Believe it or Not, Pricing Needs Procurement

Every time I conduct a pricing workshop, during a tour de tables, I ask delegates amongst other questions whether their company has a Pricing department and whether their company has a Procurement department. The answer is typically 80% - 100% of companies have a Procurement department, but 20% or less have a Pricing department. What’s wrong with this picture?

The logical conclusion is that, very simply (and sadly), most companies are more concerned about the price they pay for goods and services, rather than the price they get for their own goods and services.

Any Leading Company operating in a B2B (Business-to-Business) market will, if they haven’t already, find themselves pitching a sale to a Procurement Manager. Here’s what you can expect:

·       All Procurement or Purchasing Managers are known as “Commodity Managers” and everything they buy is a commodity;

·       They will try to find out how your sales rep earns their commission;

·       Expect to see posters, and articles on competitors amongst the magazines, in the waiting area, as well as the commodity manager drinking from a competitors coffee cup during the meeting;

·       They never accept your first offer, tell you your competitors product, service and delivery is better that yours, and they never pay more than $X for the product you’re pitching to them.

Once the psychological games are out of the way (and the list above barely skims the surface), then the real fun and games begin.

The commodity manager is going to insist on “open-book costing” where, as the name suggests, suppliers must show the buyer how they price their products. They can then pull out the ‘Procurement Managers Toolbox’ and conduct overhead analysis, break-even analysis, look at marginal costings, total absorption costing, purchase price cost analysis, cost transparency and the total cost of ownership.

Round about now, your sales rep is slumped in her chair, feeling three feet tall and has probably given away 10% - 20% in price concessions. On the other side of the desk, the commodity manager knows her job is safe for another month and she’s going to get the kudos of getting the best price ever out of this supplier.

So why, if most or all companies have their own Procurement functions, are Pricing and Sales not better prepared for these discussion? Good housekeeping needs to start at home. Pricing Managers and Sales reps need to spend time with their employer’s Procurement managers, observing and developing counter-procurement strategies.

That's why Pricing (and Sales) need Procurement.

[This post also appears on LeadingCompany, 24th May 2012]