Is Your Software Better than Free?

Open software is in the news every day.  Much of it is licensed for free.  For priced software, K&R hears, time and again, sales pitches similar to this, “We’re providing you with $100,000 (Euros, Rupees, Rubles…) of software value for only $63,000 (just sign here).”  If you are a buyer, you have almost certainly heard this type of argument.  If you have used this argument as a seller, you can be almost completely certain that it did not close the sale.  Even if the sale closed, this argument was not what made it happen.  Let’s look at the reasons.

First: a certain logic is at the heart of this argument.  One version goes like this:  “Price is a shorthand description of customer value, and a lower price is better because it makes the same value available for less.”  There are a few negotiation issues with this logic.  The primary one is that price does not describe value.  As negotiators, we have defined a rule: “You can ask any price that you want (repeat twice)”.  The seller’s initial offer (often starting at a list price) can be arbitrarily set.  Examples abound of software that sells at or near list price and of software where typical discounts exceed 50%.  A smart buyer will understand that list price is a reference point, not a value statement.  In fact, value for a given software package always starts at $0.  After all, if a lower price is better (from our opening “sales argument”), then isn’t free as valuable as something can be?

Second: welcome to the world of Open Source.  Almost no one (any more) falls for this reverse argument to the one we started with above: “Since price is a shorthand description of value, and since you don’t charge, your software has no value.”  (We’ll ignore for the moment the complexities of support, update, risk and so on, and just concentrate of acquisition costs.)  As a simple example, if Open Office and Microsoft Office both include the ability to create documents (and more), but one is free and one retails for about $400, at least one of them is mispriced.  Differentiation is key to determining which one – and this differentiation varies by user.  Which leads to…

Third: Value is determined by the buyer.  Every buyer is a niche market with exactly one member.  Sellers who mistake those buyers for generic opportunities for their products and solutions will be significantly less successful.

As a buyer – remember that your best position in a negotiation is a set of realistic, competitive options.  As a seller – remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation – if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)

Coffee on the Nairobi Coffee Exchange

While many, including K&R’s own GM of Business Development, might argue that coffee could not possibly be a commodity (bought primarily on price), at the wholesale level it is.  Recent news from the Nairobi Coffee Exchange (NCE) provides some simple examples from coffee sales that can be transferred to information technology sales.  In short, when does “commodity” not necessarily mean “inexpensive” – or even “the same”?

What happened on the NCE?

A recent Business Daily Africa article noted that weekly auction prices for coffee were up six weeks in a row, to a 12-year high.  This is interesting, and the price rise is attributed in the article first to the fact that coffee is not considered discretionary by consumers.  Like commuting costs, coffee costs are “mandatory”, and sales do not contract in response to price increases.  One of the things about non-discretionary purchases is that if your offerings fit this description, someone will get the sale.  For sellers, that’s a real plus.

Lesson 1: Your first task as a IT seller is to convince the buyer that your offering is mandatory, not discretionary.  Well-known external, regulatory-based examples of this include HIPPA compliance and Basel II (Sarbanes-Oxley) compliance.  Another “mandatory” class of fixes came around Y2K.  Internally-driven goals (from annual reports, for example), can become mandatory because they are public.  So first, do what you can to make it mandatory for the buyer to have a solution.  That solves half of the problem – the business will close. But who will win it?  If the solution is a true commodity, your odds of winning are strongly related to your price.

Back to the NCE. The second pressure on prices was a perceived lack of future supply on the New York Futures market.  A mandatory item, limited supply, higher prices.  That’s interesting, but a single seller can’t usually control this (or they would be a monopoly).  As a seller, how do you prevent your offering from being a “commodity” if you can’t control supply?

On the NCE, coffee is sold by grade.  The top grade, AA, was selling for between $168 and $353 per 50-kilogram bag.  That’s a wide price range for a commodity.  If even a similarly-graded commodity (raw coffee beans) can change in price by over 100%, how do they do it?  And how can a technology seller learn from that?

In the IT space, an offering is a commodity if buyers feel that they can choose the same thing from several (or many) suppliers.  While it is true that this will generally make the negotiation appear to be about price, we’ll offer a different perspective.  The true negotiation is about how good a job the sellers do in dispelling the buyer’s belief that “the same thing” is available from several sources.   If the seller fails at this task, then the final negotiation will be largely pre-determined, over price, and in the buyer’s favor.

On the NCE, the answer lies in “non-graded” aspects of the beans.  Depending on the bean, additional descriptors can be added: “fair trade”, “shade grown”, “sustainable”, or “organic”.  The local diner may not care about these descriptions.  The local coffee roaster will, as will their “more discriminating” clientele.  Using these characteristics, which add uniqueness, will turn a commodity at $168/bag into a commodity at $353/bag.

Lesson 2: Understand your buyer and the buyer’s true interests.  Using this knowledge, you will almost always be able to describe your solution in ways that are unique, which will in turn move you toward “high priced commodity” status.  This in turn will result in more revenue and more money for you. (TD)

A Seller’s Market for Uranium

On 04/02/08, a New York Times article titled “Report Prods U.S. on Sale of Highly Priced Uranium” inspired us to take a Negotiator’s viewpoint on disparities in value between parties.

The US government is sitting on an inventory of partly processed uranium… formerly viewed as unwanted waste that would cost hundreds of millions of dollars to stabilize and dispose of… BUT… a steep increase in the price of uranium has made it worth billions of dollars.

Clearly this is a multi-faceted issue, with many variables that can affect the final decision.

But then aren’t all issues (aka negotiations) like that?  Since the Department of Energy (DOE) is  now deciding how to proceed, one certainty is clear: by the time they make a decision and gain whatever other congressional and executive approval is required, the price will have changed… AGAIN.

Interesting how expensive waste can turn into attractive goods, but what does that have to do with negotiation?

There are several lessons present in this story that are part of all negotiations:

VALUE versus PRICE: As described in this news article, what you may view as hundreds of millions of dollars of expense, others may view as billions of dollars in value.  In negotiations most sellers’ mistakes are made early in the process, usually out of a desire to seem accommodating.  These accommodating “giveaways” are of little value (cost / expense) to the seller, so WHY NOT?  BECAUSE… it doesn’t matter what it does or doesn’t cost you as the seller…  it matters what the value is to the buyer.  One of K&R’s Six Principles™ to remember is, “Concessions easily given appear of little value”.  Early concessions without any appreciation of value in the client’s eye limit your “Negotiation Capital(tm)” later in the process.  It’s tough to trade nothing for something, if you gave your “nothing” away early without realizing its worth.

LEVERAGE: As a buyer or seller you should understand whether you are dealing with a product / solution that is a commodity (price is the only difference), a monopoly (the “only game in town”), or an offering that provides some competitive differences…  BUT price is still a factor.  The relationship between value and uniqueness is the primary driver of leverage in your negotiations.  Also, evident in this article and true of most negotiations, leverage shifts / changes over time.  Key is being able to assess your position throughout the process and adjust your strategy accordingly.  AND remember your personal / company credibility is an underpinning of your leverage and also can shift based on your actions or reactions.

PREPARATION IS KEY TO A WINNING NEGOTIATION: Another of K&R’s Six Principles™.  Not a hiring criteria for most sales people, at least when I was doing the hiring, but essential skills for an effective negotiator are patience and listening.  One should always be building their information base on a client or situation.  Understanding your “Value Proposition” is nice, being able to articulate that value in the customer terms (reality), and appropriate to each level and constituency within the client…  PRICELESS!  You cannot gather enough information.  Remember to gather information wherever and whenever possible, and utilize it as Negotiation Capital, helping you articulate the difference between “value to them” and “cost / expense to you”.

NEGOTIATION IS A CONTINUOUS PROCESS: Yet another of K&R’s Six Principles™.  As the article discusses, “STUFF HAPPENS”.  The world and circumstances change.  Usually, whatever negotiation you become part of does not start when you arrive.  Your predecessors, or maybe even you, have already set expectations (which you hope are positive ones) that affect your ongoing dealings.  AND it never stops.  Negotiations are indeed an ongoing process.  It’s the continuous nature of negotiations that apply when earlier we noted that before the Department of Energy acts, the price will change… Again.

TWO Points In closing:  First, don’t forget that leverage shifts throughout the negotiation process.  Assess your position and make adjustments accordingly.  Understanding that any actions taken by you and your team during the process, as well as external influences, will effect your leverage position.  Second, remember that particularly early in the negotiation process, information gathering is a better strategy than making concessions you may regret later.  Ask yourself “what problem are we trying to solve” rather than offer “no problem, we can do that”.  Part of every salesperson’s desire is to accommodate the customers requirements.  The danger is giving away real value, and thinking only in terms of cost to you.  You always have the right to give it up but will be more effective if you get something of value to you in return. (ES)

LogicaCMG and Dovetail

A recent agreement between these two companies yields a simple of example of the different values often seen by the two “sides” in a negotiation.

LogicaCMG is a European IT and business services company.  Dovetail is a provider of payments systems.  They recently announced that LogicaCMG has acquired a “master license” to Dovetail’s payment systems technology.  The details are not important to us, except that they provide a window on motivations, and how the motivations of two sides to a negotiation are almost always different.

At the core, most sellers get their business value from money.  Most buyers are using the purchased technology or service to solve a business problem, which in turn leads to value.  The accomplishment that the technology enables provides the value –  the technology itself does not.  In that way, the connection between business value is shorter and clearer for sellers than for buyers.  But most negotiations in IT end up with the seller describing the buyer’s future value.  It can be a difficult connection to make, but it is the most effective persuasive approach to convincing a buyer that what you offer drives value to them.  In fact, many sellers stop short of making this linkage of their offering to business value for the buyer.  For those sellers, they can expect a longer sell cycle, and a more difficult time sustaining price and terms in the agreement.

The press release from LogicaCMG makes a short value statement for each side.

First: Sarah Loveday, Director, Global Products of LogicaCMG, said, “We will develop our own variations to the core system that help us enhance our market-leading packaged solutions in response to the challenges facing our clients.”  This statement of value is indirect.  The implied value is that being responsive to clients will provide a return in market share, revenue, or customer satisfaction – something that is valuable in turn to LogicaCMG.  Valuable, but the purchase of the technology only enables the value – it does not provide the value.

Second: Martin Coen, Dovetail CEO, comments, “This validation of what we offer is the result of several years of intensive review by LogicaCMG, and confirms our belief that we have taken a significant step ahead of our competitors in delivering next generation payment systems.”  There are two values here.  (The following are not actual quotations, but things that might be said – in quotation marks for emphasis.)  One is not stated. “We got paid for this technology”.  (Although, in fact, depending on the value of the second type, even that may not be true.)  The second is a value of a different sort.  It translates to something like this, “My technology is validated by a key and credible client.  That makes my solutions more credible and attractive in the market, and raises the odds that others will also see my technology favorably.”  Which, of course leads to more chances to say, “we got paid for this technology.”

When you negotiate, as a buyer or a seller, remember this lesson.  Value drives decisions, and the value to you is not the same as the value to “them”.  You have to understand both.

Learning from the Stock Market

On the CBOE, the VIX® Index is sometimes said to be a “fear index”.  It uses a blend of buy and sell options for the S&P 500 index to measure volatility and predict stock movement.  At K&R, we find that fear plays just as importantly in negotiations, and leads to certain predictability in transactions.

Often in the Information Technology space, buyers operate under a common fear, “Did I get a good deal?  Should I have held out for more?”  Strangely, an offer of an additional discount to these buyers only emphasizes their fear.  It undercuts any confidence they had that the price was right.  This can have exactly the opposite effect of the intent of the discount.  Instead of motivating the buyer to close, it makes them worry that there is more to get – an even better deal tomorrow.  The discount stalls the decision process.

At the same time, the sellers are thinking, “What if I lose this deal?  How can I get it to close?”  Their fear is stepped up as sales measurement times approach (end of quarter, end of year).  Sellers often rush toward what they can offer – a discounted price.  That is, until they run out of pricing latitude and the deal still hasn’t closed.  Now what?

There is a better way.  First, sellers must move away from thinking that discounting provides an incentive to close a deal – it doesn’t.  After all, an even better discount might be coming in the future.  The seller has to give the buyer a reason to act – a return or value that will accrue if the buyer acts.  Ideally, that return should be quantified, and be far greater than the price of the offering.  This strategy attacks the fear in both parties: the buyer has a positive reason to make the decision, and the seller knows that what they are offering is a good business decision for the buyer – it will logically happen.

Don’t let the fear index drive you.  As a seller, be a better negotiator.  Describe the positive outcomes that will result from a buying decision.  Both sides will move from fear to confidence. (TD)

Cognos

If better negotiating is about being better able to express your value, how good are people at expressing value?  Buyers pay for value, which is not to be confused with price.  If you heard, “this is a $40,000 car, but I will sell it to you for $32,000”, what would you think?  You would most likely think it was a $32,000 (or less) car.  Since IBM just made its largest-ever acquisition, Cognos, we thought we’d look at how Cognos expresses their value.  One of their solution overview pages includes this language:

1. “Enables more effective rewards for your workforce, enhancing satisfaction and commitment.

2. Increases customer retention; win more new customers; improve productivity; and raise profits.”

There is a distinct difference between these two examples.  Number 2 follows a recognizable path – customer retention and more customers leading ultimately to profit.  Almost everyone recognizes this value statement as powerful (if believed).  Number 1 seems to be a weaker value statement to most readers.  Employee “satisfaction and commitment” are interesting, but not compelling unless you have a certain role in your organization.  For a Human Resources executive that is measured on employee satisfaction, this is a winning argument.  For the Chief Financial Officer, it probably is not.

This is a very good example of altering your value argument for the audience that you need to convince.  Use of this “flexible” persuasion is a critical negotiating skill.  Is something still missing from these value statements?  Yes – it is the uniqueness of the value that only Cognos can provide.  Without that, Cognos will be selling commodity solutions that are undifferentiated from those offered by their competition. (TD)

An RFP at Hyperactive Technologies

Is a Request For Proposal (RFP) a valuable offer to buy, or an attempt by the buyer to commoditize your offering?  An October New York Times article about artificial intelligence software for restaurant order flow management contained an interesting comment: “Just last week, [founder Joseph] Gagnon [said] the company received its first ‘request for a proposal’, an overture from a possible buyer of its products. ‘That we got an RFP tells me I made it’, he exults.”

How does a negotiator feel about it?  Mr. Gagnon is counting his chicken orders too soon.  In many commercial transactions, an RFP is a method of commoditizing buyers, so that all appear to provide the same function / feature / benefit / solution, and price is the only differentiator.  Unless Mr. Gagnon shaped the RFP specifically to match his, and only his, offering it is now a price war between the set of vendors that can offer the solution.  In fact, RFPs often intentionally omit differentiating factors between vendor solutions.  The result is predictable.  One firm that called K&R for consulting services to improve their sales negotiation success had responded to 193 RFPs in the prior calendar year – and won none of them.

The answer to our opening question in this news item: When the RFP they publish was “pre-written” by you, it is an offer to buy.  If not, it is probably an attempt to commoditize your solution. (TD)