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Avoid the Discount Trap

Avoid the Discount Trap

Discounting wars are increasingly becoming a large problem for B2B companies, from small regional manufacturers to multinational behemoths. But what is a discounting war, how does it start, and how does one get out?

Ironically, discounting, or commoditization, starts with innovation.  When a company creates a new product that better services the needs of its customers, it tends to perform extremely well in the marketplace. Rival manufacturers are quick to outright replicate the product, or create a parallel product that performs in nearly the same capacity without the patented components. This is because most B2B industries are relatively quite mature; companies cannot reliably all grow together along with the market – to get topline growth, they must wrestle it away from rivals.

This is where price wars start to get nasty. As the original product gets replicated by more competitors, each new entrant attempts to offer lower and lower prices in order to secure a piece of the revenue pie. It is a dire race to the bottom - even pure product innovation cannot help you at this point. Any advancements in the product requires R&D expenditures, which in turn inflates sales costs in an arena where the cheapest bid wins. So how does one get out of a discounting war? How do you reposition your product so it isn’t just another commodity? Consider a thorough analysis of your customer and your relationship to your customer. Who are you really speaking to? You can’t view your customer as a single entity – P&G or Pfizer are not your ‘customers.’ Each corporation has a multitude of departments, each with varying levels of decision making power, and more importantly, decision making incentives. The most common mistake for a B2B manufacturer or supplier is that they pitch and negotiate almost exclusively with procurement offices – whose sole purpose is to discount their products.

This is a terrible sales strategy, and the only inevitable scenario for a company that communicates solely with procurement offices is to become a discount commodity supplier. Instead, manufacturers should target higher on the decision making tree. Marketing, product management, brand management – these departments do not contribute to the bottom line by cutting expenses but by driving additional sales. They are the decision makers who tell procurement what they need, and procurement then finds these supplies at the lowest cost available.

If you introduce a new innovation, or want to illustrate the benefit of your product vs. the general competition, procurement will not listen. They do not care – it is not their job to source alternatives. They have strict marching orders on what features are required – they are looking for nothing more or nothing less. 

But decision makers DO care. They want to see innovations and value added products that can in turn help them drive sales. To key decision makers, a bump in revenue is worth the marginal increase in costs.

So the first step is to evaluate who exactly your sales teams are talking to. Most likely, they have been directed to procurement, and have not made attempts at reaching out to decision makers.

In the next piece in our series, we will discuss strategies for engaging decision makers, and how to begin positioning products to resonate with decision makers.

by Ivan Tan