Negotiating Price With A Taskmaster
Chuck Johnson and his sales manager, Tom Barnhart, have been trying to sell DuraFlor residential sheet vinyl to Bargain City Stores for many years. Johnson and Barnhart work for McGranahan Distributing Company of Toledo. McGranahan’s handles the DuraFlor line of resilient flooring products, which includes both flooring tile and sheet vinyl. In the resilient flooring market, the six competing major manufacturers all use “traditional” marketing channels of independent distributors, who sell to retailers, who, in turn, sell to the general public or contractors.
Bargain City operates a chain of sixty-five discount stores throughout Ohio, Michigan, and Indiana, with headquarters in Toledo, Ohio. The firm concentrates on secondary markets, and although they stock all the major product lines that other mass merchandisers offer, they have an excellent do-it-yourself building materials department. Don Schramm is the chief buyer for this department, and his strategy is to buy good value at the low end of the market to sell in Bargain City outlets. It is commonly known throughout the industry that Bargain City buyers always want good product quality at the lowest possible prices, with low price being their top priority.
The product that Johnson and Barnhart are attempting to sell to Mr. Schramm is a low-end line of twelve-foot sheet vinyl flooring called Imperial Accent. This line has twelve different patterns and fifty-six stock-keeping units. McGranahan’s sold the Imperial Accent line to Schramm seven years ago, and the sales volume was $250,000. Now, with Bargain City’s expansion, Johnson estimates the first-year order volume should be more than $500,000. Johnson lost the business when another distributor offered Schramm a 15 percent discount on a similar product made by Congolese Manufacturing. At the time, DuraFlor was unwilling to meet the competitor’s lower price, asserting that its superior brand awareness increased retailer inventory turnover and justified a higher price.
DuraFlor controls more than 60 percent of the entire resilient flooring market, but only 30 percent of the low-end twelve-foot sheet flooring market. DuraFlor has tended to neglect this market because the low-end market is a fiercely competitive one. The manufacturing process, called rotogravure, is so common that no manufacturer has a competitive cost advantage. The process allows virtually any picture to be made into a pattern. Thus, competitors can copy top sellers, making it difficult to maintain styling advantages.
Recently, Chuck heard that Bargain City’s current distributor for twelve-foot sheet vinyl is having financial problems and can’t keep its customers’ stores stocked. On the chance that Bargain City might be looking for a new supplier, Tom called Mr. Schramm and was delighted to hear him confirm a sales call appointment with him and Chuck.
Chuck and Tom have decided to ask the DuraFlor district manager, Ron Harris, to participate in the sales presentation to Bargain City because to win the Bargain City business his firm must ultimately lower the price to McGranahan Distributing. McGranahan’s current profit margin is 24 percent on the DuraFlor product.
In the pre-call strategy meeting, Johnson, Barnhart, and Harris decide to stress Imperial Accent’s improved styling and other product features. They will point out the inventory turnover benefits it offers Bargain City because of its high brand awareness with the store’s customers. The three of them agree that they will have to do some “paper-and-pencil” selling by demonstrating in specific numbers how profitable the DuraFlor line would be for Bargain City. They also agree that Johnson and Barnhart will finish the sales call with a review of the inventory monitoring, prompt delivery, and sales support that McGranahan’s can provide.
After waiting in the lobby of Bargain City’s large headquarters building for thirty-five minutes, a receptionist leads the three men to Mr. Schramm’s office. Schramm’s assistant buyer, Sixto Torres, is also there and, seeing the three of them march in, comments, “Oh boy, they’re bringing in the big guns today. We’re in for a real dog-and-pony show, Boss.” Everybody laughs, and greetings are exchanged all around.
Then Tom Barnhart says, “We appreciate the opportunity to review the merits of the Imperial Accent line with you today, Don. I’m sure by the conclusion of our meeting that you’ll agree that it offers an attractive profit opportunity for Bargain City.”
“I’ll be the judge of that,” snaps Schramm, peering menacingly over his bifocals while leaning forward in his chair.
“Here are the twelve patterns in the Imperial Accent line,” says Chuck Johnson, as he lays the patterns before Schramm and Torres. “As you can see, DuraFlor has restyled the line with five new patterns, including geometric designs, floral, and the always-popular brick patterns. We’ve also brightened the color palette in the line because market research has shown us that low-end buyers prefer brighter colors.”
“What do you think of this pattern, Sixto?” asks Harris, holding up a bright red, rather garish thirty-six-by-thirty-six-inch sample.
“It’s really ugly,” replies Torres. “I wouldn’t have it in my house. But who cares what I think about the pattern—how does it sell?”
“It’s brand new, and we don’t have any data on it yet,” answers Harris.
Barnhart jumps in. “Don, Sixto, here’s a list of the top twenty-five sellers nationwide, by color and by pattern. We suggest you begin by stocking all the patterns to see how they sell in your different markets. We’ll ship new inventory promptly to any of your stores as needed.”
Schramm leans forward, “Mm, so we won’t have to stock anything in our warehouse?”
“That’s right, Don, we’ll handle all the inventory concerns and my salespeople will regularly call on all of your stores to make sure the twelve-inch roll racks are fully stocked,” says Barnhart.
Harris chimes in, “The Imperial Accent line is really coming on strong lately, Don.” Holding up a sample of the new embossing, he continues, “Our improved rotogravure process allows us to emboss the product now, enabling it to hide subfloor irregularities better than any product on the market. We’re also using new ‘hi-fidelity’ inks that give these brighter colors.”
Schramm puts his glasses on and folds his arms as his assistant picks up one of the samples and compares it to a sample of the Congolese product they are now carrying. “This doesn’t look any different from the Congolese product,” says Torres. “How many mils is the wear layer on your product?”
“Eight,” says Harris.
“Congolese has a ten-mil wear layer,” replies Torres.
“That’s because they pump it up with air. We don’t do that. Our research shows this product is the most durable in its product class.” Harris is tired of competitors making claims that imply greater durability, while what they’re doing is literally blowing hot air into the product. DuraFlor has always been conservative in its product claims, perhaps too conservative.
Harris continues talking, interrupting Barnhart, who is urging the discussion back to what McGranahan’s can do for Bargain City. “Don, look at this profit opportunity,” says Harris, handing a sheet of paper to Schramm. “If you buy Accent from McGranahan’s at two dollars and five cents per square yard and sell it for three ninety-nine, you’ll make almost 49 percent gross margin. Now with sixty-some stores, eight rolls per store, and seven turns a year, with the average roll being, say, one hundred square yards, that’s a profit of $369,000. I know it will take a while to get the Congolese off your racks, but you could be generating these kinds of profit dollars in a year or two.” Harris smiles and looks at Schramm.
Schramm crosses his arms again and stares at the sheet Harris has put on his desk. He rubs his eyes and grimaces slightly. “Well, for one thing, Ron, if I were to pay two dollars and five cents per square yard for this product, Sixto would have my job the next day. It’s nice of you to try and help me run my department, but if I made a 49 percent margin on this product, it wouldn’t exactly be a bargain for the customer, now would it?”
“I think Ron was just trying to point out the profit potential, Don. Obviously, you’ll be changing the numbers to fit Bargain City’s marketing strategy,” offers Johnson. “And remember that 2 percent of all your purchases will accumulate in a fifty-fifty co-op advertising fund.”
“We’re only paying a dollar eighty-two per square yard for the Congolese product. Can you meet that price?” asks Schramm.
“We’ll sure try,” quickly responds Barnhart. “What about it, Ron, can we get there?”
“I don’t know for sure,” says Harris to Schramm. “Let me talk to the product manager and get a price to Tom, and he’ll give a price to you. If we can meet Congolese’s price, will you give us the business, Don?”
“Maybe,” Schramm replies. “Come back with your best price and we’ll see. The products look similar to me, your styling has improved, and the co-op program is good. But I’ll look at what your competitors are offering before I make up my mind.”
“Remember, Don, we’ll carry all the inventory, service your stores so the managers won’t have to remember to order, and deliver the products right off our own truck so you won’t take any risk of damage during delivery. And those costs are all in the price of the goods. You’ll never get a bill for delivery charges. What have you got to lose? How about giving us a shot at the sheet goods business?” pleads Johnson.
“We’ll see,” says Schramm.
Later that week Harris calls Barnhart with a wholesale cost that would yield McGranahan’s a price of $1.90 per square yard with a normal margin. Barnhart calls Johnson into his office and asks if he will be willing to take a 2 percent commission instead of 3 percent in order to help bridge the 8 percent gap. Thinking that it is critical to meet the competitor’s price of $1.82 in order to win the business, Johnson agrees to take the cut in his commissions. Barnhart calls Schramm with the price of $1.82 per square yard, reviews all the benefits of the Imperial Accent line and the services provided by McGranahan’s, and asks for the order. Schramm says he will let him know in a few days, after he hears from other suppliers.
When Schramm calls back three days later, he says McGranahan’s can have the business if they will take another nickel off their price. Apparently, the Congolese distributor has lowered the price to keep from losing the business. Barnhart really doesn’t have a nickel to give. He has already cut the price to the bone, and another nickel off will reduce McGranahan’s gross margin to 17 percent, not too attractive considering all the services they will be providing. Barnhart thinks for a few minutes, then calls Johnson in to discuss the new terms that Bargain City is requesting.
Reprinted with permission of James T. Strong, Dean, California State University, Dominguez Hills.
1.Should McGranahan’s lower the price to Bargain City by another five cents? Should Johnson agree to take an even lower commission to win the order?
2.How successful do you think Johnson, Barnhart, and Harris were in negotiating price resistance during the sales call? What types of techniques did Johnson, Barnhart, and Harris use to negotiate resistance? Do you think more persistence could have won the three-member sales team the Bargain City order?
3.Do you think it was a good idea to bring Ron Harris, the district manager of DuraFlor, along to help make the sales presentation to Bargain City? Why or why not?
4. How well overall did the sales team (Johnson, Barnhart, and Harris) do in negotiating concessions? What, if anything, should they have done differently?
5.What would you advise Chuck Johnson and Tom Barnhart to say in responding to Mr. Schramm’s request for another nickel cut in price to win the Bargain City business?