Are You Only The Tip Of The Iceberg?

When it comes to the customer’s costs, your price may only be the tip of the iceberg. That is important if you are selling a quality solution and want to avoid being hammered on price. 

The Iceberg Principle In Selling

Just like an iceberg much of the bulk of the buyer’s total cost may not be obvious. The price of your solution is plain to see, however it may account for only a relatively small proportion of the customer’s total cost.

If the customer is not aware of that fact then he or she is going to be more difficult to sell to when it comes to price.

By making your customer aware of The Iceberg Principle you can move the conversation off price and onto value.

Total Cost Of Ownership

The iceberg principle is a powerful metaphor for your customer’s Total cost of Ownership. It suggests that:

• There are costs that are often hidden. They can dwarf the purchase price.
• The cheapest solution can turn out to be the dearest. Buying a cheaper solution is a false victory, unless it improves the total cost equation.
• It is important that your customer has an accurate picture of the total cost of fixing their problem or addressing their need, as well as of the price of your solution.

Draw Your Iceberg

Draw the iceberg for your customer – showing the cost price of your solution above the water and the rest of the customer’s other costs below the water. Such costs might, include:

• Internal time and resources
• Overheads
• Expenses
• Opportunity cost

These can exist under headings such as the following:

• Buying (sourcing, selecting, contracting, procurement, etc.)
• Inventory
• Logistics
• Packaging
• Customization
• Quality control
• Implementation
• Switching costs
• Training
• Support
• Ongoing licences
• Maintenance
• Energy and other operating costs

The list of possible costs that make up TCO is endless – so it is important to determine the specific costs for your customer and how they are measured.

When you have your iceberg created help melt your customer’s iceberg, starting from the bottom up.

Price Really Isn’t Everything

Today’s buyers are increasingly obsessed with price. However, most salespeople can justifiably argue that when it comes to buying their solution “price isn’t everything!”

A supplier price renegotiation may only be a false victory for the buyer, where the purchase price accounts for only a small proportion of the buyer’s total cost. While negotiating hard on your price the buyer may be missing out on the real source of savings.

Where Savings Can Really Be Made!

The supplier’s price, while it is the most obvious place to look for savings, is rarely the most profitable. This can be seen by reference to the table below.  

For example, a saving of 10% (left hand column) on a purchase price that amounts to only 15% of the total cost (top row), results in only a saving 1.5% overall.  

Indeed on the same basis saving just 5% of the overall total costs would require a massive 35% cut in supplier price.

The lesson is an obvious one – buyers are often focused on getting savings in the wrong areas. Sellers must help the buyer to cut the total cost of ownership.

                                                                                          Figure 1: Price saving ratio

Use the table above to calculate the relative scope for savings based on the proportion of total costs accounted for by your solution.  

Then draw the buyer’s attention to the fact that the savings that can be achieved by working together is many multiples of a supplier price cut.

Inspirational Icebergs

Swiss industrial faster supplier Bossard uses the iceberg model to powerful effect. It is what they call “The Rule of 15-85″ in respect of the TCO model in fastening:

Figure 2: The Rule of 15-85

Here is how the explain it on their website:

“On average, the fastener itself makes up to only around 15% of the total costs. The remaining 85% of the costs come from development, procurement, testing, inventories, assembly and logistics. This chain of events is adding costs to the entire fastening ecosystem. Experience in the industry has shown that cost savings of 50% and more can be achieved in the areas of logistics and engineering. This has a lasting effect on the total costs of the end product.”

How does this fit into the company’s sales proposition? Well, “at Bossard, every solution we create, is designed to reduce costs, according to the TCO concept in fastening. ”

Slippery Icebergs

Yes it can be difficult. Calculating the TCO is is not straightforward. Here are just some of the challenges:

• Different aspects of the TCO may come out of different budgets and accounting periods
• Many of the costs may be discounted as soft rather than hard savings by those who apply accounting principles
• May be fixed costs – for example salary overheads
• It involves assumptions and scenarios

Add to these factors the fact that the seller may only have limited access to the information. But just because it is difficult that makes it all the more worthwhile.

Icebergs can be dangerous!

Selling to a customer who has only a surface level appreciation of the cost puts your margin and perhaps even the deal at risk.

• The buyer who does not spot the iceberg is a risk of an unpleasant surprise.  He, or she has clearly not got their numbers in order and sooner or later somebody is likely to draw attention to it.   It may call the very viability of the decision into question, or cause the purchase to stall.
• If the seller is unaware of the total iceberg in terms of costs then he or she is disadvantaged in terms of negotiating on price and will struggle to move the conversation off price and onto value.  Helping the buyer to build the justification for the decision requires that the customer understands their total cost.

References

Collis Ray: Buyer Seller Insight: Sellers: Are You Only The Tip Of The Iceberg? Retrieved September 19, 2013 from http://buyer.sellerinsights.com/2013/06/13/are-you-only-the-tip-of-the-iceberg/

Blanka Cigler

Senior Consultant, Coach & Project Manager