Product "rationalization" is all well and good, but you've probably already figured out that it puts you, the sales manager, in a serious bind. So here's how to get out of it: Put your customer's Procurement people in a bind of their own.
Let me explain.
Your B2B company probably used to offer products to meet every conceivable customer need. Then along came a wave of tools such as activity-based costing for figuring out each product's value to the company, and a lot of those offerings got washed away. And for good reason: Some of them were costing your company a bundle and weren't paying for themselves. What was left was a set of simplified, high-value offerings.
But there was a downside to this rationalization: Sales now has fewer variables or "give-gets" to play with while negotiating, leaving your company vulnerable to Procurement's single-minded focus on price.
Procurement is a powerful force in today's companies, and it got that way by providing double-digit savings from sourcing initiatives. You know all too well where those savings come from: your prices. If you're not prepared, all of your top products and services will become targets for the Procurement buzz saw.
Procurement can simply line up your high-value offering against a competitor's lower-value offering, look your salesperson right in the eye, tell her that both products are the same, and demand a price cut. If your company doesn't comply, Procurement threatens to put the business out to bid. Because of rationalization, you don't have the option to get around Procurement's comparison by offering an array of products that uniquely meet the customer's needs. So you and your salesperson fold, offering a huge discount to close the deal. This is how product rationalization has pushed selling companies into the discount trap.
But it doesn't have to go that way. Although you may not have as many products to offer as you used to, you do have tiers — think good, better, best. These tiers function both as choices for customers and as alternatives to discounting. (Software companies have been creating good-better-best tiers for years, offering different levels of features to a given software product.)
Let's say you create tiers of functionality. The "good" offering might include basic functionality of the product through a software solution; "better" might contain the software solution, plus an online option; "best" might be a customized SaaS solution that integrates with your back-end CRM.
Now when Procurement says, "You've got to sharpen your pencil and drop your price by 30%," your answer can be, "No problem. We can certainly drop the price by 30%, but we're going to have to take the customized SaaS solution out of the bundle to meet that price."
If Procurement agrees to your proposition, you'll know the extra wasn't really needed in the first place. So be it. You've reduced your company's cost-to-serve.
If Procurement howls, you've hit a nerve. Procurement knows the decision maker wants the element that you've proposed to take out of the offering. You've won.
This method is the most effective way to play Procurement's game, and it mitigates the damage from rounds and rounds of price negotiations. It's a lot more fun too!
There was a time when I routinely advised companies to trade revenue for profits. I said that successful pricing required sacrificing some top-line revenue for higher bottom-line profits. I now see a smarter way to drive business performance by combining better pricing with better negotiating techniques and a smarter offering structure. This structure should evolve with the needs of customers and with the competitive alternatives. It may add complexity to your business, but that complexity can yield enormous dividends by driving growth in both revenue and profits. And isn't that what everyone wants?