If you have been following the Price Increase Series, you are already an expert in implementing a price increase and handling internal objections. To wrap up the series, this week’s article explores how to handle price increase negotiations with your customers – the most important group to convince. Customers tend to be more emotional than rational and have a vested interest in a lower price, so do not take their demands at face value. Push back on price is common, so it is up to you to figure out what is causing the customers’ resistance and address it accordingly. To help you, we have highlighted four common negotiation tactics customers use to prevent price increases and strategies to overcome them.
1. Negotiation Tactic 1: If/Then
Solution: Do Your Homework
The business-customer relationship is frequently viewed as a trade-off. The If/Then tactic is centered around the idea that many customers will not accept a price increase unless they get something else in return or if specific conditions are met. For example, if you intend on increasing your price by 10%, then your customer may expect more value, benefits, products, etc. as compensation. This of course will water down, if not totally erase the benefit of the price increase. How can you avoid getting the short end of the stick when engaged in an If/Then negotiation?
The answer: Do your homework. Here is a checklist of four key areas to focus on:
1. Run scenario planning on multiple price levels to ensure you are never caught off-guard. If they request a price concession, what level (if any) are you willing to accept? Do not leave it to the Sales Teams' discretion.
2. Assess the impact of various “gives” from high to low cost so you know the impact of each and provide guidance on what is pre-approved versus an absolutely “no go.”
3. Create a list of “good to haves” that you can bring to counter the customers' asks and balance the scale.
4. Determine your walkaway point or no-go areas to avoid negotiating at a loss.
Being prepared and doing your homework will help you navigate the IF/THEN conditions to successfully get buy-in from customers.
Negotiation Tactic 2: Good Cop Bad Cop
Solution: Use Their Words As A Launching Pad
A one-on-one negotiation with a customer is already tough but going against a team is even more difficult. The good cop bad cop tactic involves two individuals from the customer-side who work as a team to offer a series of rewards (and punishments) to gain an advantage over you. The bad cop is focused on intimidation while the good cop offers you encouragement (in hopes of getting you to let your guard down). However, both have one goal – to make you give in to their demands. Often, the good cop is the person you are dealing with most of the time from the customer side, while the bad cop is a new person brought to deal with price negotiations. Unfortunately, the common practice (and common mistake) is starting conversations with the bad cop instead of the good cop in hopes of building a relationship.
If you remember one thing from this article, it is to ensure the conversation does not rely on your relationship/history with the Good/Bad Cop. Letting relationships into the negotiation will surely put you at a disadvantage. To maintain a level playing field and avoid a good cop bad cop scenario, follow these best practices:
1. Keeping records proving that the customer has expressed concerns/interest in the past that they cannot dismiss.
2. Escalating challenges to higher-ups on both sides of the table to get the right person to attend the negotiation. Ideally, you want to be having a “top-to-top” discussion.
3. Sending meeting notes to the customer after each discussion to ensure visibility and maintain accountability.
4. Establishing timelines at the beginning to avoid dragging out the discussion (if it is in your favor to close quickly).
Facing a Good Cop/Bad Cop combination can be daunting but keeping track of all conversations and basing further discussions on the past will helps ensure stability.
Negotiation Tactic 3: Name Dropping
Solution: Know Thy Enemy
You most likely are competing with many other companies to win business from customers. With customers having options to choose from, they want the best deal (and your proposed price increase is far from a deal). Have your customers ever mentioned the higher discounts your competitors offer? They are using the Name Drop negotiation tactic. You may be inclined to simply roll back your price increase to maintain the customer but doing so would be a mistake. To overcome this, consider what your customers are doing and how they will react to the price change by:
1. Conducting competitive intel to understand which competitors have the capacity and strategic focus to be interested in capturing your customer.
2. Leverage bid tracking and/or historical price information to understand what the true price gap is between you and the competition.
3. Simulate the competitor’s financials to understand if they would be profitable at the prices the customer is quoting to you (If possible, show the customer “unrealistic commitments” or “compromise in quality or sustainability”).
4. Calculate the switching cost to help customers understand what they may lose if they switched to a competitor (how material is it for them? What do they lose?).
5. Lastly, if you think the threat of a lost customer is genuine, make your best offer & be comfortable walking away.
Negotiation Tactic 4: Apparent Withdrawal
Solution: Understand The Why
This tactic can be frustrating because it appears out of nowhere. Just when you think you are making headway with the customer and are on the same page about the price increase, they withdraw and stop any further discussions. What happened? There are three common reasons for the withdrawal:
1. They may be frustrated at the slow pace of coming to a resolution.
Try to find something small or big that can be closed in the short term to build momentum and get the customer excited about the major resolution down the road.
2. The withdrawal may be a power move to gain more concessions.
Try to help them understand the progress achieved up to the present day and the ROI to show the value your offering provides and that it is not worth dragging it out.
3. The withdrawal may be caused by fear of losing on the negotiation.
Try to remind them of concessions made to date and what is coming up in future initiatives to ease their feeling of loss.
It is always important to understand why the customer is behaving/acting a certain way to identify the root cause and proactively address it to successfully manage these negotiations.
Keep these 4 tactics in mind next time you get into a price negotiation. If you follow our advice, your customers will be accepting your price increases without fail. Now that you know how to overcome objections from your sales force and negotiation tactics from customers, what are you waiting for? Increase those prices!
Revenue Management Labs would be happy to help with your price increase initiatives, from preparing your sales force to helping customers see the value in your offering. Get in touch today!