Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
This is the promised counter-point to my last posting on when you should “buy the business.” In many ways, this is a much tougher call, because it is always easier to drop price knowing you are likely to win than to hold the line and then hold your breath to see if you made the right choice.
We recently had a very good example of a portfolio company who played this about as well as one can, and got the price they wanted. Here’s how they did it….
This company is offering a new product that has very clear technology advantages over current suppliers, albeit some of which may require the customer to do things a bit differently. Because of their advantages, our company was planning to charge a premium for the product. However, while doing their evaluations the big customers in the space all were making noises about how the price had to be BELOW current alternatives to get them to switch suppliers. Those big fish were exercising their market power to try to get a better product at a lower price.
Our company hung tough – but did so in a non-pugnacious way. They simply kept working with those potential big customers to make sure the technical evaluations were successful, while not forcing the issue on price. This was hard because clearly price negotiations were needed to actually close business, which we as their investors were pounding on them to do. But in parallel, the company went after some much smaller faster moving fish, those who were looking to swim upstream against the industry heavyweights. Eventually, they got a start-up to select them, at what was essentially list price. That start-up did not have the purchasing power and volume potential we might like, but they did set a price level that the company could then go out and legitimately say, “Others are paying this price.”
The next step was to move up the market power ladder (or is it a fish ladder?). Customer #2 was signed a few months later at product volumes an order of magnitude higher than Customer #1. In fact, Customer #2 is an established market player (a medium-sized fish), while still trailing the top two or three volume leaders. But now, our company can look the big fish in eye and say, “we have multiple customers, including one of your primary competitors, paying prices like this.”
It is too soon to know if one of the big fish will bite. But our portfolio company has been very wise is establishing the price-value relationship. They started with little fish and moved up. It’s a model you might want to emulate.
