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They May Be Slow To Tell You, But You Absolutely Need To Know:
The Buyer’s ‘Should-Cost’ Estimate
How Shaping The Buyer's Earliest Price Estimate Is Key To Your Success.
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.
“Shaping the
buyer’s ‘shouldcost’ model is
key to your
success…”
The ‘Should-Cost’ Estimate Is Common Sense
The reality is that most buyers don't set about buying something
without having an idea (however vague) of what it 'should-cost'. Any
salesperson 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 on
getting the sale. Yet most salespeople try to sell without actually
knowing what the buyer's 'should-cost' estimate is. That does not
make sense.
Why Do Buyers Need A ‘Should-Cost’ Estimate?
For the professional buyer developing a 'should-cost' estimate is a
mandatory step in the buying process. Its importance derives from the
fact 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 buyer's 'should-cost' estimate is generally more than a feeling, or
a guess. It is typically based on a set of assumptions, perhaps even a
model. How accurate or fair the 'should-cost' estimate is matters to
the salesperson and his or her strategy for winning the deal.
When Are ‘Should-Cost’ Estimates Created?
With longer and more complex buying cycles, it is important for the
buyer 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
questions that the buyer is going to have to answer.
In most cases the buyer will have to set out a broad 'should' or 'could'
cost estimate before a formal buying process ever gets under way.
The problem is that this initial estimate can overshadow the full
procurement process.
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“Shaping the
buyer’s
‘should-cost’
model is key
to sales
success.”
What Are The Implications For The Salesperson?
Sellers who don't know, or fail to address the buyer's price
expectations run the risk of chasing phantom opportunities where
there 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
competitor.
As a seller, before you can justify the cost of your solution, you need
to understand what the prospect expects it 'should-cost' and how that
expectation has been derived.
-
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 headon.
Why Are ‘Should-Cost’ Estimates A Secret?
While salespeople may ask a prospect what he, or she expects, or
plans to spend they will rarely get an honest answer. Little surprise
either!
Buyer's rightly fear that answering such question sets the parameters
for the seller's pricing. They are reluctant to share their 'should-cost'
price expectation because they want to better it.
So, while most buyers have an expectation of price, they are unlikely
to reveal it. Something similar happens with sellers, who for a myriad
of reasons can be less than upfront about their pricing.
The result is a cat and mouse game between buyer and seller around
price, with inevitable shocks and surprises along the way.
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“Early
‘should-cost’
assumptions
can be slow
to change.”
Why Are Some ‘Should-Cost’ Estimates Difficult To Change?
The buyer's initial 'should-cost' estimate may have been calculated
based on patchy information and some degree of guesswork.
However, while the estimate may be couched in general terms with
lots of disclaimers and health warning for the reader, it can be
stubborn to change. That has implications for the seller who is often
arriving late to the table to be confronted by a 'should-cost' estimate
that is woefully out of date, but difficult to change.
The buyer's early 'should-cost' estimate can quickly become set in the
minds of senior management.
Here is an example:
When the cost figure for a
new IT system is revised
upward the senior manager
baulks saying 'but you said it
would cost '1 million'. The
buyer responds 'that was 6
months ago before we talked
to all the users and
determined that a more
sophisticated and longer term
solution would be required'.
Regardless, the business case
for the purchase has now to
be fundamentally revised.
That could mean the buyer
going back to the drawing
board and the sale being
stalled as a result.
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“Many buyers
are amateur
accountants in
search of your
margins...”
Does Your Buyer Think He/She Is An Accountant?
"Everybody is an amateur accountant these days" exclaimed a sales
manager recently, as yet another prospect probed into the supplier's
costs and margins.
Expressing the frustration experienced by many salespeople the
manager continued: "Buyers think they have a right to know, or worse
that they already know the business model of the supplier - something
that has taken many suppliers years to establish and indeed refine. Yet
with a few simple formulas in a spreadsheet the buyer thinks he can
capture, even rewrite the economics of the suppliers business!"
The manager may well be right, but the reality is buyers are
increasingly inquisitorial in their desire to understand just how low
they can get the supplier's price. That is their job!
Faced with this reality the seller must deliberately intervene to shape
the buyer's 'should-cost' model. To see how effectively you are doing
this answer the questions overleaf, ticking the boxes if the answer is
'Yes'.
Your Sales Gauge:
The Buyer's 'Should-Cost' Estimate
There are 8 items in the best practice checklist below. Use these to
gauge how effectively you are handling the buyer's 'should-cost'
estimate and the impact that address this issue could have on your
sales success.
Tick the ones for which you can answer 'Yes' – that is those that are
presently being addressed, or covered by your sales approach. Pay
particular attention to those that you cannot Tick – they could be
limiting your success.
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“Gauge how
effectively you
are handling the
‘should-cost’
issue...”
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 don't leave price till later address 'should-cost' issues
immediately. It is the seller's job to shape, inform and correct 'shouldcost' assumptions from day one.
It is vital to know the 'should-cost' for each key opportunity in your
sales pipeline.
The appropriateness of the buyer's 'should-cost' estimate and its
susceptibility to influence must play a role in the seller's
prequalification of the opportunity. If the gap between the seller's
price and the buyer's '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
seller's reaction. Expect that he, or she will listen carefully and invite
the supplier to correct aspects of the model that may need
refinement.
In this environment the salesperson can unwittingly end up revealing
a lot more than they had intended, sometimes even correcting buyer
numbers downwards!
Tick  If ‘Yes’
 Do You Know How Buyers Arrive At Their ‘Should-Cost’?
Even if buyers won't 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.
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“What are the
flaws in the
‘should-cost’
estimates for
your solution?”
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 isn't 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 buyer's 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 seller's role in bringing the relevant skills & numbers to
bear on the buyer's '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.
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-
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.
Tick  If ‘Yes’
 Do You Ensure Their Estimate Reflects Requirements?
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 buyer's 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.
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“Make sure
that the buyer
also has a
‘should-save’
estimate…”
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 buyer's '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 buyer's 'shouldcost' 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.
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The Science Behind This Paper
These insights and tools are based on extensive research under 3
headings:
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 Group
and cannot be reproduced in any format without written permission.
Would you like help in tackling your sales challenges? Contact us at:
[email protected]
www.theASGgroup.com
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