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Avoiding the Death Traps of Reverse Auctions and RFPs

Ken Gaebler

How to Avoid Commoditization RFPs and Reverse Auction Bids

We all know that being a commodity is the kiss of death in business.

The second you start to sense that sales prospects are viewing you as a commodity, you're on the cusp of business failure, unless you immediately embark on the proactive actions that I'm going to prescribe to you below.

The Problem

Before we get to the cure, let's understand the malady a little better. Commodities are purchased on price and price alone. In commodity markets, much to the dismay of sellers, lowest price always wins. Profit margins erode quickly as competitors race to the bottom.

Buyers love to make you think you are a commodity. If a buyer can get you thinking that you are a commodity, then they've got you into a mode that they adore -- a mode where you are going to drop price to get their business.

Even if they know you are not a commodity, they may hand you over to Procurement, which is essentially a death sentence for sales people. It's a cruel mind game played by some buyers: "I know you are not a commodity, but I'm going to treat you like one so that you behave like one. I was going to buy from you anyway, but this way you'll give me a much better price."

On a quick tangential but related note, I have a friend who owns a business and he has a VP of Procurement named Steve. On a daily basis, however, they call Steve the "VP of Nobody Makes Money But Us" because that's essentially what Procurement does. Given a spec, they try to buy for the lowest possible price. They could care less if you make any money, with the exception being that they might throw you a small, barely edible, profit margin bone if they need you to stay in business long enough to fulfill the next order.

In this tough economy, mind you, Procurement departments are busier than ever. Sales are down for many companies and there's pressure on profits on all fronts, so buyers -- your customers -- are doing something that is completely logical on its face: in order to improve their margins, they are shuffling purchases over to Procurement and telling them to get it for a lower price.

Whereas you used to be able to wine and dine the head of a business division to get business, you now find yourself talking to some low-level flunkie in Procurement. Even worse, you're not talking to Procurement, you are interfacing with them. Maybe you're asked to sign up for their new reverse-auction bidding system and submit your prices, or maybe you're asked to send in an RFP, without ever being given the chance to meet with any human beings.

This is the predicament. If you are not in it now, it may just be a matter of time. So what should you do to avoid the RFP and reverse-auction death traps?

The Solution

There are three things you can do to avoid playing the reverse-auction game:

#1 Define your differentiation and its value to your customers.

What is that you have that the guy who might underbid you doesn't have? List out all your points of differentiation and assess their value to your customers (ideally based on customer and prospect input). In order for you to avoid being viewed as a commodity, your incremental value, relative to the competition, has to exceed the money your customer would save if they went with a low bidder. In other words, you can't just say your offering is not a commodity. You have to prove that the non-price attributes of your product are worth paying a premium for. As simple as it sounds, many companies struggle with this exercise. Get help if you need it.

#2 Inoculate yourself against the procurement curse.

If you are lucky enough not to yet be viewed as a commodity, you need to invest in protecting that edge. If you believe you are not a commodity based on your differentiation, then it's really a marketing exercise to convey that to prospects. If you know it, it doesn't matter. The world has to know it. Whatever it is that makes you not a commodity has to be driven home in the minds of the prospect as something that they cannot live without. The usual marketing tools apply: case studies, testimonials, sell sheets, PR placements and product reviews in the media, and relationship selling with face-to-face discussions. The messaging has to make the case that there is more to your offering than price. Moreover, get the message out that if a prospect just purchases based on price alone, they will likely suffer some significant pain of some kind.

#3 Call their bluff.

If it's late in the game and you've been complacent, you may already be viewed as a commodity by buyers. In this case, you need to try to convince Procurement that, with respect to buying your product, they need to be more thoughtful than they are being. In a subtle way, you need to make them realize that they will fail if they proceed with their current plan of buying based only on price. They will get fired, the business will fail or have a crisis of some kind, or profits will be down, for example. Raise enough credible pain scenarios to make them double-think the reverse auction approach to buying.

To have this discussion, you can go to Procurement directly to try to get an audience or you can work with the business line contacts to get them to influence Procurement. There are pros and cons to either approach. The best case is to have Procurement and your line-of-business contacts all in the same room. If there's an RFP or bid process, you don't want to just respond to the bid; you'd want to contact Procurement and the ultimate consumers of the process, and say "We'd like to schedule a meeting to ask a few questions about the bid process and the requirements." If you can get that meeting, that's your chance to make as strong a case as you can that they've written the specs wrong -- i.e. they've forgotten the features you have that competitors don't -- and making it painfully clear to them that if they just go with the lowest bid, there will be hell to pay in the future.

Key Lessons

There's a reason our Chicago marketing consultants spend a lot of time helping clients to define their value proposition and their competitive differentiation. In markets that are nowhere near being commoditized, it provides an edge over the competition. But in markets that have the potential to be commoditized (and you may be closer than you think to that unenviable fate), defining differentiation that is highly valuable to customers is not just essential to win business -- it's critical to ensure long-term survival.