Rethinking Supplier Pricing: Target Price or Test Balloon?

My client was preparing to make a counteroffer to a vendor asking them to reduce their price, when an announcement to close a division of my client’s organization was made public.  The closure impacts the vendor’s relationship with the organization, but doesn’t eliminate the relationship.

My client’s line-of-business stakeholders are demanding price reductions, but at the same time, the closure of the division changes the scope of work.

She was in a quandary.

She needs to execute the MSA before the LOB can create a new business case for the vendor’s scope of work.

Her question to me was, “How do I set a price target when all the information I have is outdated due to the closure, and the LOB won’t be ready to re-compile a business case including the closure?”

 A Target Price

Typically, I suggest that negotiators establish a target price.  A target price is the preferable price that a buyer wants to pay or the supplier wants to sell. By setting a target price, negotiators take some control over the money conversation. A target price is not the seller’s asking price, nor is it the buyer’s bottom line. It is a number supported by data.

The target price helps you determine the Zone Of Potential Agreement. Using a target price, you are no longer calculating your counteroffer off of the anchor price. You are making your own independent judgement as to the price of an item or service.

To set a target price, you’ll need data. What data is available to your team that your team could use to set a target price? Typically, I suggest the following:

  • A category’s (items or services) financial trends
  • The Line of Business’s financial case for purchasing (so you don’t sacrifice value for price), or the seller’s pricing structure (so you don’t sacrifice value for price), and
  • Some form of Cost Benefit Analysis.

Setting a target price is not a shot in the dark, but rather a reasoned price that you can and will support with data.  This is true irrespective of whether you are the buyer or the seller.

What If You Don’t Have Data?

And that is exactly my client’s problem—she cannot access data in time to complete the MSA negotiations. She knows the financial trends, but the financial case for buying the vendor’s services and the cost benefit analysis are no longer applicable to these negotiations.

She has no choice but to send up a test balloon. In other words, she will ask for price discounts while also reducing the scope of work to account for the closure of a division—all in a 6 week time frame. That’s a tall order, indeed.

Here are the steps we decided to take:

  1. Sit down with the vendor and expose the elephant in the room. The vendor read about the closure, but no one on the customer’s negotiation team had talked to them yet formally  about the impact of the closure. We needed to talk about the closure to frame the negotiations going forward.
  2. We had an internal meeting to get the stakeholders on the same page as the negotiation team. We needed to know how they wanted to handle the situation in light of the newness of the announcement and the lack of time to prepare a revised business case.
  3. The negotiation team agreed to offer some new tradeoffs to the vendor now that a division was closing.
  4. The vendor’s and customer’s technical teams will have to collaboratively re-align the statement of work together to ensure a complete understanding before re-pricing and starting the work.
  5. The primary negotiator will send up a pricing test balloon. The test balloon means she will ask for a discount on pricing the revised statement of work without the data to support her request. She’ll be relying on the relationship’s goodwill to lower the vendor’s price to meet the Line of Business’s demands to “reduce the vendor’s price”.

In my estimation, a test balloon is pitch rather than aiming at a fixed target. It’s a request. You are hopeful rather than armed, since you have little to validate your price request.