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"I need you to break this price down for me.", "What is behind this price.", "Please show me the cost build up.", "Please provide full price transparency." If you're a salesperson you've heard this request or some request of this question more times than you care to count. If you're a procurement person, this is a part of your daily repertoire. You expect price transparency. Why is price transparency such a hot topic? Why do procurement people need to know what the build up is? Why are sales people so protective of it? Are price, cost, and value the same things?
Procurement people are designed and trained to be analysts. Good procurement people need to know what's behind the price. Why? Because they believe that what makes up the price generally determines the value that the company that they are working for is receiving. "What am I paying for?" Is ultimately the question that they are asking. It's not enough for them to do market bench-marking to determine who is most competitively priced, they need to know that even if the product is competitively priced that they know what they are paying for. In many cases, procurement people require full price transparency on the product or service.
For example, its not uncommon for a procurement person to ask the salesperson of a pump to break down the price into the following categories:
And then, even after the salesperson has provided these things, a good procurement person will do research on each sub section to determine whether they are being overcharged and request the salesperson to reduce pricing accordingly or tie raw material costs and sometimes even labour costs to indices to maintain objectivity in price changes.
Procurement people look within the price to determine value. Of course, salespeople could always choose not to provide this information, but that rarely happens, because they'll get the following line or some version of it: "All of your competitors have provided this information." And so essentially they get pressured into revealing the info they don't want to disclose.
The definition of "value", "price", and "cost" is probably the largest worldview difference between salespeople and procurement people. Generally (I said generally, so don't send me angry emails saying, "I don't think that way!") speaking, procurement people believe that the value of a product or service lies in the buildup of the price. Whereas salespeople believe that the value is what the product/service delivers and price is therefore largely irrelevant as it is determined by what the market can bare. But are either of those the true value?
"The price is the price.", "Why do you need to know what's behind the price.", "No you cannot have the buildup of the price." These are all thoughts a salesperson has thought. When a procurement person starts questioning the price, generally (see there it is again), salespeople start to get very nervous and defensive. This is because they believe that their margin and revenue is in jeopardy. Rightfully so. It is. Procurement people will grind on the build up if they feel they are being overcharged and so it's natural for a salesperson to get nervous about sharing this information.
Salespeople believe that the value of a product or service isn't determined by the buildup of the price but in what that product or service does for the customer.
And here we come to a conundrum. If procurement people believe that the value of a product or service is determined by the buildup of the price, and salespeople believe that the value of a product is determined by what that product or service does, then how do we collectively (as sales and procurement people) move past this issue or at least work with it in the future?
This is a much bigger issue than one blog post can solve, and I'll be digging into this topic on a future podcast, but I do have a few recommendations:
Price transparency is a HUGE topic and we've only scratched the surface, but ultimately I think both sides of the table need to focus more on real value (ACTUAL ROI) than anything else. Start thinking about how you engage in your discussions around price vs. cost. vs. value. They're not the same things and yet we use them seemingly interchangeably.
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