Saturday, April 5, 2014

IT Procurement - The Pricing Woes

Most IT products (both hardware and software) targeted for home or individual end customers usually carry a standard rate card. Some large resellers, considering their sales volume may offer a discounted price and that may be about 5 to 10 percent. While this seem to be a fair game, on the enterprise products side, things are totally different. The buyer, reseller (be it integrator or just a distributor) and the principal vendors play a game of negotiation. The end result of this game mostly is that one or more players lose. This is in contrast to the win-win theory where it is expected that all the players win.

The principals offering such enterprise products don't seem to have a standard pricing policy. Instead, they price the product or service for the specific enterprise customer based on the deal volume, the strategic importance of the deal and the indirect values that can be derived out of a specific deal. The indirect benefits could range from an increased reach to the associates of the customer, a consent to publish case study which might improve the market ranking of the product or increased revenue figures which again is used to determine the market share of the product or service.

The discounts the enterprise customers get range from 40 to even 90 percent. Large enterprises manage to negotiate and get substantial discounts on such products and services. Neither the principals nor the resellers can expect any margin out of such deals, but look for indirect benefits. This could potentially lead to a situation, where the principals don't see the intended indirect benefits being realized, they tend to take a 'no-frills' approach and thus not actively contributing towards the business goals of the customer.

This kind of pricing approach also result in the smaller businesses end up compensating the benefits that the larger enterprises get. That is, the discounts that the large enterprises get is out of the gains that the principals and resellers make out of deals with smaller business entities. This is in a way like taxing the poor for the benefit of the rich and could very well be termed as corporate corruption.

Knowing this, customers try their best to engage into a hard negotiation and get the maximum discount. When it is good to get the price advantage, are they aware of the hidden perils that could get in their way? Here are some such things that could happen:

  • The principals are likely to cut corners to ensure that they maximise their gain out of the deal or minimize the loss out of the deal. This could mean anything like trimming down the features which were not explicitly demanded by the customer and charge the customer when such features are required by the customer.
  • Vendors take the tendency to tone down post sale service levels. This could be the reason for a contrasting experience or feedback from different customers for the same product or service.
  • Principals and / or resellers take the no-frills approach. That is customer cannot expect a 'Customer Delight' kind of offering. The principals and vendors would stick to deliver what has been committed and not a bit more.
  • Unduly longer time and efforts is lost in the process of negotiation, which can have an impact on the time to market advantages for the customer.

While the above could impact the value delivery, these should not come in way in the negotiation process and thus ending up agreeing for an unreasonably higher cost.  This is where a win-win approach is recommended. A win-win outcome is one that gets all parties more than what no agreement would have guaranteed them. Win-win agreements do no promise all sides equal or similar gains. They only promise that all sides get is an outcome that is better than their most realistic estimate of what they would have ended up with had they walked away with no agreement.

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