If you sell your product to other businesses or government, you’ve undoubtedly encountered the challenge of the Procurement Department.
When Procurement gets involved, whether to negotiate a purchase or to initiate and manage an RFP process, there is a common concern that the buying decision will be reduced to a competitive pricing war, with minimal regard for the quality of the software or the overall value it brings to the table. After all, software companies fear, the Procurement Department is tasked with spending as little as possible and manned by people who are not intimately familiar with or affected by the problems that the software is intended to solve. How can they really know which solutions and companies are best?
But dealing with Procurement is often a fact of software business life. And the sooner you accept—even embrace—that reality, the sooner you will find success.
The Critical Role of Pricing Integrity
Procurement professionals, particularly at large entities, are sophisticated specialists trained to be highly rational in their decision-making process. They have access to people, tools and data to help them best manage their company’s constraints and resources.
This is to say that one of their inherent strengths is to avoid being tricked, gamed or taken advantage of, which for sellers, shines a very bright light on pricing.
To thrive in this environment, software sellers must be able to defend the integrity of their pricing structure. They must be able to explain to Procurement how the pricing is calculated, why the metric(s) on which the pricing is based (e.g., number of users, quantity of data, etc.) is fair and reasonable and how the pricing scales with future use. Any holes in these explanations will damage the company’s credibility with Procurement and eviscerate its negotiating leverage.
Two prerequisites are required for software companies to successfully defend the integrity of their pricing: a well-conceived programmatic pricing structure and a verifiable commitment to market fairness.
Let’s look at both:
- Programmatic Pricing Structure
Sophisticated buyers know how to exploit ambiguity. A programmatic pricing structure relies on formulas—which account for every foreseeable use case—to remove any ambiguity from the pricing model. Discounts are earned according to actual purchasing behaviors, not random, one-off deals. In fact, a programmatic pricing structure is intentionally designed to eliminate individual pricing discretion, be it from a sales rep, manager or team.
Procurement professionals want to understand how your pricing is built so they can identify true costs and potential potholes. To get there, they may push for transparency into the logic and underpinnings of your pricing model. The more gray areas they find, the more they try to shift risk or costs to you.
- Market Fairness
It’s one thing to develop a programmatic pricing structure and another to adhere to it. We have long encouraged software companies to adhere to the Market Fairness Principle, which holds that if two customers buy the same set of products and services from you, they should pay the same price or rate. When it comes to working with Procurement, your ability to verify your adherence to market fairness may be your most valuable asset.
Even if you have a comprehensive programmatic pricing structure and can effectively defend it, the existence of widely varying net prices for similar configurations of software and services can cripple you. With their access to a wealth of data points and market intelligence, and a network of industry contacts, the procurement professional will likely discover your pricing realities. If what they find is consistent with your claims, they will know their pricing boundaries and confidently project near- and long-term costs. If not, the deals they discover will become a target to beat and their comfort with your company’s integrity will diminish.
A Procurement Success Story
A recent example from one of our clients illustrates the importance of Programmatic Pricing and Market Fairness when selling to Procurement:
In this case, our client was pursuing a multi-million-dollar contract with a large enterprise in the regulated and retail utilities industry, an industry known for its adherence to an RFP. Procurement became involved after end-user committees had conducted initial research, held demonstrations and narrowed the field to a handful of finalists. Procurement invited finalists to individual meetings where they were asked to explain their solution. As a surprise during the day’s breakout sessions, Procurement broke participants into a working lunch to explain the rationale of their pricing structure.
Our client, with whom we had diligently constructed a programmatic pricing model with metrics based on the software’s key value drivers and strategically structured incentives, was the only finalist who could demonstrate a sound pricing strategy and a completely non-discretionary logic to calculating their prices. Our client even produced redacted contracts to prove how deals with similar configurations were priced similarly and adhered to the model.
They won the $4M deal two months after their pricing engagement with us finished. In the post-mortem, they were told their ability to defend and validate their pricing model gave the Procurement team confidence and made it possible to accurately forecast costs over time. Further, they were told that none of the other RFP participants could match their perceived brand integrity or earn the Procurement department’s trust.
While software companies may try to focus their sales process entirely on the end-users and beneficiaries of their solution—and avoid Procurement—that is frequently not possible, particularly within large businesses. In fact, efforts to circumvent Procurement—even if done in concert with the end-user—will likely lead to delays, compliance issues and a poor working relationship going forward. In the event a deal does go through, it may be a shallow deployment, as Procurement tries to avoid getting trapped with high switching costs by narrowing the scope or limiting the contract term and keeping other vendors in the wings. At renewal, companies lacking true pricing integrity often go through yet-another-RFP-process, creating even more friction for both parties.
Instead, software companies could adjust their selling process to proactively address Procurement’s needs by building proper rigor and discipline into their pricing model. This creates a position of strength that few competitors can match.