How to Guide Win-Win Contract Renewal Negotiations
Negotiating a win-win contract isn’t a battle, it’s a symphony of strategy and mutual growth.
Published: August 7, 2023
— Negotiating contract renewals necessitates a shift from redistribution of earnings to increasing total profit, leveraging analysis of pricing, promotions, and portfolio, and harnessing powerful software tools to promote beneficial outcomes and foster enduring partnerships.
Outlets want to see increases in trade terms and investments
Each year, sales teams are expected to renew their customers’ contracts, and each year, they engage in long and arduous discussions with their customers about the performance of the previous year’s contract and how to improve it. Invariably, customers look at their competitors’ behavior and performance and use it as the basis for their argument to increase trade terms and investments.
Naturally, sales teams push back. But the customer’s argument of “our competitor is doing ‘x’ and achieved ‘y,’ so why don’t we do the same?” is difficult to refute, leaving sales teams in a tricky position of needing to carefully negotiate their way out of a lopsided contract re-negotiation.
Focus the discussion on the wins—for you and the client
So how can sales teams guide the discussion to a mutually beneficial outcome for both sides? Assuming you’re armed with a decent pricing story, promo post-analysis learnings, and a portfolio strategy that will increase net sales per item for both sides, you can learn to effectively focus the discussion on increasing the total profit pool instead of redistributing the earnings from one pocket to another.
Ask the right questions to prepare a more effective plan
As is common with promo post-analysis, the manager should analyze the good and bad of the previous contract. The best way to start is by answering the following questions across pricing, promotions, and portfolio.
Key pricing questions
- Were there any periods that were favorable or unfavorable for the product?
- What was the customer’s profit or loss from these sales?
- How did their competitors react?
- Which side—the sales team or the outlet—started the price game first?
Generally, periods with favorable pricing for your company are less than favorable for the customer’s profit. Invite the marketing and RGM functions to help you analyze these periods and how the market reacted to decide if you need to encourage the customer not to repeat the actions from the previous contract.
Key promotions questions
- Was your promo calendar healthy?
- Did the customer have any unprofitable promotions?
- Was there any promo stock-up if your customer gets on-invoice discounts?
You should prepare a book of learnings to share with the outlet, as this knowledge will impact profits for both sides. Also, don’t forget about competitors. Were there any actions in your portfolio worth repeating, especially regarding new promo mechanics and non-standard promotions?
Key portfolio questions
- Was your portfolio balanced?
- Did you manage to get an increase in net sales per item?
- What gaps should you cover next year?
These questions allude to the essence of what the customer is interested in—to sell, generate traffic, and profit from it. Answering them will help you guide contract renewal discussions to a more mutually-beneficial outcome, as customers will feel their needs and objectives are adequately represented. Conversely, suppose you fail to take the customer’s perspective into account and do not propose contract changes that aim to increase profitability. In that case, it will be challenging to sell your customer on further developing your portfolio.
Leverage historical advantages to create new contracts
In order of importance, I would also recommend performing the following actions:
- A pricing analysis, which you will get from marketing and RGM departments, proves that your pricing levels fit the customer’s total revenue increase (not just cannibalizing competitors). You can also correct customer profitability by correcting recommended shelf-price levels.
- A promo strategy, showing not only standard promo periods with price tag discounts but new ways to attract consumers to the outlet. Customers should see an interest in developing common business.
- Portfolio changes that target increasing net sales per item and profitability for the customer.
For those reasons, you need a user-friendly but powerful software application that will be able to give the necessary information in the following areas:
- P&L comparison between periods with detailed information about investment change.
- Profit pool calculation by brand to understand gaps in profitability between the company and the customer.
- Portfolio change to show transparent changes to the management.
- Factor analysis to get a clear picture of whether your product mix is positive—the main KPI for profitable revenue growth.
This application should be geared towards sales, not finance so that sales teams are empowered to autonomously create new contracts leveraging all RGM pillars: pricing (increasing or decreasing recommended price levels), promotions (adding or canceling promo slots or changing promo periods), trade terms, and portfolio (adding or delisting some products).
The result will be less friction between sales teams and their customers, a comprehensive and well-researched contract that explains when what, and how you will increase the total profit pool to your customer, and a mutually-beneficial outcome for both parties.
Negotiating the renewal of contracts will build trust and a willingness to achieve a common goal and develop long-term partnerships. I will address tracking results of and reacting proactively to the customer’s and producer’s profits and sales in my next article.