Is Your Poor Pricing Killing Your Customer Relationships?

pricingBy Chris Provines

Suppliers facing increased competition, pressure from the sales team, or hard customer negotiation tactics sometimes decide to be more “flexible” with pricing. This “flexible” pricing usually starts with the best of intentions – be more customer centric. Pricing rules are loosened and individual customer deal negotiations proliferate. But this can quickly result in illogical and unjustified market prices. Instead of being customer centric and meeting customer needs, this type of pricing behavior has the real potential to kill customer relationships.

Consider this story. A supply chain executive at a large hospital requested a meeting with the local sales team. The customer wanted to discuss the “relationship” and suggested that the local team invite senior management from the supplier to the meeting. The supplier agreed since this was a large and important customer.

Once the meeting started, and after some initial introductions, one of the hospital supply chain executives asked the supplier representatives if a relationship with the hospital was important to the supplier. The supplier representative, of course, indicated how important the customer was and that it was indeed important to have a strong relationship. The executive then asked “what type of relationship do you think we have?” The supplier said it was an excellent relationship and talked about all of the business that they did together, the training the supplier had provided, and some other key support the supplier provided.

A senior executive from the hospital then walked to the whiteboard and began writing. When she was done, she had listed her hospital along with a number of neighboring hospitals. She also listed the prices each hospital was paying for an important technology the supplier manufactured. She then turned to the head of sales for the supplier, and asked why all of the smaller area hospitals had substantially lower prices for the same product. It was the beginning of an uncomfortable discussion about pricing and the “relationship.”

Many suppliers have faced similar situations. Maybe it was a materials manager confronting the supplier with price benchmark data from one of the various benchmark data providers (e.g., ECRI, MDBuyline, Broadjump). Sometimes the benchmark data is accurate and is used in the right context. Other times, the pricing data is way off or not being used in the right context (low prices are associated with much higher purchasing volume or share-of-wallet).

These events speak to the need for sales teams to be able to assure customers, with facts and data, that the customer is being treated fairly. One of the reasons procurement negotiates so hard and why price benchmark data is used frequently is because buyers have first-hand experience of the lack of pricing integrity that some suppliers have and because buyers often don’t trust suppliers.

As hospital supply chains become more sophisticated, they will inevitably follow a standard procurement transformation playbook. This means implementing category management, rationalizing the supply base, reducing the number of suppliers for each item, and building more strategic and collaborative relationships with fewer suppliers. A recent survey of hospital executives showed that two of the biggest barriers to building a collaborative relationship with suppliers were the quality of information shared and lack of trust1.

Too often messy pricing perpetuates a lack of buyer-supplier trust, creates a missed opportunity to work more closely on real buyer-supplier collaboration opportunities, and drives combative buyer negotiation tactics. Suppliers who can build trust by providing data to assure the customer that they are being treated fairly, and more importantly help the customer understand how they can earn a better price should have much better relationships and a real opportunity to collaborate. Poor price management and lack of transparency will result in the opposite – lack of trust and the killing of customer relationships.

  1. IDN Summit market research report, 2014.

 

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