WHITE PAPER

CHALLENGES

Losing revenue in price-cutting wars with competitors.

Losing sales.

Shrinking deal size.

Shrinking margins.

TAKEAWAYS How to position yourself as a unique solution, command higher prices, preserve margins and gain business respect.

How to build value-based impact statements that create better deals and stronger relationships that your competition can’t touch.

Sales Negotiations in Highly

Competitive Environments

Value-Based Selling Approaches that Make You Indispensable and

Your Competitors Obsolete

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What’s in this paper?

1. Introduction

2. The Power of Value-Based Negotiations

3. Competing on Your Unique Value: Building the Value Argument

4. Building a Value Case – Understanding and Leveraging ViO™ ¹

5. Shaping Your Value Argument

6. Conclusion

7. About K&R Negotiations

Introduction With pressure to meet earnings and revenue targets, expand new markets and make the most of every resource, today’s global sales force is the difference between success and failure. Communication and online information are leveling the playing field, creating an extremely competitive environment and shrinking margins. Even the best products are one development cycle away from being leapfrogged in the marketplace. Competing on price is the path to becoming commoditized and to being robbed of the ability to present a unique value proposition. Ultimately, it’s your sales people—and their skills and experience—that will help you differentiate yourself, your solutions or your company in a highly competitive selling environment. Sales professionals who know the art and science of negotiation can make a tremendous difference to your bottom line. Successful negotiating begins with understanding your customers and the context in which you can provide them with value. Ultimately, what the customer values is the outcome to their business (or person) brought about by your solution. To have the greatest impact, the outcome should be measurable. That is why we talk about value-based negotiations being dependent on ViO—value, impact and outcome. This white paper will help you turn sales negotiations into a value-based dialogue that generates better deals, bigger margins and improved close

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rates. The result is an opportunity for increased revenue as you build long-lasting relationships. You’ll learn how to: • Focus the discussions on the ViO to the client so you can get out of the price-cutting wars and into value-based sales

• Position yourself to create leverage as a high-value partner instead of an interchangeable commodity

• Avoid the most common negotiation pitfalls

• Apply best practices to increase deal size and margin based on ViO

The Power of Value-Based Negotiations All sales involve negotiation to some degree. It follows that the more your sales team sharpens their negotiation skills, the more success you can expect over time—quicker closes, increased sales, and customers who believe in the value that you deliver and are ready for repeat business. Even in a B2C environment, understanding the value that your products or services deliver to a customer enables you to get better prices and repeat or referral business. By learning and applying the principles of value-based selling to craft a singular value argument, your salespeople can systematically set their products and solutions apart from competing providers. They can improve their numbers and their customer relationships at the same time—growing trust and winning lucrative repeat business. In this situation, your company will become the incumbent seller that is difficult to unseat. But how do you get there? Our experience shows that employing a value-based approach to win trust and credibility creates better opportunities to discover the needs and wants of those across the negotiating table. Only then can we express our solution as providing an impactful outcome or ViO for the buyer. In these optimal situations, all parties leave the table with a full understanding and appreciation of the value they have received—value that extends past the close. Value and the Leverage to Compel Customer Action

The concept of leverage originally comes from physics, referring to mechanical advantage from simple machines like levers. With most lever systems, the longer the lever, the greater is your mechanical advantage, so you can move objects of heavier mass more easily. In negotiation, you want to

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move people closer to your way of thinking—your value arguments are your levers. The more credible value arguments you have, the more easily you can move people closer to your point of view, because they will move voluntarily.

This power to move people closer to your way of thinking is leverage in negotiations. And it is positive leverage when people move voluntarily because of the ViO that you provide.

In sales negotiations, to be successful consistently, you need to have two types of leverage. One compels the client to act—to make a buy decision because they want to change the status quo or get a reward. The second is the leverage that makes the customer want your products and services instead of a competitor’s.

To understand how we can get the customer to make a decision, it is important to know the risks and rewards that will drive their decisions in the context of their business or industry (or if personal in their social context). To illustrate this, we have a four-box model:

Risk Reward

Action

No Action

In this model, leverage is provided by the client’s rewards of action and risks of non-action. For example, if they act, they may address regulatory compliance risk such as Dodd-Frank or Basel III. An example of a reward may be that your solution enables online sales for the customer sooner, thus delivering revenues and profits.

We also have to address the risks they may perceive if they take the action (upper left) or rewards they may get from not acting (lower right). Examples of risks of action may include that this type of product has had some recalls and therefore may have maintenance issues. Rewards of non-action include

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alternative uses of capital that may be more compelling for the customer. Risks of action need to be overcome through credibility or the customer will not act. Likewise, if the rewards of action do not outweigh the rewards of non-action, the customer will not act.

ViO and the Leverage Slope

To illustrate the second type of leverage that is necessary for a sales negotiator to understand, we’ve developed the concept of the Leverage Slope, defining the relationship between the customer—who wants an optimal solution at the lowest possible price—and the seller, whose goal is to get the highest price while maintaining demand for their product or service.

In this context, a seller’s leverage is driven by unique value and heavily influenced by incumbency. Note that being unique is not enough to generate leverage—the uniqueness needs to generate value to the buyer. What is it that we provide that has a unique impact (ViO) on the customer? The bottom of the slope (lower left) represents a seller with a commodity, a relatively undifferentiated product or solution available from any number of vendors. With a commodity product, the main purchasing criterion is price, which is naturally driven down by competition. Incumbency can move you either up or down the leverage slope. If your performance is good, your leverage increases. If it is poor, your leverage decreases.

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Further up the slope are competitive products, which have some uniqueness or value that separates them from most of their alternatives. A seller can negotiate a higher price by successfully articulating some kind of unique ViO as a competitive advantage. But there’s a price point where the buyer will look for less optimal solutions regardless of cost. (For you economists out there, the closer we are to being a commodity, the higher the price elasticity of demand, so even a small change in price will result in diminishing demand.)

The job of the seller in a negotiation is to get as high up the slope as possible. To do this, you need to establish unique ViO. The higher the ViO of your product or service, the higher up the slope you are, and the higher the price you can command. This separates you from commodity offerings and helps you escape from margin- and price-cutting wars with competition.

A high-leverage position comes as a result of effective articulation of unique value as it applies to the client’s specific issues, and it is best when the impact is quantified in a credible manner. The ideal high-leverage position creates a transactional monopoly, where you have demonstrated that your solution is the best choice for helping the other side achieve their goals. When the seller is in a monopoly position in a transaction with unique, quantified value, the customer has no practical alternatives that will create the same customer value. If doing nothing is not an option, then the seller’s prices, margins and odds of winning improve dramatically.

Quantifiable Value Argument

The most critical aspect of a successful sales negotiation is to understand the customer and needs of the people on the customer side. Understanding what they value and being able to systematically demonstrate how your product or solution meets their needs is extremely powerful.

The critical question to ask yourself is: “Can I quantify this value?” Without a quantifiable value argument, you lose the biggest weapon in your arsenal. Making this argument convincingly by demonstrating how your solution uniquely solves your client’s requirements gives you the leverage to move that customer to favorable agreement. Quantifying value can be the most demanding part of the process, but it is also the most persuasive.

In the case of commercial sector customers, think of quantifying the value of your solution in terms of their revenue, operating margin (profit), cash flow and asset utilization1, and of course, specific customer KPIs. For public sector 1 Our friend Laurie Kauffman calls these the “Four Pillars of Finance.”

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customers, quantification is generally related to the specific mission of the agency, such as how many citizens can they service within a certain timeframe at a fixed or lower cost.

Competing on Your Unique Value Building Your Value Argument To win the deal against your competition, you need to craft a compelling value argument. A value argument is a persuasive argument that builds credibility and leverage.

Value comes from advantages created for both sides as a result of the transaction. For example, why would Company A and Company B want to do business together? The reason is simple: mutual benefits. Each wants something that the other can provide.

Delivering value to the other side is one of the easiest ways to get them to agree with you. If they perceive that you are offering something that is clearly more valuable than the alternatives, they are more likely to make the deal.

One of the biggest stumbling blocks in sales negotiation is the failure of the seller to articulate and quantify value for the other side. The most common argument looks something like this:

“I am glad you are interested in our stuff. We understand you are looking at some alternatives. Our stuff is better than their stuff, and by the way it’s cheaper. So please buy our stuff.”

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It sounds funny, but is not far from the truth—the seller is used to talking about their “stuff” in relation to their competition. Making the ViO argument—why the seller’s “stuff” has a greater impact on the customer—is much more difficult. This is why preparation is critical.

Building a ViO Case

If you don’t build a value case by articulating how your solution positively impacts their business, your potential customer or client may not see that value. Even if they do see the value, they may not effectively quantify that value or they may not acknowledge it in an effort to deny you leverage.

Additionally, not articulating ViO may affect your credibility because the buyer may feel you are not listening to what matters to them. As a result, you may lose credibility. The alternative is true when you can link your solution to the outcomes they seek—you are showing that you care about what they care about.

We have observed that most people take their own value and leverage for granted. These are among the important questions to ask yourself:

• Are you bigger than your competitors?

• Do you have longevity in your industry?

• What is your industry reputation as a supplier?

• Do your customers rely on you for service and support?

• Can you identify advantages of size, longevity, reputation or service that provide value to the customer?

The poor negotiator will understand that their company is big, or has a good reputation, but will fail to make a direct connection between those things and the impact to the customer. That connection is specific to the customer—what is important for one is not necessarily important for all.

Know your value propositions and begin formulating specific, customer-personalized ViO arguments that will translate into leverage. Historical cost savings or revenue performance are a good place to start. By presenting a credible history, you can turn a positive track record with other customers into the advantages of an incumbent supplier.

The biggest mistake is taking for granted your negotiation strengths and assuming that the other side knows the value that you’re bringing to the

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equation. The customer does not owe you the recognition of your credibility, value or leverage. It’s up to you to make the argument.

Personal Value is Business Value

Some of the best value you can articulate is the kind that makes the job easier for your company and for the other side. Presenting your customer’s representative with a positive business case jump-starts the work they need to do to get internal approval and makes it easier for them to become your advocate. It is still critical that the business case contains company value, which should be expressed as a quantified benefit. Common examples include:

• The four pillars of finance mentioned above: improved operating margin (profit), revenue, cash flow or asset utilization

• Cost savings

• Improved efficiency, leading to an identified outcome the customer wants

• Better resource usage, enabling such things as reduction in unfilled requirements, or improvements in time to revenue

Profit and loss come from a well-articulated value statement. Effective value statements show that you understand what your customers need. Then, customers will be more likely to make a good buying decision because that decision helps them.

Value Articulation

Let’s briefly examine some of the ways to express ViO to your customer in a sales negotiation:

Money

Money is a universally accepted measurement, so its value is instantly understood by both parties.

Property

Whether you are discussing real estate, goods (such as machinery or electronics), intangibles (such as trademarks and intellectual property, or IP), the value of possessing property is generally understood. “You will receive the gadget” and “You will receive the gadget that can perform $300 worth of work for you as calculated by…for a price of $100” are both property-based

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statements, but the second statement benefits from being more specifically value-based.

Services or Actions

Of course, performing an action usually has some value, but in a negotiation you will need to supply a clear description of the action, as well as its impact to express ViO. Just as with property, the value of the action may also be expressed in monetary terms (e.g. cost avoidance). The benefits are not always tangible; action-based value can also be expressed in terms of intangible benefits, such as legal compliance.

Rights

The right to do something or the rights conveyed by the agreement have value. But the rights may not be recognized as having value unless they are clearly identified. It is important that the boundaries and significance of the rights be clearly understood and documented.

Risks

Naturally, value articulated in terms of risk is best understood by those who happen to be risk-averse. “If you are not satisfied, your risk is limited to our out-of-pocket expenses,” “We will indemnify you in case of litigation regarding our product,” and “If the project is not successful, we will pay the expenses,” are examples of risk-based value statements. Of course, allocations of risk can often be quantified in monetary terms. Keep in mind that there can be serious legal implications in risk-based value statements. Therefore, just as with rights-based value statements, it is a good idea to involve your legal counsel.

Shaping Your Value Argument

It is critical to consider the various groups of stakeholders across the table that need to understand and accept your ViO argument. The ultimate answer to the customer’s question, "What’s in it for us?" can fall flat and jeopardize the deal if your argument is crafted with only one kind of stakeholder in mind.

The diagram below illustrates the relationship between roles, motivations, desired outcomes (which are often understood through measurement impacts), and relative numbers of people that are typical at many businesses.

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For example, technology companies often sell to IT departments, which have significantly different motivations from the rest of the business. If a seller only focuses on IT’s motivations, their ability to drive faster closing and higher prices will be severely compromised.

As a negotiator you should identify goals by individual, using their measurement systems as appropriate. Adjust your value arguments to the motivations of the person or people with whom you are meeting. Of course, these value arguments need to be consistent, a challenge made more difficult by occasional conflicts in measurements within a customer organization or even your own.

Typically, less is known about buyer motivations early in our interaction with a prospective customer. When value arguments are challenged by participants on the other side, make sure you ask the question “Why?” Ultimately, you will need to meet the needs of both the person and team making the challenge, as well as the ultimate decision maker. Planning and listening are both important. Many diverse sources of information can help you uncover and consider your potential customer’s motivations.

Remember that the higher you go in a customer organization, the greater the span of control. As a result, getting sponsors at those levels gives you greater leverage in closing agreements. Research shows that senior executives get very involved in the decision-making process for major investments or purchases. But that involvement is typically early in the cycle, when key strategic decisions are made, and late in the cycle when results are reviewed.

In the middle of the sales lifecycle, delegation proceeds first to implementation staff, then (often) to procurement for detailed negotiation, then back to implementers before the executives are heavily involved again.

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(Source: "Selling to Senior Executives" survey, conducted by OnTarget™ with the Keenan-Flagler School of Business)

To gain and maintain credibility and positive leverage, a seller must remain involved with the buyer team and communicate with executives throughout the cycle, not just in proximity to when the agreement closes.

Executives perceive a "loyalty gap" when benefits that are discussed early in the cycle are not discussed again during implementation until after the project concludes. Then, if the results at conclusion of a project do not match the initial expectations, they may consider the project a disappointment, even though changes in conditions during implementation may justify the actual result and make it objectively positive.

To be successful you have to be ready to make a value argument to each responsible person. Leaving one out will only lead to stalling your agreement when that party is in charge—and lessen the likelihood of closing the deal you are looking for.

Conclusion K&R Negotiations has successfully employed our methodology in creating valuable outcomes for some of the largest global companies, improving billions in deals over the years. In each instance, we strive to instill an approach that deemphasizes cutthroat tactics, focusing instead on understanding value delivery, cooperation and the merits of the deal—the ViO to both sides.

Making the merits of the deal compelling for all is the goal of the value-based selling and negotiation process. Rigorous discovery of the potential customer’s organization, people and position, combined with a thoughtful ViO argument, gives you the edge over competitors vying to be the low-cost solution or those who have the advantage of incumbency.

This value-based approach creates opportunities for faster closes, bigger deal size at higher margins and better relationships that yield repeat business. Equally as important, it positions you as a player with unique value who competes on your own terms—something that no competitor can take from you. Applied consistently, the ability to create value-based leverage is a powerful weapon with which to arm a sales team under pressure to achieve unprecedented results.

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About K&R Negotiations

K&R Negotiation Associates, LLC, is a consulting firm specializing in structuring and negotiating business transactions around the world. The company is comprised of professional negotiators, sales executives and business attorneys. K&R professionals average more than 20 years of professional negotiation experience and apply a results-driven methodology to change negotiation behaviors and improve negotiating success. K&R’s clients include Fortune 200 companies such as IBM, EMC and Xerox, as well as smaller companies such as Bristol Technology (now part of HP), Priceline, SEI and others. For more information, please visit www.negotiators.com.

© 2012 K&R Negotiation Associates LLC 908 Ethan Allen Highway Ridgefield, CT 06877

For more information, please visit http://www.negotiators.com or call 203-431-7693.