Well run organizations always look for new ways to drive down costs. One cost reduction strategy at the top of every CFO’s list is getting the best possible pricing from vendors.
A common tactic used by many organizations is to promise more business in the future in return for getting better pricing today. It reminds me of the line that was often used by the character J Wellington Wimpy in the Popeye cartoons when he said “I’ll gladly pay you Tuesday for a hamburger today.”
But there’s a big problem with this big promise: many organizations fail to deliver the additional business. They simply can’t get the traction and buy in they need from their internal buyers. Some of the common reasons for this include:
An inability to control spending due to decentralized purchasing
Resistance to move from long-term relationships with existing vendors
A lack of rigor and business discipline in the organization’s purchasing strategy
But here's the problem: Vendors have grown weary of offering price concessions for future business that they never get. More and more, vendors are looking hard at both the pricing they offer and the customers with which they work. Their focus has shifted from quantity to quality. The economics are simple; they literally can't afford to spend time and resources on customers that are not are not committed to a mutually beneficial relationship.
So there's a new approach taking shape. Some vendors are starting to replace long-term contracts with dynamically adjusted pricing tied to the customer's recently delivered market share and profit margin. In other words, they are continually aligning their best pricing with their best customers.
So if you want to get the best pricing from your vendors you need to focus on being a great customer. That means committing to a mutually beneficial relationship with your vendors, and delivering on promises made to them the same way you’d want them to deliver on promises made to you.
Tom is Founder & CEO of Vendor Centric, a consulting firm that helps organizations adopt a risk-based approach to vendor management. Connect with Tom on LinkedIn or drop him a note at email@example.com.