Arjit Agarwal , DGM-Global Sourcing , Bharti Airtel
Every business owner has at some time wished for some single correct formula for calculation of "true" value of the purchase which is done in his organization. The beauty of purchase is that this true value moves and lives and breathes. True market value is almost as difficult to analyze intelligently as the tax code.
Nonetheless, in real life, sellers and buyers each have to start someplace in quantifying value expectations. There are dozens, possibly even hundreds of formulas, approaches possible but most sellers go at the value proposition far more often than the buyers. The most common approaches by the seller, in ascending order of realistic viability are:
- The seller asks himself "How much do I need to sell so as to maintain the profitability of my organization?" (Absolutely irrelevant to any buyer);
- The seller seeks published information on pricing of similar kinds of products from competition; or
- The seller uses some value comparisons which confirm that the product has got an edge over the competition and hence a premium is demanded. Generally, this is a safety measure taken by any seller to ensure that if competition is pretty aggressive, he can still sail through.
Buyers are the people who are custodians of company's money and, therefore, generally go through a far more complex analysis. For a buyer to be successful, the most important aspect is the clarity of thoughts. Most negotiations are decided in the first interaction between a buyer and a seller. Hence it becomes important for a buyer to do all preparations before entering into a negotiation.
Let's attempt to discuss a professional buyer's eye view to the question of valuation and how to create strategies around the same:
Know your seller. This is one of the key aspects before you enter into any negotiations. The more you know your seller, more are the chances of negotiations going in your favor. You should be well aware of the financial health of the seller organization, how the seller is doing in local as well as global market along with the recent wins-losses which seller has faced. Knowhow of the product which is supposed to be bought is also quite important from a buyer's perspective and it is recommended that buyer should conduct a product demo session with all the bidders along with the business user to get better understanding of the product. This helps the buyer to stand his argument when product supremacy is discussed.
Identify your boundaries. A buyer should always be clear on how much he is supposed to spend with a firm capping on the higher limit, along with all other terms which can be executed in his organization. Buyers who provide a well-calculated target and remain firm on the same are more likely to be successful as compared to those who keep on shifting the goalpost. If a buyer is able to convince or logically establish his ask with the seller, half the task is done.
Categorize your seller. Buyer should categorize the seller in the light of below rules and on basis of this should decide the final negotiation strategy:
Type A. Both supply and demand don't hold any power. In this case it is advisable to ensure that contracting and compliance are done in an efficient manner because in this kind of scenario, neither the buyer has got the negotiating power nor the seller is in a position to establish his supremacy, and hence pricing at times takes a back seat; however, other key areas such as delivery time, SLAs on after-sales-support, etc., become more relevant.
Type B: Supply power is more than demand power. This is generally the case of monopolistic products where supply power is far stronger than demand power. A buyer needs to control the demand or change the nature of the demand and develop innovative cost structures which are new to the seller. Innovative but well thought through cost structures generally result in benefiting both buyer and seller.
Type C: Both supply and demand hold equal power. This is an ideal case of developing cost partnership. Buyer should seek joint advantage with the supplier.
Type D: Demand power is higher than supply power. This is the most ideal scenario for any buyer wherein there are ample suppliers and buyer holds the key. Tendering, auctions, target pricing, best-and-final offer and many other mechanisms can be implemented in this kind of purchase scenario.
A successful buyer is the one who is capable of identifying the right strategy to be used for each supplier negotiation and does not make his moves predictable to the seller, however, ensuring at the same time that the seller is not losing.