Four Keys to the Tech Sector’s Power Game

Dear Friends,

Here are the posts to catch up on since the last newsletter.

The value of mail: When the US postal service raised prices for first-class stamps this month, it rekindled the old question about the value of old-fashioned mail. You can read the full post here.

A split in the fashion market: People need a “portfolio” of clothes, and for many, there is no middle ground between luxury and fast fashion. You can read the full post here.

The rise of communal shopping: Is group shopping at warehouse stores a viable way for young consumers to beat high inflation? You can read the full post here.

How GenAI powers creativity: The ongoing experimentation and application of generative artificial intelligence (GenAI) is opening up new frontiers for creative teams. You can read the full post here.

Our colleague Federico Fabbri recently contributed this video on the Power Game to our Expert Interview Series. For this week’s newsletter, my co-author Arnab Sinha and I have invited him to apply the insights from the video to the current state of negotiations in the tech sector.

Four Keys to the Tech Sector’s Power Game

The tech winter might be coming to an end, but vendors are still dealing with consolidation headwinds that are generating pricing pressure and high-stakes bidding.

Buyers are looking to reduce their sources of spend after a post-Covid explosion in tools. That means that some vendors face the risk of being cut out entirely, while others feel compelled to underbid the competition as they try to seize opportunities for footprint expansion. Either way, vendors increasingly face tough negotiations with procurement departments.

These situations are where the tools and recommendations from the Power Game come into play. Companies play the Power Game in markets with high concentration on the buyer and seller sides and with products that usually have limited scope for differentiation, often due to strict technical specifications.

Game theory is the main framework for making pricing decisions in the Power Game, because every decision in those high-stakes negotiations matters and influences future decisions. The Power Game is a repeated game, which means the same buyers and sellers negotiate across multiple sales cycles.

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Price discipline is paramount

Faced with the risk of losing share, it is tempting for vendors to make price concessions. The risk of entering a downward price spiral is high, however, precisely because negotiations in these highly concentrated markets are repeated games.

Armed with previous concessions, procurement teams will look to consolidate savings at the next renewal and make price concessions a habit. Meanwhile, competitors who have been outbid, will look to gain lost ground at other accounts where they are likely to face the same competitors. This upsets the balance of power in the market in favor of the procurement teams.

Four ways to maintain your balance

To avoid paying long-term consequences for short-term budget headwinds, tech vendors can pull several levers:

• Make your value measurable and clear: This means you underscore the value created by your solutions for clients. When the scope for differentiation is limited, every advantage stands out, and these advantages can derive from the quality of the relationship as much as from the product itself. You need to measure outcomes and proactively engage the customer teams that benefit.
• Highlight your customer’s risks: If you are a pure play vendor facing pressure from platforms or bundled solutions, you can highlight the buyer’s risks of overreliance on fewer suppliers. If you are a platform player asked to make portfolio-wide concessions, try to isolate negotiations around specific parts of the platform.
• Know your customer’s growth areas: You need to identify and understand the areas which are more likely to receive funding and then develop an effective product strategy and narrative around them. Tech companies without an AI story, for example, face a greater risk of getting squeezed.
• Set the right internal incentives: Building a price-based metric into your sales incentive plan can reward salespeople for price discipline and reduce the risk of a win-at-all-costs mentality. It ensures that your selling team is incentivized to protect the quality of your revenue.

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