When competition starts putting the pressure on you, it’s natural to look at price-cutting as the primary way to keep the business. But in the long run, this is a mistaken impulse, unless accompanied by a sound business rationale such as a reduction in scope, change in terms or outcome from the deal. One of our engagements with a client that served a European industrial (the customer) with technology solutions definitely illustrated the value of avoiding such “unprincipled concessions!”
Unprincipled concessions are “giveaways” not tied to a credible business rationale. Our research shows that this simple business negotiation mistake costs companies between 9 and 18% of gross revenue and significant profit. (See our infographic on the topic for a more detailed discussion of this vital principle and how it can be applied.)
Our client was bidding for four different stacks of technology services worth in excess of €100M over a number of years. They were incumbent and delivering successfully in two of the stacks — but heavily challenged by highly skilled competition.
The customer requested significant discounts off existing services and that our client pay for transition costs related to the area of services it was not yet providing. Our response? Why would we lower the price for services that are already being successfully delivered (given identified risks of change) and eat the costs on the transition to new services? After all, if the value proposition was not strong enough, the client would not go through the headache of change? Instead, we were able to obtain a principled concession from the client by agreeing to a partial success fee structure, raising the amount of the variable components of the deal. As principled concessions tell us: Adjustments in price are justified if the outcomes, content or terms of the deal change. In other words, our approach had the effect of communicating that there would be no arbitrary concessions. Therefore, when it became clear that no additional concessions were justified, we said “no,” explained why, and that position was respected.
This deal was dependent on the value being delivered, but the success in maintaining an acceptable margin and revenues to deliver successfully for the client hinged on principled concessions.
The result? Our client documented a 4% improvement in PTI (pre-tax income) on a €100M+ total contract revenue, saved over €100K on bid and proposal costs and improved time-to-close by six months. Great results like this come from understanding and applying the concept of principled concessions.
Our client also reported improvement in intangibles that feed their success — most notably, increased credibility (which always leads to more positive leverage) and a more structured approach for all their future dealings with this valued customer. Certainly, our client felt more confident going forward in their ability to retain their well-earned advantage and expand their business with the customer in the future. Click here if you would like to see more applied examples of K&R’s negotiations principles.