The Case of the Pricing Predicament

As soon as Scott Palmer’s secretary told him that Joanne Braker from Occidental Aerospace was on the phone, he knew he was in for a long day. Inheriting the Occidental account had helped him earn top sales commissions last year, his first at Standard Machine Corporation. But a month ago, Joanne informed Scott of the purchasing department’s new, more aggressive competitive bid policy, and said it would apply to the acquisition of a computerized milling machine for Occidental’s new training center. Scott nevertheless submitted his $ 429,000 proposal with great confidence and even boasted to his regional sales manager that the deal was “in the bag.” After two weeks of unreturned phone calls, however, Scott got the feeling his confidence had been sorely misplaced. “Hi, Joanne. Long time, no hear. What’s up?” Joanne got right to the point. “Scott, I’ve got a $ 22,000 problem you can solve.” “What do you mean?” “You know we have to look hard at a number of different vendors on purchases of this size. And your bid is well above the competition’s. Kakuchi came in under $ 390,000, and Akita Limited at a little over 400K.” She waited, and Scott waited back, not wanting to show his anxiousness. “The way I count it,” she finally continued, “you’re $ 22,000 too high, and I just can’t sell that here.” “Well, Joanne, you get what you pay for in this world. You know that Standard’s got the best machine tool equipment in the world. Not to mention our service and training. So we have to sell at sensible list prices, no more no less, if we want to keep providing the kind of products and service you expect from us.” Scott began to recount Occidental’s long and fruitful relationship with Standard, and the unmatched performance of its milling, grinding, and boring machines. But Joanne interrupted. “Scott, you don’t have to sell me on your equipment,” she said. “And you understood what the new bidding policies meant when we announced them. We’re under the gun to cut costs, so we have to look at other suppliers. I just can’t budge on this till you come down to the middle someplace. That’s the way it is.” Actually, Scott had always wondered just when Standard’s fixed-price policy would meet strong resistance from a customer, but he had not expected complaints from Occidental. That company had maintained its manufacturing edge by investing in the sort of state-of-the-art automation Standard provided, and it had installed virtually nothing but Standard equipment for more than 20 years. Scott told Joanne he appreciated her problem and her frankness about the other bids. But he continued to argue Standard’s case. “We ship a lot more equipment than the others,” he maintained, “and we ship it on time. Our prices have to reflect that. And you’ve seen how we train your operators and hang around after installation until everyone’s up to speed.” “Akita and Kakuchi say they will too,” Joanne replied firmly. “I should tell you they both provided some pretty convincing testimony from other U.S. accounts.” “I don’t want to knock Akita,” Scott responded. “Some of its basic equipment is decent. But how reliable will it be in a crunch? What would it have done when you bumped up against capacity last year? Installed practically overnight like we did? It would have had to train your staff in Japanese in 24 hours.” He paused briefly for effect. “It’s awfully far away when you’re in a bind.” “It’s true that none of Akita’s customers have plants that are as big as ours, or that seem to be growing as fast,” she conceded. “By the way, did you take a long hard look at Kakuchi’s software?” Scott bore in. “If your people can figure out how to use it, they’ll get a Nobel Prize. Its training division is almost nonexistent. And I hear some of Kakuchi’s European customers call their field service group, ‘field circus.’” Joanne laughed. “I’ve heard that too. That’s why we’re hoping to get you close to Akita’s bid. Its A71 package looks pretty good.” “Pretty good isn’t good enough, Joanne. You know that and I know that. I’m sure the rest of purchasing knows that. And do you think the guys in manufacturing want to compromise on quality to save 5 % on a piece of equipment?” “Look, Scott,” she said, “we all know what we know. You know Akita’s solid, and so is its equipment. And its managers know there’s a lot of potential business in the two plants we’re planning to build over the next four years. Everybody in the industry knows those plants are on the drawing board. So it’s really a question of your attitude toward the future, not just the quoted price on one piece of equipment.” Joanne said the deadline for final bids was in two weeks. Scott explained to her that he couldn’t give an inch on price unless he could convince his regional manager, Tony Della Pena. Scott hung up, and his mind turned immediately to the office down the hall. He wondered whether a carefully worded memo to Tony might not get better results than simply walking into his office. But because he felt he was battling the clock, Scott went straight to Tony and briefed him on the conversation with Joanne, finally suggesting that Standard rebid at $ 407,000. Tony held firm on the original proposal. “Scott, you’ve done great work in a year, really first rate. But if you’d been selling for us a little longer, you’d understand why we don’t dicker with our prices, even slightly.” “But Tony, think about those two new plants. Joanne practically promised us that business for $ 22,000 less on this deal. It doesn’t seem smart to let Occidental get experience with other equipment and suppliers now.” “I know, I know. I’ve seen the new products from Akita and Kakuchi. The software on the A71 looks pretty damn good. And Akita hasn’t been so terrible on service in the U.S. since it built those field centers here.” “I wasn’t aware of that,” Scott said sheepishly. “But there’s a lot more to this business than price,” Tony continued. “We don’t want to mess up the industry. We aren’t selling a commodity. Of course we want Occidental’s long-term business, but we can’t let every customer nickel-and-dime every bid. Do that, and you might as well be selling sheet steel.” “I know we want stable conditions. But it’s not as if we’re losing money with $ 407,000. And we may lose a big account just as it’s about to get a lot bigger.” “Scott, you know how this company got where it is. Standard is founded on quality and reliability. We’re innovators. We can’t stay ahead of the curve if our prices don’t support our development costs. How many man-years do you think went into building the software for our 1052? Or into upgrading it to work with new production processes? And you know what we spend on customer service. That’s why we’ve had Occidental’s business for all these years—by thorough installation, training, by rushing spare parts to them.” Tony paused. “By paying our salespeople enough to know what’s going on with our customers. It’s not to Occidental’s advantage for us to cut prices if it means it’ll lose its manufacturing edge in the future.” “I hear what you’re saying, Tony. But right now Occidental doesn’t seem to value our service and support as much as the money it wants to save. Couldn’t you at least go talk with Bob Davis about making one minor adjustment to the fixed-price policy?” Davis was corporate vice president for sales. “I’m not going up the line to argue for an exception to a policy that’s been around a lot longer than either of us have.” Tony looked resolute. “This is an old company, and a successful one. You don’t go running to the fourteenth floor every time you get a decision you don’t like, Scott. Why don’t you see what else you can do for Occidental instead of complaining to me about our pricing policies?” Scott got the message and started toward the door, remarking as casually as he could, “Winter is coming, Tony. We could both use a week in the sun. And those new Occidental plants could bring us some pretty nice rays.” Back in his office, Scott gathered evidence for the memo he realized he should have sent Tony in the first place. Tony had chided him in the past about being too impatient to close a deal in a business where the sales cycle tended to be long. Scott thumbed through trade magazines for articles on the Asian invasion and sent his secretary to the copy machine loaded with nightmare stories about the dwindling market share of established U.S. manufacturers in industries like Standard’s. By quitting time, Scott had completed a succinct memo that outlined to Tony three possible compromises on Standard’s fixed-price policy. 1. For Occidental only, Standard would rechristen the 1052 as the 1052X, change the color of the control panel from gray to blue, make a few other cosmetic changes, reduce the motor’s power slightly, and offer the revised machine at $ 407,000. 2. Standard could rebundle the 1052 service package to justify the $ 407,000 price tag. This would mean eliminating the usual one week of on-site operator training and cutting back the time troubleshooters would remain at the facility after installation from two weeks to one. In addition, it could trim the “free” six-month service period to two months. 3. A modified combination of the first two alternatives could also cost $ 407,000. As an addendum, Scott wrote a brief analysis of encroaching global competition, supporting his arguments with the articles from the trade press. He also reminded Tony about the recent Munich trade show, where other salespeople had complained of losing large accounts because of price competition, particularly from Akita. Scott thought his arguments were solid, but Tony had to decide where to go from here. What would you do? F.G. “Buck” Rogers spent 34 years with IBM before he retired in 1984 as vice president of marketing. He lectures widely on management topics, and is the author of The IBM Way and Getting the Best Out of Yourself and Others. This is not just an argument about price. This is a multi-faceted argument about a policy deeply engrained in Standard that has probably been critical to its success over the years. This situation also involves the need to sell value and a manager who has not done a good job of training his field people. Scott is obviously trying to circumvent the fixed-price policy and take the easy road to selling. He wants Occidental’s business at any price and without having to do his homework. What’s going on is clear enough. Occidental is changing its procurement policies. The company now requires multiple bidders. Joanne’s in purchasing, and that’s the line. Occidental clearly likes and prefers Standard and wants Standard to get the business. Why else would Joanne tell Scott precisely how much he has to come down in price? More important, Joanne’s proposed new price is still above Akita’s bid of “a little over $ 400,000” and Kakuchi’s bid of “a little under $ 390,000.” Standard doesn’t really have to be in “the middle someplace.” In short, Occidental agrees with Scott’s pitch about Standard’s superior package. Scott is not solving any problems for Tony. He’s creating problems. Tony won’t submit Scott’s proposals to headquarters. He’s no dummy; he knows that headquarters will see Scott’s modifications as price cuts that are not very well disguised. A proposal to Bob Davis that cavalierly undercuts the fixed-price policy would make Tony look foolish, which presumably he is not. He might talk over some alternatives or strategies with his boss, but Tony is not going to make a formal proposal or forward Scott’s memo. On the other hand, the new competition is real. A valued customer is behaving differently, and the threat posed by Japanese suppliers cannot be ignored. And the pressures are being felt by other salespeople as well. Of course, we shouldn’t take the Munich trade-show complaints at face value. Just because a salesman says he lost business to a lower bid doesn’t mean that’s why it was lost. What else is he going to say? “I lost it because I screwed up. I was a lousy salesman. I mishandled the customer.” Finally, Scott’s selling approach is all wrong. He commits the cardinal sin of selling someone else’s weakness rather than the bottom-line value of doing business with Standard. Also, he tells the customer that the responsibility for getting action is out of his hands. Let’s step back from the facts of the case and consider the situation on a more general level. In today’s tough and demanding marketplace, industrial customers want to negotiate, and when the deal is significant enough, you can be sure Standard will reevaluate its position. What will happen when Occidental builds its new plants? The capital budget for machinery is surely going to be several million dollars—probably tens of millions. Every supplier, including Standard, will at least consider negotiating terms on a project like that, even in an environment where price competition isn’t heating up. But the negotiating will not be done by Scott or Tony alone. It will also involve Bob Davis or the president of Standard, working with their counterparts at Occidental. Scott and Tony will draw up a detailed assessment of the customer’s specifications, delivery requirements, and other factors, and then higher level executives will actually do the deal. Or consider an even more basic question: Why would any company selling big-ticket industrial items have such a rigid pricing policy in the first place? The explanation is not simply Tony’s concerns about destabilizing competition and sheet steel, though that may be important. Rather, the fixed-price policy sends an unequivocal message to the sales organization: you must know your prospects and customers so well, and get into every nook and cranny of an account so deeply and continuously, that you understand the customer’s business, its people, its problems, its needs, and its strategic thinking more thoroughly than any other supplier—perhaps even more thoroughly than the customer itself. This means the sales organization will be able to help customers define their needs, design their plant layouts, train their employees, support their manufacturing systems. That is, Standard will provide such a high level of service that no other supplier will win on price alone. It is a working partnership based on solution selling. If Tony had properly inculcated his salespeople, Scott wouldn’t be suggesting these phony shortcuts. Tony had many chances in his discussion of the Occidental bid to “train” Scott. He could have asked questions like: Who are the real decision makers outside of purchasing? What does Occidental’s engineering department have to say? Who have you been talking with in manufacturing? How do they feel about our products, especially the ones they bought last year? What kind of calls have our service people been getting from Occidental? Any troubles? Any really good things we’ve done for them recently? In short, Tony is not using the non-negotiation policy to do what it’s designed to do—namely, to force the salespeople deep into the business of prospects and existing accounts, to create intricate and intimate partnerships. Scott seems to work only through Joanne. Admittedly, many companies don’t want salespeople getting inside their organizations, or insist on carefully screened relationships. But with complicated, big-ticket investments they do want help from sales reps. Scott doesn’t even mention what else he’s doing at Occidental, and Tony doesn’t ask. Indeed, the problems with the Standard sales organization seem pretty serious. For example, this milling machine is for Occidental’s “new training center.” Well, shouldn’t Standard try to help here? Maybe it shouldn’t even sell the machine, but give it to Occidental—ostensibly for joint learning about its use and as a pilot installation for Standard’s own reexamination of its training of machine operators. After a few years, Occidental could return the machine or buy it for half the original price. Finally, Standard might consider an entirely different strategy for this particular account in this particular situation. Tony could make a pretty good case for going back to Occidental and withdrawing the bid. He could argue, in effect, the following: “We can’t and won’t go below $ 429,000. Not because of our no-discounting policy but because if we went below what we think is the right price, we’d have to cut corners on what we do for you, and we just don’t think that’s right. If we have to come down in price, we’d just as soon not bid. You wouldn’t get what you need.” None of this is to ignore the transformation and the globalization of competition facing Standard Machine. We don’t have enough information in the case to deal with that. But we do have enough to see that this is, in the first instance, not a problem of global competition, but of sales-force management. The key is to understand the customer’s requirements, have broad management coverage, and put together a cost-justified solution that truly conveys value-added marketing. Bruce Moore has been president and CEO of H.R. Krueger Machine Tool Inc. of Farmington, Michigan since it was founded in 1971. He is also a director of the National Machine Tool Builders Association. Standard will lose the order from Occidental unless it modifies its pricing policy. It might also lose the chance to sell millions of dollars of machine tools for Occidental’s proposed new plants. And it will have opened the gates even wider to its foreign rivals. The scenario is rather straightforward. Occidental is willing to throw out Kakuchi’s bid. But Akita Limited is producing decent equipment. Its software is good. Its service is improving. Its price is right. Without some movement by Standard, Akita will get the Occidental order. And if Akita gets its foot in Occidental’s door, it will be there forever. Standard must either change its pricing policy now or change it later—and under less favorable circumstances. The entire machine tool industry, like other U.S. manufacturing industries, faces a very different marketplace from what it faced 15 years ago. The industry must adjust its product and marketing strategies to meet the demands of an international economy. Put simply, the days of non-negotiable prices are over. But Standard’s marketing executives have not convinced top management that the company is competing in a different environment. Standard has a good opportunity with Occidental to adjust its pricing policy. The relationship between the two companies has been long and mutually rewarding. Occidental clearly prefers to do business with Standard. That’s why Joanne disclosed to Scott the identities and prices of his competitors. But Scott is a young salesman trapped by inexperience. He was unprepared to deal with Occidental’s new policy of soliciting multiple bids. His response was to knock the competition, always a bad idea. His arguments to Joanne in defense of Standard’s marketing policies were inappropriate and fruitless. How do you quantify “sensible list prices”? After Joanne freely offered information about competing bids, Scott did not seek additional information about alternatives to the $ 22,000 price cut that might improve Standard’s position. The real problem at Standard is Tony, the middleman between the sales force in the field and upper management. One of Tony’s jobs is to sell products to the customer. But he has another job which is just as important, if not more so. That is to sell the customer—its conditions, needs, performance requirements, attitudes—to top management. Tony is not doing this. He reiterates old company policies to Scott. He shows little concern for the possible loss of a good customer due to changing competitive conditions. He doesn’t recognize that this is an important sales problem he should take to his superiors. Standard’s top managers appear to be quite competent. Their policies have produced high-quality products and excellent service support to customers. Standard has an excellent record of on-time deliveries—no small accomplishment in today’s machine tool industry. With this demonstrated capability, I cannot believe they would not listen to reasonable arguments about adjusting the fixed-price policy. One strategy Tony should consider taking to Bob Davis is a variant of what Scott proposed in his memo. Occidental is looking for greater perceived value. If Standard were to set separate prices for the components of the milling-machine package—that is, unbundle the final price—Occidental could compare relative values. And Scott could talk Joanne about these individual prices and what really mattered to Occidental. For example, the Standard personnel who “hang around after installation until everyone’s up to speed” may not be as important to Occidental as Standard thinks. There could be negotiated reductions of how long these people remain on-site. Should Occidental later need more training, it could pay extra. In all probability, these training costs would not be as much as what Standard has factored into its current price. There are certain compromises Tony should not suggest to Davis. For example, he should not propose shortening the free service period, since this would considered a decrease in value by Occidental. Nor should he gimmick up the machine with paint jobs, less horsepower, and cosmetic changes like Scott suggests. Occidental is very familiar with Standard’s products, would spot the changes instantly, and would perceive a decrease in value. These and other price reduction ideas may not make the entire 5 % difference. There may still a 2 % to 3 % price gap. Good enough! Tony will have to sell Bob Davis on the idea that Standard’s management can find the rest in cost reductions not affecting quality or performance. Surely this is not an insurmountable challenge for a machine tool company that wants to be around in the future. Richard T. Lindgren is president and CEO of Cross & Trecker Corporation of Bloomfield Hills, Michigan, the largest producer of machine tools in the United States. This is a case study of a company headed for trouble—not because it won’t negotiate prices, and not even because of the appearance of foreign competition. Rather, it is headed for trouble because the sales organization isn’t doing what Standard’s pricing policy is designed to have it do, whether that relates to domestic or foreign competition. In fact, price may not be the critical issue this case from either Standard’s or Occidental’s point of view. The real question is value—and that is measured not in terms of initial price but in terms of the effect that Standard’s equipment will have on Occidental’s operations over the longer term. The key for Standard is not just to make the sale, which appears to be Scott’s only concern. In fact, Scott has no understanding of what the company’s overall operating rationale really is. This is even more dismaying since he is able to summon clippings of the coming Japanese competition in order to undermine the rationale and price policy—when the policy may be the company’s best competitive weapon to deal with foreign competition. What the case really illustrates (more by what isn’t in it than by what is) is the critical relationship between industrial suppliers and purchasers. This relationship is especially important in industries where equipment is highly complex, takes new forms, and requires a great deal of training and service. It is even more critical in industries where foreign competition is threatening to disrupt or challenge traditional ways of doing business—ways that have made sense for both supplier and customer. In those situations, which are increasingly prevalent in American industry, a close working relationship between supplier and customer is the key to sustained competitive performance for both parties. It is out of such cooperative relationships that technological improvements flow to lower parts cost, improve quality, and reduce working capital needs. The purpose of Standard’s policy on price is to force the company to pursue these kinds of relationships. It is designed to make the salespeople work closely and cooperatively with the customer so that they understand each other’s needs and interests, rather than haggle over price. When the policy works, it is the best weapon that both supplier and customer have against a foreign invasion, which usually begins on the basis of price. The tragedy of this situation is that neither Scott nor Tony appreciates the real meaning of the warning of foreign competitors, nor its relationship to and the real value of Standard’s pricing policy. With sophisticated equipment like machine tools, sales is not just about sales, any more than engineering is just about engineering. Everything has to work together because, as this case shows, business is all about getting and keeping a competitive edge—and that cannot be done based on price alone. Sure, the seller has to be reasonably price competitive. But it also has to make enough money to be able to support the kind of R&D that will constantly help keep itself and its customers competitive. In this case the customer seems to understand that; it is not asking for a low-ball bid. But the sales organization clearly isn’t doing its part. William Whitescarver is president of the Bindery & Forms Press Division of Harris Graphics, a subsidiary of AM International based in Dayton, Ohio. Standard Machine has created for itself an opportunity to fail with a major customer. How did this unenviable situation come to pass? Let’s look at how Scott and Tony have handled a major change in purchasing policies by one of Standard’s most important customers. Occidental first announced its new, competitive-bid policy a month ago, but there was virtually no reaction from Scott. He never even bothered to discuss the new policy with Tony until Joanne told him he had to come down in price. In fact, he threw Tony off base with his “it’s in the bag” comment. Scott apparently did not appreciate the gravity of the competitive message being sent by Joanne. Earlier and more serious attention to the competitive-bid policy would have allowed Standard to prepare a more effective response. Scott also stumbled by telling Joanne that only Tony could make a decision on price changes. This is a tactical error that gives Joanne an opening to go directly to Tony, the person with pricing authority. Of course, Tony has made blunders of his own. He has information about the competition (for example, Akita’s new U.S. field centers) that he has not shared with Scott. Such information might have caused Scott to be more concerned than he was about the pending Occidental order. Tony views Scott as an impatient rookie. He makes it clear that Scott does not control the Occidental business, but offers no creative help with this major account. Moreover, Tony seems insecure about his own position. Why doesn’t he advise Bob Davis of the Occidental dilemma and discuss the growing strengths of the competition and possible responses? Standard has a very high regard for its position in the industry. According to Tony, it has the best equipment, service, and training. It is an innovator and leader. Its business is founded on quality and reliability, so it can command a premium for its product. All of this may be true, or may have been true, but it also has the ring of marketplace arrogance—which typically leads to a false sense of security, lost orders, and declining market share. Despite his shaky start, Scott has come up with some workable alternatives for handling the Occidental bid. Equipment changes, alterations to the service and training package, and/or reduction of the warranty would likely be acceptable to a customer completely familiar with Standard’s equipment. This would also protect Standard’s fixed-price policy. Joanne has clearly opened the door for a price above $ 407,000. She seems willing to work with Scott to develop a mutually acceptable plan. One final point. Scott, Tony, and Bob Davis need to coordinate their efforts and educate senior management that Standard is facing the same competitive pressures as Occidental. It is time for Standard to install cost-reduction programs of its own. These programs should in turn be reflected in product pricing. Standard should prepare sales tactics and selling strategies that will develop continuous business, not just look at customers order by order. If done well, the long-established, fixed-price policy can remain a major positive selling tool for Scott and his colleagues at Standard Machine.

The Case of the Pricing Predicament

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