Co-Opetition - Adam M. Brandenburger [125]
There’s another reason to proffer long-term contracts if you’re in a strong position. Next year, your suppliers may have more added value than they do now. Thus, you should seize the opportunity to lock in your advantage while you have it. With a long-term contract, it’s as if next year’s negotiations have been concluded today, so you’ll be better protected against a future shift in power.
We know just how effective it can be to shift to long-term contracts. We’ve sat at the other side of the table and seen this strategy used against our clients. They felt they had to be a lot more aggressive on price. They didn’t like the rules, but they didn’t have the power to change them.
If you’re on the short side of the market, ask your customers and suppliers to compete for long-term contracts. Conversely, if you’re on the long side of the market, then you want to go for short-term contracts. In sum, if you’re short, go long, and if you’re long, go short. Of course, you’re more likely to get your way when you’re on the short side—that’s when you have more added value.
Finally, a word of caution. Long-term contracts are hard to write, since there are more contingencies to consider. For this reason, long-term contracts are, by necessity, incomplete, which makes it more likely that someone will try to renegotiate with you later on.
Going Long
If you have the power, use it to require your suppliers (or customers) to compete for long-term contracts with you.
PROS
1. Since they only have one chance, suppliers (or customers) will compete more aggressively.
2. You have the power—this is the time to use it and lock it in.
CON
1. Long-term contracts can be hard to write and hard to enforce.
After our business-to-business example of how rules link games, we now turn to a mass-consumer-market example. We’ll look at a remarkably effective pricing rule: “package discounts.” A package discount links the game of selling one product with the game of selling another. We’ll examine a real case, but with some simplified numbers, to explain the rather subtle theory behind package discounts.
Discounted Value Warner Bros, owns The Fugitive and Free Willy. You might say that both movies are about escapes; other than that, though, the two movies are quite unrelated. Seeing one movie doesn’t necessarily make you any more, or any less, likely to want to see the other. The two movies neither compete with nor complement each other. All they share is the Warner Bros. name. And yet there’s a reason to link together the way the two movies are sold.
After the theatrical release and the premium-rental cycle, Warner Bros, was ready to sell the two videos to the mass market. What price should it charge? Let’s imagine that it conducted a survey of four hundred regular video buyers, and the results revealed four equal-sized market segments:
• A hundred people would pay $20 for The Fugitive but had no interest in Free Willy.
• A hundred people had just the reverse preferences: they’d pay $20 for Free Willy but weren’t interested in The Fugitive.
• A hundred people said that they’d buy both movies at $20 each.
• Finally, a hundred people said they liked both movies but weren’t quite as enthusiastic; they’d pay somewhere between $15 and $20 for each of the movies, say $17.50 for argument’s sake.
Warner Bros.’ unit costs for videos are about $5, equally split between manufacturing the shell, cartridge, and packaging; and advertising and shipping expenses.
Based on all this information, Warner Bros, decided on a suggested retail price of $19.95 for each video, or a net price of $10.95 after taking into account the video store markup. At $19.95 each, Warner Bros, would sell a total of four hundred videos—two hundred copies each of The Fugitive and Free Willy. To reach that fourth group of customers and sell an extra two hundred videos, Warner Bros, would have to lower price to $17.50. Would