Chinese negotiators should have more transparent pricing strategies
A Chinese negotiator I know recently met with a potential buyer from overseas, and then called me with a question. The Chinese salesman had explained his product offering, and then quoted the potential buyer a price. The buyer merely nodded his head and said, “Ok, I understand”. The Chinese negotiator, however, had expected the prospect to come back with a counter-offer or a new proposal. Instead, the overseas buyer merely asked a few polite questions about the industry, said goodbye, and left. The client was never heard from again.
The negotiator in question asked me if the buyer was serious, and if so, why he didn’t come back with another offer.
“How high was the price you offered him?” I asked.
“Pretty high, but I would have come down if he pressed me,” was the Chinese salesman’s answer.
“How much would you have come down?”
“65 – 70%. But he never even tried to bargain with me.”
This leads to the question of PRICING STRATEGY. There are several ways of approaching the initial price question.
Many sellers like to start out very high, and then “allow” the other side to bargain them down to a much lower price. This approach works best when you have a unique asset for sale (such as property), or have a very high volume of potential customers. In truth, it works best when the buyer is not very knowledgeable or sophisticated.
Other sellers try to make their first offer so competitive that they immediately engage the buyer’s interest. The works best in high-volume sales where competition is high and price is the key factor. Many Chinese manufacturers set prices based on this model. The margins may be very thin, but volume is high and buyers have the ability to compare prices easily. This approach works best when you have a cost-advantage over your competitors. Many Chinese companies start with this approach, and try to climb the “value-chain” by offering more services or higher-margin products later.
A third approach that is rapidly gaining favor in China is the “package” approach. The initial price is often quite high – but includes a variety of value-added services or features. The basic product offering is relatively low-margin, but the salesman makes his real money from services and “extras”. Anyone who has every bought a new car is familiar with this approach. Typical extras & add-ons include service contracts, custom design, warrantees or guarantees, faster delivery, training, or other types of service and consultation. Buyers will bargain for a lower price by deciding how much extra value they require from the seller. This approach requires that the seller actually have the ability to deliver value-added services and features that are worth the extra money.
Chinese marketers have been very successful with the high-volume, low margin approach. More and more Chinese companies are switching to the third approach of adding value for higher prices. The first approach of quoting very high starting prices and then bargaining down is becoming less effective with international B2B clients for 3 reasons.
1) Better transparency in the market. Overseas buyers are growing more sophisticated about doing business in China. Services like Alibaba.com and professionals sourcing consultants have made it possible for relative “outsiders” to learn about costs and competitors more quickly than they could in the past.
2) DMU or Decision Making Units are becoming more common. There was a time when a salesperson in China could meet the single decision-maker from an overseas company and build a relationship. Nowadays the visitor to China is probably just one representative of an organization that has a sophisticated buying process, and they come to China to visit a long list of potential suppliers. If the initial offer does not meet a pre-set criteria, that company will not be considered for further meetings.
3) Even though the Chinese seller may be very honest and have the most honorable intentions, if his offer is two or three times that of his competitors for the same product, he will appear dishonest and disreputable. The China market has gotten more and more sophisticated, and overseas buyers have learned that there is no shortage of reputable, honest trading partners here.
It really doesn’t matter whether you choose to compete based on price (option 2) or value (option 3) – you still must be able to defend your first offer. If your initial price proposal is unreasonable or uncompetitive, you probably won’t get a second chance to win the business.
