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Firesale by jigordon
April 1, 2008, 9:32 am
Filed under: pricing, risk

Today is April 1, the day after most corporations close their first quarter. So, I’m guessing that more than a few of you just finished a pretty strong push to get a few deals done by 5pm yesterday. Most folks call them firesales – the financial incentives made by vendors to close out their quarterly pipelines; we talked about them before in the Time Management discussion.

I call it Christmas (well, actually, I call it Hanukkah).

Discounts range from 30-75% off (there’s a rare 80%’er). Add-ins include free products/training/conference tickets, discounted maintenance and even better contract terms. That means that a deal for which you’d normally pay $300,000 can be had for $150,000 or less.

But you can’t just sign random deals as they’re offered. Risk is still a concern, as is purchasing something you don’t really need. I always think about a Dennis Miller comedy sketch when discussing sales. He talks about buying lime-green leisure suits… 2 for the price of 1. And he says that if they really want to screw you, they’ll give you three of them. So it pays to be prepared and know what you want and plan for how to get it.

More important, however, is whether you can get these deals on the off-months. The answer, of course, is yes – so most people just want to know the trick. But there is no trick.

Proper prior planning prevents poor performance!

Yep, that’s all there is to it. If you take your time, perform thorough research, use proper sourcing methods (RFPs, solid team-based negotiation techniques and well-written contracts), and relentlessly manage your vendors, you can successfully obtain solid discounts on ALL of your deals. Because here comes the surprise: a single (or even a few) deals with a great discount won’t overshadow dozens (or hundreds) of deals with poor discounts.

Assume for the moment that you do a modest number of significant deals during the course of a year (say 30 to make it “statistically significant”). Of those 30 deals, let’s also assume that they’re each of modest financial value for a decent sized organization, about $100,000 to $500,000. So, on average, each deal would be worth about $300,000 and your total spend for the year would be $9,000,000 (which adds up about right for such an organization).

Now assume that these 30 deals are equally spread out through the year – and that you’re able to close 4 of them (1 per quarter) with a spectacular discount of 65% off. $300,000 – 65% = $105,000. Four deals * $105,000 = $420,000. Now assume that you only get 10% off all of the other 26 deals ($270,000 * 26 = $7,020,000). Together, your annual spend is $420,000 + $7,020,000, which is: $7,440,000, a 17.4% discount for the year. Not bad.

But assume now that instead of a few spectacular deals, you were able to consistently save 25-30% on every deal. Let’s split it up equally, 15 deals at 25% and 15 at 30%. You know what I’m going to show you, but let me do the math anyways. (15 * $225,000) + (15 * $210,000) = ($3,375,000 + $3,150,000) = $6,525,000, a 27.5% discount for the year.

Thus, consistent “average” savings of 25-30% on each deal will net you almost a million dollars in savings ($909,000) more compared to a few really large savings. Not bad at all. Especially if you live in an organization that measures spend versus savings.

Oh, and I’m not even considering the idea that you can get your 25-30% on every deal in addition to the 4+ quarterly blowouts. Which is why I call it Hanukkah.

So let me repeat the advice:

  • Take your time. Don’t get pressured into something you’re not ready for. Make each step of the negotiation worth something. Rushing to close a deal virtually never is beneficial to you.
  • Perform thorough research. In business school, they teach the “Three C’s” for understanding the basics of marketing research and you can use the 3C’s for your deals, too. Company: learn all that you can about the organization you’re working against. Competition: know your adversaries competitors in the marketplace and the ins and outs of their solutions in comparison. Customers: are you gonna’ be their biggest deal? are you going to offer access to an industry they want inroads to?
  • Use proper sourcing methods (RFPs, solid team-based negotiation techniques and well-written contracts). This is the easiest to say and the hardest to accomplish. It requires significant effort (templates, time, resources), a lot of organization, cooperation and skill. But of the various pieces of the puzzle, this is the easiest piece to “do” as well.
  • Relentlessly manage your vendors. Know who they’re talking to in your organization, what products they’re pushing, deadlines they need to meet, etc.
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