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The Pricing Conundrum: It’s Time For Honesty

November 17, 2009

I spent today chairing a conference about contract manufacturing and outsourcing in the health and pharmaceutical industry.

Throughout the event, whether speakers were addressing technical or commercial issues, the importance of ‘the relationship’ in delivering successful outcomes was a consistent theme. And both providers and customers made regular reference to the forces that undermine relationships – in particular when there is an unrelenting focus on price reduction.

The participants came from different parts of the business and most are in senior positions. It is not that they fail to understand the need for efficiency and competitive cost structures. Their point was that many relationships just don’t take off because the parties don’t develop mechanisms to explore opportunities for mutual cost reduction and possible margin improvement. They perceive too many conversations focusing on cutting the supplier’s price or charge (or of course, in times of constrained supply,  the conversation reverses and is about price increases).

“Many customers just don’t realize how difficult they are to work with”, lamented one delegate. “What do you do when they don’t value relationships or when they simply don’t have the organizational structure to manage them?” he enquired.

The answer is really quite simple, though often hard to deliver – especially through a commission-based sales force. It reminded me of a blog I wrote earlier this year on the subject ‘fear corrupts’. We have three options. Typically we stay quiet, we hope for the best, we persuade ourselves that things will be OK. And we move forward with a contract that contains hidden and unidentified costs and risks associated with the absence of efficient contract and relationship management. Alternatively, a few suppliers are brave enough to no bid. These are mostly efficient and highly successful organizations that don’t need the risk or the low margins that are associated with ‘difficult’ customers.

Recently I came across one supplier who was breaking the mould. They decided that the right answer was to be honest. They had the courage to declare a ‘service premium’ as a separate priced item. They explain to their customers ‘Here is the achievable price, but here is the actual price to you’. This approach rapidly gained customer attention and led them to wonder how many suppliers were charging a hidden premium to cover their risk aversion, or bureaucracy, or slowness to reach decisions or manage changes.

Healthy relationships require honesty and openness. We all need more courage if we are going to drive business improvement. We actually do our trading partners a tremendous service when we point out the ways that make them difficult to do business with. If they are serious about cutting costs, they will welcome the insights and opportunities these revelations represent. After all, they even save the fees a consultant would charge to tell them the same things!

  1. I once did something similar to the ‘service premium’ in response to an overly-aggressive markup of our standard contract. On a conference call with the other side, with my sales exec’s approval, I explained to the (young) lawyer that the pricing we had been offering was tied to our standard T&Cs. I said we’d agree to all but two of the contract changes he was requesting, but the pricing would increase by 40% to take into account the increased legal risk. He was outraged. When the dust settled, his client withdrew almost all their change requests.

    • DC, thanks for sharing this experience. Another similar example came from a company that required suppliers to respond based on the standard terms and conditions contained in the RFP, but to highlight where they would like revisions and what the price benefit would be.

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