Co-Opetition - Adam M. Brandenburger [84]
If MFCs help the seller capture more of the pie, why do customers go along with them—even press for them? One reason is that some customers simply don’t get it. They don’t realize how an MFC changes the game. That’s hardly surprising, considering that the way MFCs work is rather subtle, even counterintuitive. A second reason is that some customers recognize they are poor—or, at best, average—negotiators. These customers do better taking the lowest price anyone else negotiates, even if MFCs lead to higher prices overall. Third, MFCs don’t always lead to higher prices. There’s always the chance that someone will turn out to be a really tough customer. If the seller is forced to give this customer very generous terms to get the deal done, he’ll have to go back and give the same terms to everyone else with an MFC. These other customers will then get price breaks they might have been unable to get for themselves.
Corporate customers have another reason to accept, even desire, an MFC. A corporate customer may be less concerned with the absolute level of prices than he is with finding himself at a cost disadvantage vis-à-vis his competitors. If so, having an MFC makes a great deal of sense. It’s effectively an insurance policy that guarantees the customer cost parity with anyone else who buys from the same supplier. The premium on the policy is the likely increase in the overall level of prices.
Customers’ purchasing agents are often the keenest devotees of MFCs. The last thing a purchasing agent wants is for a competitor’s purchasing agent to get a better price. It will look as if the agent isn’t doing his job—and that’s a good way to get fired. An MFC solves the purchasing agent’s problem. He may not realize that MFCs lead to higher prices overall, or, even if he does realize, he may not care too much so long as he gets the best price in the market. What that price is, well, that’s someone else’s department. The situation is reminiscent of this verse from Tom Lehrer:
“Once the rockets are up, who cares where they come down?
That’s not my department” says Wernher von Braun.
We’ve now looked at how MFCs benefit sellers and why customers go along with them. That leaves one more aspect to discuss: how MFCs, once in place, change the way customers negotiate.
MFCs reduce customers’ incentive to negotiate. We saw what happened when the government voted itself an MFC and then sat back and let others do all the negotiating. Most customers who take MFCs play a more active role. They don’t give up the chance to negotiate for themselves. Even so, the typical customer with an MFC won’t push as hard in negotiating with the seller. That makes sense. The customer might as well let others do some of the hard work, secure in the knowledge that he’ll benefit from any price breaks that they extract from the seller. Of course, if everyone lets everyone else do the hard work, the hard work never gets done.
This slacking-off effect is especially strong if what the customer really cares about is cost parity vis-à-vis his competitors. With an MFC, the customer is guaranteed that no one else can get a better price than he can, even if he sits back and does no negotiating at all. Should the customer work hard to try to extract a low price from the seller, in the hopes of opening up a cost advantage over his rivals? Probably not. Chances are his rivals also have MFCs from the seller. If the customer gets a good price, so will everyone else. He’ll have put in a lot of effort and not gained any advantage. Why bother?
In sum, MFCs turn sellers into tigers and customers into pussycats. So who do you think gets the lion’s share of the pie?
What ultimately makes MFCs so effective in changing the game is the subtle way in which they enable a seller to take control, almost in a backdoor fashion. By giving out an MFC to one customer, you change the game for everyone else. That’s because when you negotiate with someone, much more important