How to avoid customers trying to negotiate your prices down
I recently had a discussion with someone in the mechanical engineering industry. He described a struggle, that is unfortunately rather common. Not only in engineering, but in basically every creative project as well. It is the struggle of customers trying to negotiate your prices down. Here is how it goes:
They have customers, that want to buy machines for their assembly line. The machines are custom made. So they approach him with some specifications on what the machine should be able to do. Based on that input, they make a design for the machine and estimate, how much it would cost to build it. With this design of the machine, they go back to the potential customer. They present the design and ask him, whether they should build it for the price.
You now would expect the customer to say yes. It is the machine with the specifications he asked for. But that is rarely the case.
Most of the time, one of two things happens:
- The customer negotiates the price down
- They take the design and buy somewhere else
This is obviously frustrating. You either loose a good part of your margin, or you get nothing for the time invested in the design of the machine.
It harms the customer relationship as well, as you feel a lack of appreciation for your work. Many companies inofficially charge a “customer handling fee”, to pay for the overhead. Difficult customers pay higher prices. However, higher prices increase the likelyhood of price negotiations. And the likelyhood of your customer buying cheap low quality equipment as well.
So how can we avoid this loose loose situation. As with any problem, let’s try to understand before we solve.
Why do customers negotiate prices?
In my opinion, there are four main things leading to this situation.
Different perspectives
The first is the difference in perspective. The people defining the requirements usually have a business background. The people recieving the requirements, usually have an engineering background. Imagine, how each of those hear the sentence “The machine should produce 5000 pieces of xyz”
The business person will think something like:
- Our production plan says, that we currently need on average of 3000 pieces
- The machine must last for 10 years to pay for itself
- We want to grow, so we need a bit of more capacity
The engineer will think things like:
- To produce 5000 pieces, we need the following technical specifications
- For 4500 pieces, we would get along with setup a
- But for 5000 pieces, we would need setup b
- Setup b could work for up to 8000 pieces, if we adjust this and that component
The different perspectives are not a problem per se. But they are often not discussed. You need a discussion to happen that includes questions like these:
- Why do you need 5000 pieces?
- What would be the impact, if you had 4500 pieces instead?
- What benefits would you have, if you could produce 8000 pieces instead?
- What does this mean in terms of revenue?
- How much are you willing to pay for a certain feature?
This leads to the second problem
Not aligning priorities
You need to know, what is important to your customers and what isn’t. Sometimes you have features, that are very important and easy to implement. Others are not that important, but hard to implement.
Features, that are easy to implement and are important to your customer drive profits up. Your customer doesn’t want to pay, what it cost you. He pays according to the value you provide.
Once you understand, what is truly important to your customer, you can focus on the profit drivers. This requires conversations like the following:
Customer: I need a.
You: This will cost you x.
Customer: That’s fine, the feature is important. I also need b.
You: That’s tricky to build. It will cost y.
Customer: That’s a lot. Can we go lower?
You: Why do you need this feature? Maybe there is a way, to achieve your goal in a more cost-efficient way.
Finding out, what is important to your customer and what the implications of are is important. But, especially in non-standard, custom made engineering, it is work. This leads to problem number three:
Doing unpaid work
The guy I talked with, said, that they designed the machine before they charged the customer. This is common. Their business is building machines. And how would they name a price without doing the design first?
The thing is, that you do work, that is basically unpaid. And that has multiple implications, you want to avoid:
- You have to redistribute the cost of customers that didn’t buy to those that buy
- This punishes customers that buy from you with higher prices
- It creates higher pressure for you to sell, weakening your negotiation power
- Your customer has a lower incentive to make things work with you, as they invested less
The solution is, that you have a paid project for the design of the machine and then a second one for building it. This brings a lot of advantages, for you and your customer. But you have to be able to sell the design project independently. Something, that many engineering companies don’t know how to do.
Not playing as a team
This leads to my final pain point. The one, that kind of ties everything together. Contractor and customer not playing as a team.
If you would play as a team, both of you would want the other party to succeed.
You would want your customer to achieve his goals. And for that, you would try to understand, what he actually needs. Why he has the requirements, that he has. And whether these are actually the best solution.
Likewise, your customer would make sure, that you profit from working with him. He would try to get as much value from you while not creating extra costs. And if you deliver great work, he would recommend you.
Many companies secretly fear or dislike their customers. And most companies are frustrated by their contractors. Way too often, business relationships are dominated by fear. Everyone tries to take as much as possible from the other party. But this makes it impossible, to go into a territory of voluntary giving.
If you want successful long-term partnerships, treat your customers like friends. Try to give them more than they ask for. Be generous. Try to understand and help them.
Yet, if they try to exploit you, end the relationship. If your business partner tries to get unpaid work from you, don’t let them. If they devalue your work by negotiating prices, don’t do it. Talk with them about the kind of relationship you want to have. And if you can’t agree, then leave.
And yes, I know, that many companies are dependent on some large customers. This makes it hard to leave. And the imbalance in power makes it hard to change the nature of your relationship. But you can learn, how to lower the dependency.
If you don’t want abusive relationships in your personal life, don’t accept them in your professional life.
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