Co-Opetition - Adam M. Brandenburger [86]
Having MCCs with your customers can help you sustain a higher price. Normally, an elevated price would invite your competitors to undercut you. If you have an MCC in place, however, a rival can’t come in and take away your customers simply by undercutting your price. If he tried, you could then come back with a lower price and keep the business. The back-and-forth could go on until price fell to variable cost, but at that point it wouldn’t be worth the rival’s effort to steal your customer. The only one to benefit would be the customer, who’d end up with even more of the pie.
You can see the strength of your position by stepping into your rival’s shoes. He runs a risk anytime he cuts price to go after your business. Remember the Eight Hidden Costs of Bidding from the Players chapter? We recast them below as they apply to a rival’s bidding for one of your customers:
Eight Hidden Costs of Bidding from a Rival’s Perspective
1. He’s unlikely to succeed—there are better uses of his time.
2. When he wins the business, the price is often so low he loses money.
3. You can retaliate—he ends up trading high-margin for low-margin customers.
4. Win or lose, he helps establish a lower price—his existing customers will then want a better deal.
5. He’ll set a bad precedent—new customers will use the low price as a benchmark.
6. You will also use the low price he helped create as a benchmark.
7. It doesn’t help him to give his customers’ competitors a better cost position.
8. He shouldn’t destroy your glass house—if you’re a little vulnerable, you’ll be less likely to go after his accounts.
Despite this list of reasons not to go after your customers, a rival might still try, in hope of gaining some new business. But when you have MCCs, that justification is much weaker. Now going after your customer has all the old downsides and even less upside. The rival would do better to make sure that his existing customers are happy.
Putting in MCCs changes the game in a way that’s clearly a win for you. As for rivals, while it’s true that they have less ability to take market share from you, there is—perhaps surprisingly—a win-win element here, too. Your higher prices set a good precedent: they give rivals some room to raise price to their own customers. What’s more, you’re less likely to go after their customers because, with your higher profits, you have more to lose. That’s the glasshouse effect again.
As for customers, why do they go along with MCCs? It may be the norm in their industry. Even without a formal MCC, it is generally accepted that customers don’t leave their current suppliers without giving them a last chance to bid. In some cases, it may be that customers’ purchasing agents are focused on the short term. In return for a price break today, they’re willing to accept less bargaining power tomorrow. In other cases, it may be that customers don’t thoroughly understand the rule’s implications.
Whatever the reason, MCCs do offer some benefits to customers. This is because MCCs assure producers of a long-term relationship with customers, even in the absence of long-term contracts. With this assurance, producers are more willing to invest in serving their customers better and more likely to share technology and ideas. This partnership orientation can lead to a long-term win for the customer.
If you’re a seller, remember that asking for an MCC is a way of getting paid to play. If a customer wants you to bid, but won’t pay you to play in cash, ask for an MCC. If one of your existing customers has solicited fresh bids for his business, forcing you to come down on price, ask for an MCC in the new contract. The customer may consider this a small concession to make in light of the price concession you’ve