"Give me this discount, Pinky. i have a target price, and i will definitely not place this order unless i get it," declared Jean, a long time buyer from Bordeaux, in a tone that the company's account representative for europe knew was serious.
"Pinky, are you crazy? you throw away $25,000, but won't give me a 5% discount on the samoa collection?" jean decides to change the spirit. "I thought you needed orders? and don't tell me your costs are too high. you must make a lot of money to afford replacing all those defects."
"Here we go again", pinky thought. "Negotiations end in a stalemate, and here i am hoping to god that either joseph or nenette (the owners) would come back to the trade show stand this instant."
Otherwise, as in most similar cases in the past, pinky has to decide whether to close this order at a discount at the risk of losing the potential income, or invoke company policy and kiss this order goodbye. deep inside, how pinky wished she could close the deal, somehow. Gina, the plant manager, claims marketing just doesn't close enough orders early enough, and thus more delays.
To Jean's bewilderment, pinky smiles as she ponders for a moment. several times in the past, joseph did claim that it was possible to sell below the product's calculated prices in situations of "excess capacity". for the longest time, the general manager talked about this mysterious jewish physicist who is supposedly changing the landscape of manufacturing and marketing in the united States, preaching these "never-heard" theories that seem to go against all rules. he used weird words like throughput, bottleneck exploitation, marginal pricing, and other new jargon.
Excess Capacity. "Was this such a situation?" pinky speculated. "How would i know? I'm in Marketing, not production." the only recourse is to bring up this fire for the bosses to fight - make them decide.
"You know, Jean, it's best we wait for nenette or Joseph. " pinky explains. this did not make her feel right at all, though. jean expected an answer, now. and wasn't she hired to give the customer beyond what s/he expects?
"On the one hand," she continued, "it is our responsibility as AR's to book or close as much sales orders as possible. on the other hand, we are not authorized to give any price below what is listed in this standard pricelist. we have product costs, you know." Secretly, she wished she knew for sure if saying yes would really help the company or not.
"I have to catch a plane for cebu in a couple of hours. with your traffic in Manila, i have to leave in 10 minutes." Jean's impatience was obvious. "Just once, Pinky, take a risk, and i will talk to nenette or Joseph."
"Will i take the risk and agree to the discount or not?" pinky wonders to herself. "This is so frustrating because either way, i am blamed for some reason or another. but don't the bosses do it all the time? either they stick to policy and lose a sale, or give unbelievable discounts and in the end wonder why they lose money."
The conflict is obvious. the account Representative, sincerely wants to close the deal, but is reluctant to give in to the buyer, lest she offer a price below cost. she knows it has something to do with her lack of authority, but given this authority is not enough. how can she know for sure what to decide? she understands that pricing beyond what the market could take is just as foolish as spontaneously agreeing to a discount. But, if she doesn't give it, she loses the sale, and starves the factory.
Conflict Resolution:
To discount or not to discount? this question has haunted us for years. why is it so difficult to answer? more important questions come to mind: in agreeing to this discount, and closing this sale, will we make money or not? how do we revise the offer to satisfy both the buyer's and company's needs of moving more product and making money? can we adjust our pricing or ordering policy to satisfy both party's needs? to resolve this conflict, let us try to understand the reasons behind both positions: to give the discount or not to give the discount. Then, let us see if it possible to draft a win-win resolution that will satisfy all or at least most of our respective reasons for our positions.
What are the reasons behind giving discounts? we can start with the buyer's point of view. why does he even ask for it? obviously he wants to make more money from every product of ours that he sells. by buying cheap and selling expensively, he will make more money. affordable prices also means faster turn-over. the buyer hopes to buy more product from us faster, and this is not exactly against our interest, is it? the buyer also needs us to deliver reliably and so on .
In giving the discount, the ar is not only increasing booked sales, but s/he is also making the customer happy. the ar is also happier from the commissions s/he supposedly gets (if any). these are all in the company's interest, provided it makes money in the end. Ultimately, if we make some money in every transaction, then the company "makes" money, not "loses" money.
By disagreeing to give the discount, the ar may be signing a death warrant to the sale. note that this is not entirely true because the client may agree to take the higher price if s/he is convinced that what is offered to him, to his perception, is just as valuable or more than the discount he was asking for. Apparently, in the above case, the client's perception of value for our product was less than the price pinky asked for. this is just as true for our so called reliability and quality.
Or if there is no re-order because we were priced out of the market, all future money is lost. this sinks all the money ever spent on product development, representation, tradeshow costs, and other investments to get this one customer interested in us in the first place. all this money needs to be spent again, to find the next customer. how many first-and-only-time-buyers did our company ever have? ask them why they never re-ordered, and what would their answers be?
Another question comes to mind: if we lost money, say last year, was it because most of our products were over-discounted? can products make or lose money? or did we lose money because we did not know better to close enough sales for non-bottleneck products, and consequently did not deliver enough orders? or did we lose money because we simply wasted too much materials, time, and other resources on non-bottleneck departments? should good clients pay for this? how about bad customers with non-profitable transactions? is it fair to charge good customers for what we lose from the bad? is it not more fair to scrap the bad customers to give the good better prices and savings?
On the issue of excess capacity products, whether or not a resource works, money is spent. for a machine, whether used or idle, we pay depreciation, amortization, allocated rent, machine operator's salary, among other fixed costs. is it in the company's interest to keep machines or resources idle or under-utilized? if the machine is idle, then, is it right to say no to a deal because the price the client wants is 5% lower than what is on the standard price list? on the other hand, if the machine is fully ujtilized on a high-priced, bottleneck product, is it right to say yes to a discount knowing sales invoice will not really increase because we will only clog the bottleneck whose output is the same?
Taking the other side, we want to sell at the highest possible price that the buyer will agree to. we are afraid that in giving the discount, we might lose money if we sell below cost. it is without doubt against the company's interest to lose money. the ar is also responsible to sell at a profit, or at a price higher than what it will cost the company to produce and deliver the goods. more precisely, the ar is responsible for closing orders that will make money for the company. let me emphasize this: selling at a "high price" is not really the objective, but "making money" is.
To make money, the company must first be able to sell more - or move more throughput out the door. in Goldratt's theory of Constraints, the output of the entire system is dictated by the bottleneck process/es. if the plant capacity is limited for a particular product, it is called a bottleneck product. if we insist on promoting this product through discounts, then we are actually losing MONEY, because the plant cannot deliver at the pace we require unless the bottlenecks are broken first. we cannot say it is not our responsibility, because marketing dictates which product is sold, bottleneck or non-bottleneck. non-bottleneck or excess capacity products on the other hand, activate idle machines and therefore induce more company sales, for no extra fixed costs.
In the case of order volume, if quantities of each design are too low, set-up and transaction costs that do not change with volume shoot up. to be honest, somehow, we have never been comfortable with our costings. we seek a protection or buffer of sorts in case we do lose money on this or that product, or on this or that order for whatever unforeseen reasons. we all know of claims, wastage, re-work, repairs, etc. we simply need to put a safety net somewhere in the price. although material and labor costs are covered, fixed overhead costs skyrocket in relation to sales when there aren't enough orders.
Sometimes, we sell at a discount because we do not know how to negotiate. unscrupulous customers can and do abuse such kindness, often expecting the same discounts for future products offered.
A discount policy is also necessary, to avoid people from abusing their authority, and closing just about any sale - even at a disadvantage to the firm-for the sake of higher sales commissions.
There are other very real reasons to avoid discounts. we have an image to keep, a reputation to protect. Somehow, we believe that someone must be willing to pay for quality, reliability, and responsiveness to customers. we do not want to destroy our markets by offering higher quality, better designed products too low. after all, we do not want to be likened to other low end suppliers who hardly spend anything for research & development or customer service like we do.
Both buyer and supplier seem to have legitimate needs hidden behind their respective positions. Unfortunately, in most negotiations, many of these needs are compromised. the best resolution is not compromise, because it implies sacrifice from either party. neither of the parties put time or effort to find a better solution apart from self-centered, hard-line bargaining in one or two meetings.
We must actively, deliberately seek a win-win solution. why not think a bit harder about each other's needs and challenge policy to address these needs squarely? after identifying the points of conflict, and outlining the reasons each party has behind his point, it is easy to find a unifying objective, or a scenario wherein both sets of reasons are sufficiently covered. stephen covey says we must strive to arrive at a win-win deal, or agree that it is better not to deal at all, and just stay as friends.
In our story, what is the common need of the buyer and the company? there may be others, but i can think of at least one unquestionable common need: a long term, mutually profitable relationship. for both parties, the best case scenario is that we close the sale, make reasonable money, while keeping the other party happy. without say, the last part of this requirement, will either of us be in business for long? this naturally suggests that we sell (and the buyer buys) more quality products faster, at terms - not just price -- that allows both of us to make money.
It is not always necessary that we get the best price, provided we make money. why do we always argue about one issue, PRICE, and negotiate as though this were the only way to earn money? higher price does not entirely mean -higher profit. it is like saying "If i ask the boss for a higher salary, my troubles at home will end." the boss has to agree first. and you have to solve your troubles yourself. we probably mean that "Higher-price-for-a-closed-deal-where-the-company-is-able-to-deliver-on-time -at-good-quality-and-at-low-cost-with-minimal-problems" means PROFIT. according to Goldratt, what is true is this: higher Throughput, less inventory and less operating expense means higher Profit.
For countless reasons, besides low price, we lose money in a deal, and first and foremost is when we are unable to close the deal when we actually have excess capacity to do it. salaries and wages, the mother of all costs, remain virtually the same regardless of how much is sold or produced. the less sales we make, or the less product the company moves out the door, the more awesome salaries look.
Unchallenged policies (say on L/Cs), slow procedures delay the release of orders. this coupled with poor scheduling end up starving bottleneck processes, reducing total invoiced sales for the period.
Designs that insist on using bottleneck processes do not contribute to higher sales. wrong product load ability wastes precious bottleneck time or causes lost opportunity from short shipments. small quantity orders raise set up costs. terms of payment affects financing costs. many - identifiable -- problematic products give birth to countless quality defects, and blowing up costs of goods sold. some finishes, no different in perceived value, are far more costly than others. idle assets and sleeping inventory cost us interest. investments to improve non-bottlenecks that produce more work-in-process inventory to clog the (sometimes idle) bottlenecks.
If orders are so designed to avoid these bottlenecks and problems, a lot of money can be made to benefit stockholders, employees and eventually our own customers.
(IMAGE)
The actual solution to Jean's case above (fictional) of course depends on the current realities and what jean perceives as most "valuable" besides PRICE. but the approach or strategy is generic. remember that in every transaction, money is lost or gained by the system in many forms.
The client does not only buy product. he buys the whole offering. understand that each client is unique and so is his own perception of what is valuable. the closer we get to solving the client's core needs, the higher he perceives the value of our offer. this approach can inspire breakthroughs.
The strategy then is to carefully arrive at a total package, or a combination of some or all dimensions of an order such that we address both his core needs and ours as we dissected above. the key is to give the customer what we have that is most valuable to him, so we can in turn get what is most valuable to us. we must make money, but it need not be hinged entirely on price. other dimensions like volume quantity, terms of payment, product selection, color, future orders, and other issues should be examined and where applicable, traded.
discount, can we offer him a 10% discount on a non-bottleneck
product of same perceived value? (more throughput)
buy other products (non-bottlenecks) at a special promotional price
just above variable cost? (more marginal profit)
Do we really mind not receiving the letter of credit at Sight?
Higher or lower price per se does not necessarily mean that more or less money is made. the sale has to be booked, invoiced, and collected. and many more such sales have to be booked, invoiced, and collected. if due to high price, no sale is closed, then no money is made. if due to low price the company is unable to cover total costs despite high volume sales, then no money is made..
To discount or not to discount therefore, is not the question. it is against company interest to thoughtlessly disregard an order just because the client asks for lower price. neither is it in our interest to blindly close an order for the sake of increasing sales. thinking globally for the entire order, and the entire company, we must persevere and reconfigure the offer, or even better change general policy, to meet both the customer and the company's needs.
What is more important is that in the end, we close the deal and make MONEY. to do this, we must revise the package and adjust existing policies to address both the customer and our company's needs, with the common objective of attaining a long term, mutually profitable relationship.
A win-win approach is not so easy, but it is powerful. win-win negotiation
does not allow giving in without getting anything in return. without doubt,
having more understanding, we will agree and close the deal: neither the
company's deal nor the customer's deal, but the better deal. - JNP