|
We've all been there.
You and your start-up company have worked your tails off to land
that signature account which will not only provide validation for your
investors, but signal to the marketplace that you are real and that your
product is indeed superior. Then, at the last minute (or sometimes even
later than that), a competitor - usually larger and more well-financed -
drops their price to levels that the potential customer cannot ignore.
Even if this happens after the official call for BAFO (best and final
offer) - you find yourself in a spot where the prospect essentially
says, "Sorry, but either you adjust your cost down, or I'll have to buy
from the other guy!"
What do you do?
Do you take all the profit out of the sale, or
stand your ground? And if you do drop your shorts, how do you explain
that to your venture investors? How do you keep that unsustainable
price from becoming your new price ceiling?
My experience says that while you certainly want to carefully
analyze the situation, make sure this isn't just a tough purchasing
agent playing with you, and continue to argue for price based on value -
in the final analysis it is better to "buy the business" than let your
competitor do so.
The reasoning is simple. History shows us that market share is a
much more powerful and lasting phenomena than one would expect from
simple product competitiveness evaluations at points in time. Switching
costs for customers tend to be higher than they think, higher than you
think, and higher than are easy to calculate. So, once you've got 'em,
you tend to keep 'em. Also, there is ample evidence that market share
momentum does impact the purchase decisions of others. So, the fact
that you bought the business in one account will tend to allow you to
win the business elsewhere, often without the same price pain. In fact,
once your competitor knows that bombing the price won't work - they
usually stop trying.
Here's a real example, sanitized for confidentiality. One of our
portfolio companies worked for a year to land a major account. In this
area, two players own about 33% of the market each, with others 10% or
less. This customer was one of the "big 2", and are widely viewed as the
innovative leader in the space. After the BAFO process was complete,
and our firm was told they had won, with a reasonable gross margins on
the deal, the other finalist - a public company, offered a EBATTWRMIFO
(even better and this time we really mean it final offer). The customer
apologized for the break in protocol, but indicated as a business
decision they had to take the new offer seriously.
Our firm thought long and hard about it, but finally decided this
account was too important to lose, and so dropped their price - not as
low as they thought the public company had, but within hailing
distance. The customer jumped at it. The gross margin on the deal was
close enough to zero as to make it essentially a pass-through. Ugly!
But, here's what happened over time. First, the customer signed
up for an 18 month commitment, but didn't meet their volume
projections. So, after that initial contract period, they negotiated in
good faith for a better price. It still wasn't quite up to the
original "win" level, but at least now measurably positive. Then, a 10%
market share player selected our firm's product, at standard pricing. Six months later, the other of the "big 2" players finally rolled over
and bought from our company, again at standard pricing for their
volume. Our company now has a commanding position in the segment, and
with reasonable profitability to boot.
So, if you are small and hungry, go ahead and behave that way.
If your big competitors force you to take scraps of profit initially,
such is life. Over time, buying the business usually pays off.
Next time, a counter example, of a portfolio company that hung tough on price and prospered.
 |
