Whenever they’re asked to sweeten a deal, most vendors respond with a discount.
They don’t have to.
In Five Ways To Sweeten A Deal – Apart From Discount, we gave several alternative tactics for sweetening a deal without dropping the price. We illustrated some of them with our interactions with the following vendors:
- Acme Accounting: This accounting firm increased its scope of work without charging more
- Acme Campaigns: This appointment-setting firm reduced its scope of work without proportionately reducing its price
As you can see, these alternative tactics work by adjusting the scope of work. So, we’ll collectively call them “Right-Scoping”. If they involve a price drop, it’s only because the scope has reduced, so it’s not the same as discounting.
In fact, as shown in the below exhibit, if done correctly, right-scoping has the opposite effect of discounting. Where discounting leads to loss, right scoping leads to profit.
Just to make the distinction between discounting and right-scoping clear, let’s take a simple example of a product that has a list price of US$ 10 per kilogram:
Discounting would mean selling it for US$ 8 per kg, thereby yielding a net realization of 8 dollars per kilogram (being US$ 8 / 1 kg).
Right-Scoping would mean selling half a kg of the product at US$ 6, thereby yielding a net realization of 12 dollars per kilogram (being US$ 6 / 0.5 kg).
In this post, we shall look at the following benefits of Right-Scoping closely:
- Make or break the deal
- Increase margin
We’ll continue to the use the same two examples from the previous post to explain these benefits.
#1. MAKE OR BREAK
Acme Accounting: Activities like collection of accounting material from our office, making a photocopy of the entire set and delivering the copy in a file back to us were vital to us. But it was painful for us to carry them out. If Acme Accounting had insisted on excluding them from its scope of work, we’d have looked for another vendor. Acme Accounting won the deal by taking these activities into its scope of work without charging anything extra.
Acme Campaigns: We had the field sales capacity to handle only 8 appointments per month. Therefore, the additional 8 appointments in Acme Campaigns’s original proposal of 16 appointments per month had no value for us. Had Acme Campaigns insisted on sticking to its original scope, we’d have shopped around. By halving its scope, Acme Campaigns made an offer we couldn’t refuse.
#2. INCREASE MARGIN
Acme Accounting: By not giving a discount, Acme Accounting preserved its margins. (Had the firm asked for a slight price increase to compensate for the increase in its scope, we’d have agreed, in which case the firm would’ve enjoyed higher margins).
Acme Campaigns: The company could halve its cost of delivering 8 appointments a month instead of 16 appointments a month. We were willing to pay a 30% lower price for the reduced scope. By agreeing to a price that wasn’t 50% lower, Acme Campaigns could increase its margin.
As the above examples show, Right-Scoping can help you to boost your win-rates and improve your margins.
You can use Right-Scoping whenever your deals have either or both of the following characteristics:
- You can carry out a certain set of activities for a lower cost than your customer. It makes sense for you to take them into your scope of work. This is the basic principle behind outsourcing.
- Your customer attaches lower value to a certain set of deliverables than it costs you to deliver them. Therefore, it makes sense for you to not offer them. This is the basic principle behind unbundling.
If you need help with structuring the best scope for a given deal, we’re there!
