shared with the audience was a simple value calculation. My point was that if you can't communicate your value on the back of a cocktail napkin, you're probably getting too complicated.

When you keep it simple, it does three things:

1. It helps salespeople communicate the value clearly.
2. It helps the champion or other point of contact at the customer understand your value.
3. It's simple enough for that champion to share your message with other members of the buying center when you aren't present.

What are the most common ways industrial companies unintentionally commoditize their own solutions during the sales process?

At the top of the list is discounting without a good reason.  One of procurement's best tactics is silence.  It might be silence during a phone or Zoom call; it might be not responding to an email for a couple of weeks. This makes salespeople uncomfortable, and they often fill that silence with a discount.  To the procurement buyer, this means the product or service was probably overpriced to begin with, and it trains them to expect a discount on the next deal, immediately eroding pricing power.

Another common way industrial companies unintentionally commoditize their solutions is by tying their price almost exclusively to the cost of its ingredients. As an example, we have a client that makes aluminum cans. Aluminum makes up about 65% of the cost of the can.  If our client were to ask for a price increase solely based on an increase in the cost of aluminum, they might get it in the short term.  As soon as the cost of aluminum comes down, though (and you can rest assured that their customers are closely monitoring that cost), they'll have to lower their price.  If they base their price on their value, including elements like unique labels on the can, different colors, faster delivery times, etc. they won't be inextricably tied to the cost of aluminum. Cost needs to be an element of their price, but it can't be the sole element.

How should manufacturers and integrators communicate value differently when customers are focused primarily on price?

In addition to quantifying their value, like I described above, manufacturers and integrators can use price-value trade-offs. We call them "Give-Gets."  If a buyer is asking for something, you as a salesperson must get something in return.  For example, if they want a discounted rate on your product or solution, you should get more favorable payment terms or commitment for a larger purchase (as examples).

Solution bundling is a good way to enact an approach like this. For instance, a supplier could offer silver, gold, and platinum levels of product and service.

• The silver level has all of the basics.
• The platinum level has enhanced features, perhaps better payment terms, faster delivery, a dedicated customer service representative, etc.

If a buyer requests a lower price from the platinum level they have been offered, the salesperson can offer to move the customer from the platinum level to the gold level. They can explain the differences between the two and how the price will be reduced.  By using this sort of tiered pricing, customers are empowered to make choices (which most customers appreciate), and the supplier keeps price and value aligned.

What role does negotiation strategy play in protecting margins and improving profitability in manufacturing and automation businesses?

Negotiation strategy plays a huge role. In our experience, professional buyers (procurement) have a 10 to 15-year head start on the average seller when it comes to negotiation.  To level that playing field, the seller must first recognize they’re in a negotiation game (Procurement will bring their negotiation playbook to bear).  Second, they must understand what type of buyer they are working with.

At Holden Advisors, our research has shown that there are four distinct buyer types:

1. Price buyer. They really only care about price and are willing to switch vendors at a moment's notice to save a penny.
2. Value buyers. They have expertise in what they are buying and truly understand the value of one vendor versus the other.
3. Relationship buyer. These types of buyers may not even issue an RFP. They want a supplier who will stick with them, educate them, and give them a fair deal.
4. The Poker Player. The Poker Player is a Value or Relationship buyer pretending to be a Price buyer. This is the type of buyer that Procurement often represents.

When salespeople diagnose the type of buyer they are working with and do not assume they are a Price buyer, then the negotiation is on a more level playing field. It enables them to improve profitability for their businesses. 

This is especially critical because our research has shown that 47% of salespeople believe that price is the primary driver in B2B purchases. In reality, this number is closer to 15 to 20%. When Poker Players are accurately diagnosed, then salespeople realize they are not dealing with a Price buyer but instead dealing with a Value or Relationship buyer.

What practical steps can manufacturing leaders take to build stronger pricing power without damaging customer relationships?

It’s an important question because losing customers is often the #1 concern when discussing pricing with manufacturing leaders.  While it may make sense to shed unprofitable customers, true pricing power means that manufacturing leaders can price fairly for their value without losing the customers they want to retain.

My top 5 practical steps to improve pricing power are the following:

1. Understand and quantify your value – think through your ability to increase your customer’s revenue, decrease their cost and/or mitigate their risk.  Then, quantify that value so it can be simply communicated.
2. Differentiate beyond the core product or service – on top of the core offering, manufacturers should be communicating and validating their value associated with delivery, subject matter experts, payment terms, and all their other attributes that complete the solution for the customer.  One of our clients gained significant market share by creating a “fast lane” (think TSA Precheck) for their best customers.  The customers were happy to pay more for faster service.
3. Focus on outcomes - especially with the acceleration of AI, it can be difficult for buyers to determine the value of a high-cost solution versus a low-cost solution.  When businesses focus on outcomes, they can make the case for a higher price.  An additional element of focusing on outcomes is pricing for outcomes.  Meaning, a manufacturer could put some of their fees at risk based on the upside gains of their customers.
4. Price for value or risk in a scarce market - Companies with rare components, geographical access, or specialized labor forces can command premium prices by understanding their scarcity position. This also applies whether you’re allocating limited equipment, labor, or delivery windows.  Likewise, manufacturers and systems integrators should understand the critical role they play for their customers.  If an inferior systems integration fails, it could cost the buyer hundreds of thousands of dollars.  That’s the case for higher prices for higher quality.  Consequence, not cost, ultimately defines willingness to pay.
5. Use rules to price with confidence – Creating systematic rules as part of your pricing processes ensures higher-value products and services retain their higher prices.  As an example, the 100 HP engine should never cost less than the 50 HP engine.

Brian Doyle is CEO of Holden Advisors where he and his team improve their client’s revenue and profitability through value-based pricing strategy and go-to-market effectiveness.  Under Brian’s leadership, his clients have earned an extra $1B in increased profit.

Brian’s leadership experience began as a US Air Force pilot where he commanded 31 combat missions in Kosovo and transported the Presidential motorcade around the world.  He regularly speaks on the topics of pricing, negotiation, and leadership.

Brian received a BS in Astrophysics from the US Air Force Academy and an MS in Systems Engineering from St. Mary’s University.  

The content & opinions in this article are the author’s and do not necessarily represent the views of ManufacturingTomorrow

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