Many vendors are very secretive with regard to their pricing models and methods – and that serves them well. More complexity and less transparency makes it easier for vendors to negotiate higher fees while making it more difficult for buyers to counter those efforts. “Mystery equals margin” is what we call it at NPI.
Here are the top four ways IT vendors add mystery and complexity to their pricing:
Bundling versus line-item pricing.
Adding offerings into bundles and not showing line item pricing makes it difficult to understand what you are paying for and the value of each item in the bundle. Vendors also frequently add products/services to the bundle “at no additional charge” as an incentive. These are offerings that an organization may not need but have perceived value – which is a perfect recipe for shelf-ware. NPI recommends requesting vendors provide item level pricing and discounts. This way each item can be evaluated for its value to the organization, and line-item price benchmark analysis can be performed.
Random application of discounts.
NPI has seen many proposals where discounting is applied randomly over a bill of materials (BOM). A customer could receive multiple bids for the same BOM and see discounting applied very differently on each proposal. In these cases, the blended discount can become an important metric for pricing assessment.
Price proposals that include descriptions rather than SKUs.
First, it’s important to conduct price benchmark analysis on all pricing proposals to determine if you’re getting a fair deal from your vendor. But what if those proposals include descriptions of offerings instead of SKUs? That’s bad news, especially considering many vendors use the same description for multiple SKUs. NPI recommends customers request SKUs, list pricing and discounting be included in all vendor proposals.
Fixed pricing for services.
There is value to fixed fee projects where the vendor assumes the risk of completing the project within the negotiated price. And, while widely accepted, vendors typically apply a premium to their pricing to take on this risk. This does, however, create a situation where it’s difficult to determine if the customer is getting a fair deal for the statement of work.
NPI advises customers request a rate card or, if that’s unavailable, request the number of resources and skill levels that will be employed on the project along with a project plan that outlines the number of days and milestones. The reality is vendors calculate overhead (sometimes heavy-handedly) and determine a price that ensures profitability. You have a right to know who is working on your project and how long it will take in order to assess the value to your organization.
One final thought – any time a vendor pushes back on requests for more pricing details and transparency, it should be treated as suspicious. This makes it even more important to strengthen your negotiation position with credible competitive alternatives and timing on your side. This leverage will help force vendors to be more transparent with pricing.
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