The Buyer's Should-Cost Estimate

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Few buyers approach the purchase decision without some estimate of what they are going to have to spend. For the seller, that estimate, whether it is well informed, or not, impacts on everything from prequalification to negotiations.

Finding out what the buyer thinks your solution 'should-cost' is not as easy as it sounds. After all most buyers don't want to tell sellers what they plan to spend. Even if you do find out, the buyer's 'should-cost' estimate can be stubborn to change.

This whitepaper will provide you with the tools and tips you need to understand and influence the buyer's 'should-cost' estimate.

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The Buyer's Should-Cost Estimate

  1. 1. Retail Price: $29They May Be Slow To Tell You, But You Absolutely Need To Know:The Buyer’s ‘Should-Cost’ EstimateHow Shaping The Buyers Earliest Price Estimate Is Key To Your Success. Few buyers approach the purchase decision without some “Shaping the estimate of what they are going to have to spend. For the buyer’s ‘should- seller, that estimate, whether it is well informed, or not, cost’ model is impacts on everything from prequalification to negotiations. key to your Finding out what the buyer thinks your solution should-cost is not as success…” easy as it sounds. After all most buyers dont want to tell sellers what they plan to spend. Even if you do find out, the buyers should-cost estimate can be stubborn to change. This whitepaper will provide you with the tools and tips you need to understand and influence the buyers should-cost estimate.
  2. 2. The ‘Should-Cost’ Estimate Is Common SenseThe reality is that most buyers dont set about buying somethingwithout having an idea (however vague) of what it should-cost. Anysalesperson who sets off to buy something important either for work,or personally does exactly the same thing. It is just common sense.What the buyer expects your solution to cost has a major bearing ongetting the sale. Yet most salespeople try to sell without actuallyknowing what the buyers should-cost estimate is. That does notmake sense.Why Do Buyers Need A ‘Should-Cost’ Estimate?For the professional buyer developing a should-cost estimate is amandatory step in the buying process. Its importance derives from thefact that it not only sets expectations, but determines such things as;- Whether a buying process will get off the blocks- What the budgetary allocation will be- The parameters in terms of specifications and even- The negotiating stance to be adopted with potential suppliers.The buyers should-cost estimate is generally more than a feeling, ora guess. It is typically based on a set of assumptions, perhaps even amodel. How accurate or fair the should-cost estimate is matters tothe salesperson and his or her strategy for winning the deal. “Shaping the buyer’sWhen Are ‘Should-Cost’ Estimates Created? ‘should-cost’With longer and more complex buying cycles, it is important for the model is keybuyer to set pricing or budgetary parameters at the earliest stages.Indeed, what is it likely to cost? is going to be one of the earliest to salesquestions that the buyer is going to have to answer. success.”In most cases the buyer will have to set out a broad should or couldcost estimate before a formal buying process ever gets under way.The problem is that this initial estimate can overshadow the fullprocurement process.P a g e |2© The ASG Group 2011
  3. 3. What Are The Implications For The Salesperson?Sellers who dont know, or fail to address the buyers priceexpectations run the risk of chasing phantom opportunities wherethere simply is not the ability to pay (due to poor prequalification).They also risk being beaten-up on price, or being out-sold by a “Earlycompetitor. ‘should-cost’As a seller, before you can justify the cost of your solution, you need assumptionsto understand what the prospect expects it should-cost and how that can be slowexpectation has been derived. to change.”- The earlier you do this the more acceptable you can make your price to the buyer.- The later it happens the greater the risk of a price-related shock on either side.Above all salespeople must deal with the should-cost challenge head-on.Why Are ‘Should-Cost’ Estimates A Secret?While salespeople may ask a prospect what he, or she expects, orplans to spend they will rarely get an honest answer. Little surpriseeither!Buyers rightly fear that answering such question sets the parametersfor the sellers pricing. They are reluctant to share their should-costprice expectation because they want to better it.So, while most buyers have an expectation of price, they are unlikelyto reveal it. Something similar happens with sellers, who for a myriadof reasons can be less than upfront about their pricing.The result is a cat and mouse game between buyer and seller aroundprice, with inevitable shocks and surprises along the way.P a g e |3© The ASG Group 2011
  4. 4. Why Are Some ‘Should-Cost’ Estimates Difficult To Change? “Many buyersThe buyers initial should-cost estimate may have been calculatedbased on patchy information and some degree of guesswork. are amateurHowever, while the estimate may be couched in general terms with accountants inlots of disclaimers and health warning for the reader, it can be search of yourstubborn to change. That has implications for the seller who is oftenarriving late to the table to be confronted by a should-cost estimate margins...”that is woefully out of date, but difficult to change.The buyers early should-cost estimate can quickly become set in theminds of senior management.Here is an example:When the cost figure for anew IT system is revisedupward the senior managerbaulks saying but you said itwould cost 1 million. Thebuyer responds that was 6months ago before we talkedto all the users anddetermined that a moresophisticated and longer termsolution would be required.Regardless, the business casefor the purchase has now tobe fundamentally revised.That could mean the buyergoing back to the drawingboard and the sale beingstalled as a result.P a g e |4© The ASG Group 2011
  5. 5. Does Your Buyer Think He/She Is An Accountant?"Everybody is an amateur accountant these days" exclaimed a salesmanager recently, as yet another prospect probed into the supplierscosts and margins. “Gauge howExpressing the frustration experienced by many salespeople the effectively youmanager continued: "Buyers think they have a right to know, or worsethat they already know the business model of the supplier - something are handling thethat has taken many suppliers years to establish and indeed refine. Yet ‘should-cost’with a few simple formulas in a spreadsheet the buyer thinks he cancapture, even rewrite the economics of the suppliers business!" issue...”The manager may well be right, but the reality is buyers areincreasingly inquisitorial in their desire to understand just how lowthey can get the suppliers price. That is their job!Faced with this reality the seller must deliberately intervene to shapethe buyers should-cost model. To see how effectively you are doingthis answer the questions overleaf, ticking the boxes if the answer isYes.Your Sales Gauge: The Buyers Should-Cost EstimateThere are 8 items in the best practice checklist below. Use these togauge how effectively you are handling the buyers should-costestimate and the impact that address this issue could have on yoursales success.Tick the ones for which you can answer Yes – that is those that arepresently being addressed, or covered by your sales approach. Payparticular attention to those that you cannot Tick – they could belimiting your success.P a g e |5© The ASG Group 2011
  6. 6. Tick  If ‘Yes’ Do You Address ‘Should-Cost’ Issues From Day One? The longer a should-cost model or assumption exists the harder it is to challenge. So dont leave price till later address should-cost issues immediately. It is the sellers job to shape, inform and correct should- cost assumptions from day one. It is vital to know the should-cost for each key opportunity in your sales pipeline. The appropriateness of the buyers should-cost estimate and its susceptibility to influence must play a role in the sellers prequalification of the opportunity. If the gap between the sellers price and the buyers should-cost estimate is too great the deal cannot be won. Tick  If ‘Yes’ Are You Ready If The Buyer Tries To ‘Should-Cost’ You? Be ready for the coy buyer to use their should-cost model in supplier negotiations. Expect the buyer to show the model and ask for the sellers reaction. Expect that he, or she will listen carefully and invite “What are the the supplier to correct aspects of the model that may need flaws in the refinement. ‘should-cost’ In this environment the salesperson can unwittingly end up revealing estimates for a lot more than they had intended, sometimes even correcting buyer your solution?” numbers downwards! Tick  If ‘Yes’ Do You Know How Buyers Arrive At Their ‘Should-Cost’? Even if buyers wont tell salespeople what their plan, or expect to spend, sellers need to know the assumptions prospects make when it comes to price. That includes the formula by which it is likely to be calculated. P a g e |6 © The ASG Group 2011
  7. 7. How easy is it for your prospects to develop a should-cost model? What are the building blocks, metrics and assumptions that buyers typically use in your category space? What information sources, or point of reference is the buyer likely to use? These are all important questions to consider. The seller needs to understand the science, or lack of it, behind the buyers should-cost estimate, including; key variables (day rates, lines of code, etc.), benchmarks/yardsticks and rules of thumb (e.g. 20% more expensive than a semi automated process), etc. Tick  If ‘Yes’ Do You Know Their Most Common ‘Should-Cost’ Flaws? Management accounting isnt easy – just ask your accounting colleagues. Techniques such as Activity Based Costing - aimed at apportioning fixed costs to individual products, or services, can be surprisingly complex. So, the buyers back of an envelope calculation is certain to have some flaws. Addressing these flaws is important for the seller. Develop a list of the most common flaws, or misunderstandings regarding the cost of your solutions. Tackle these erroneous assumptions up front, before they even surface.Tick  If ‘Yes’ Do You Help Them Inject Realism Into Their Estimates? What is the sellers role in bringing the relevant skills & numbers to bear on the buyers should-cost estimates? Here are some ways the seller can help: - Help buyers to ground their should-cost estimates by providing them with access to 3rd party numbers, analyst data and customer case studies. P a g e |7 © The ASG Group 2011
  8. 8. - Get your finance team to help you in understanding and dealing with how buyers estimate costs. Encourage buyers to get input of finance or other internal experts to make their model more robust. Tick  If ‘Yes’ Do You Ensure They Also Have A ‘Should-Save’ Estimate? The flip side of the should-cost equation is the should-save estimate. However this is something that buyers can struggle with too. In particular our research shows a high level of scepticism regarding the savings estimates prepared by procurement. Buyers know that a narrow focus on cost is a mistake, so focus on the payback and the business results. Highlight cost in its broader context - Total Cost of Ownership, Total Lifecycle Costs and Total Acquisition Costs. Also bring risk into the mix too. “Make sure that the buyer also has aTick  If ‘Yes’ ‘should-save’ Do You Ensure Their Estimate Reflects Requirements? estimate…” Everybody knows that the cost of the basic model, or service is just the bottom end price-wise. Indeed, when all the extras are added the basic price may have little in common with the final ticket price. So, delve into the buyers requirements and help them to understand the cost implications of their specific needs. Similarly, help the buyer to understand competitor segments/groupings, so that the buyer is not using the wrong end of the market to inform should-cost estimates. P a g e |8 © The ASG Group 2011
  9. 9. Tick  If ‘Yes’ Do You Probe Their Real ‘Should-Cost’ Motives? Understandably sellers can be suspicious of the buyer who is too inquisitive about their numbers and margins. In addition to the obvious concern that the buyer is striving to shave margins, the seller may fear that the buyers should-cost estimates are aimed at informing a make or buy decision. That is where the buyer is evaluating the cost of doing it themselves and bypassing the supplier all together. The seller has to be able to handle the should-cost issue when a make, or buy decision may be at play. In effect the seller wants to get the buyer to realize that while it may look easy, it is not. What Should You Do Next? Use the checklist above to decide what you want to do next. In particular, see how many items were you able to tick Yes. If you ticked most, or all of them then you have the buyers should- cost estimate under control. So, you might like to navigate to some other aspect of the Opportunities Stage, or elsewhere in the sales process. If not, this area could be limiting your sales success. You can start addressing it by tackling those items in the checklist that you could not tick. For each make a note of specific actions you can take – you will find space to write earlier in this paper. P a g e |9 © The ASG Group 2011
  10. 10. The Science Behind This PaperThese insights and tools are based on extensive research under 3headings:1. Buyer Research – our ground-breaking research into how modern buying decisions are made and the implications for sellers.2. Best Practice Research – Over 1 million pages of best practice sales case studies, books and research.3. Common Practice Research – Our peer comparison benchmark of 1,000s of your competitors and peers.The Sales Engine® and SellerNav are trademarks of The ASG Group.The entire contents of this document are copyright of The ASG Groupand cannot be reproduced in any format without written permission.Would you like help in tackling your sales challenges? Contact us at:enquiries@theASGgroup.comwww.theASGgroup.comP a g e | 10© The ASG Group 2011

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