Imagine going to the store to buy your favorite breakfast cereal – a classic Uniform Game product – but instead of paying the price displayed at the shelf, you negotiate the number of flakes in the box, customize your own mix of fruit, nuts, and sweetener, demand a special container and dispenser, and ask for a better deal because you’ll be back for more cereal in a couple of weeks. Then once your favorite brand has offered you a price, you stroll across the aisle and ask a competing brand whether they can match that offer and throw in a plastic toy for free.
That’s the essence of the Custom Game, where the core offerings of each competitor are usually comparable, but a vast menu of supplemental features, combined with the negotiated terms and conditions, provides enough differentiation to make nearly every deal unique. The figure below shows the market characteristics of the Custom Game, which is the polar opposite of the Uniform Game at the top of the Hexagon.
Custom Game markets have a small number of suppliers that compete intensively for most deals. Unlike the Power Game, however, the concentration on the customer side is much lower. Customers are so numerous and diverse that they prevent a convergence toward large customer segments, common price structures, and standard product configurations. Their purchase volumes can also vary by orders of magnitude. The market for heavy-duty trucks, for example, includes hundreds of thousands of individual owner-operators, but also includes companies that buy thousands of trucks for their fleets. This lack of standardization also precludes the creation of bundles, packages, or other segment-specific offers with transparent prices.
Generally speaking, no two customers in a Custom Game market will buy the exact same offer configuration, and even if they do, the odds are good that they will pay different prices. That is what happens when companies encourage and incentivize their salespeople to customize discounted deals amidst heavy competition.
Establishing consistency amidst the chaos
Discount management is vitally important in the Custom Game, because discounts form the primary tool for price differentiation. But determining discounts can seem chaotic when so many factors – timing, purpose, channel, location, volume, and the customer’s alternatives – can influence the outcome of a negotiation.
Pricing to competition is essential to win a sufficient number of profitable deals. Successful players of the Custom Game take several steps to prevent an overly generous pricing regime that drains profits, or worse, triggers a downward price spiral or price war that can jeopardize the industry. The intent of these steps is to establish and preserve a business logic behind every deal, one that empowers salespeople to say “no” when necessary but also understand when they have leeway to charge more.
One central step is for the company to find its Natural Volume Slope (NVS), a phenomenon we have observed with surprising consistency across industries, geographies, and time periods. Every Custom Game market will have natural reference relationships between prices, margins, and volumes that transcend short-term market trends and endure even as innovative products enter the market.
Once a company knows its NVS, it can understand price variation as a function of factors such as geography, end-use application, and other factors subject to significant variation. The combination of the NVS and the market adjustments will reduce but not eliminate the role of salesforce discretion, which governs their ability to discount as well as their leeway for changing the optional features in the offering.
Cost spikes can challenge the integrity of this business logic. That’s why successful players of the Custom Game choose to add separate surcharges that make cost changes transparent instead of building them into base prices.
The business logic not only establishes guidance and consistency. It also fosters a sense of fairness among customers. Imagine the reaction when a buyer joins another company – either by switching jobs or through an acquisition – and finds out that their new company buys similar products but pays prices so out of whack that they defy explanation.
Consumers often suffer under similar intransparency when they negotiate a price. Think back to the last time you bought a car. How certain were you that you got the best price? Maybe the final number you negotiated seemed like a stretch, or maybe you felt you overpaid for one or two of the additional features? This lingering uncertainty and the lack of fine transparency around prices are just two of the aspects that makes the Custom Game much different than the six other games in the Hexagon. A systematic, logical, and data-driven process for setting target prices for salespeople is the best way to prevent such outcomes and the risks they create.
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