“Make him an offer you can’t refuse,” is one of the most famous lines from the Godfather movies, in which Don Corleone tells his lawyer Tom Hagen to get his godson a part in a new movie. The producer, Jack Woltz, did not understand who he was dealing with and declined the Godfather’s offer. The next day he woke up with the head of his prized horse in his bed. Jack Woltz clearly did not know his buyer or he would have accepted the deal up front. Business is much more civil than organized crime, but before beginning negotiations on the price of anything all sellers would be wise to identify the type of buyer they are dealing with. In their book, Pricing with Confidence, Holden & Burton identified four classifications of buyers, each of which has different negotiating implications:
- The Price Buyer
- The Value Buyer
- The Relationship Buyer
- The Poker Player
The price buyer truly cares little about value, and focuses on getting the lowest price. Price buyers are usually led by Procurement and look for a hundred ways to beat the seller up and obtain a lower price. However, price is not value and price buyers generally don’t even recognize the differences in value between competing offerings. They will easily switch between suppliers for lower prices. If you are dealing with a price buyer, don’t get in a bidding war with competitors. Look for ways to de-scope your product or service, and take some of the value adds out. If the buyer wants the extra services, charge them separately for those elements. Then you may have a chance of winning some business without damaging your brand and pricing structures.
For the value buyer, price is a secondary consideration to the value of the products or services in the buyer’s business. Value buyers are generally interested in obtaining the products that will most help them deliver their own high-quality operations, and they look for continuous financial improvement over time. Make sure you clearly understand the value buyer’s needs and focus your efforts on how your products or services meet those needs and add value. Your negotiations should be centered on your unique suitability for the buyer’s business, and much less about price.
Relationship buyers look for partners with whom they can build longer-term mutually beneficial relationships for solving their business problems. They want suppliers that will provide competitive advantages and who they can trust. Prices are not the critical drivers of success with relationship buyers, and these buyers often pay higher than average prices. However sellers who take advantage of that relationship and set prices substantially higher than the value they bring to the customer can lose the trust of the relationship buyer. Don’t be afraid to charge prices that reflect your superior value and service, but also remember the relationship must be mutually beneficial.
Poker Players really want value, but they will act like price buyers. Their goal is to bluff enough that sellers lower prices in a bidding frenzy, but still deliver the highest value products and services. For sellers, the most important step is to determine whether the buyers are really price buyers or just playing poker. Look at how often the buyers have switched suppliers in the past. Identify their true needs and match your offerings to their needs. Offer to remove value-added services in exchange for lower prices. Getting something in exchange for any price concession signals that you are not a price competitor. All of these things will provide clues to the buyer’s true nature. If the buyer is really a price buyer, the seller with the lowest price will win. However if you are negotiating with a poker player, by quietly calling their bluff you can refocus the discussion on how your products or services provide advantages to the buyer, and you will be able to sell at prices that reflect that value.
Understanding the type of buyer you are dealing with is a critical step in any sales process. Failure to do so could result in emphasizing the wrong things during negotiations, making unnecessary concessions, or chasing a buyer who will never pay your price. However, if you get it right, you will sell more products and services at better price levels.