A guide to commercial decision making

This article is intended to help people who are faced with commercial decisions and need a simple framework in which to think through and determine whether the deal is good or not.

I have spent the majority of my 15-year career working in commercial organisations and have experienced deals ranging from personal spending of 1$ to equipment or service sales valued at over 1,000,000,000$. The core concepts are the same for all commercial decisions and the below framework is something I use on a daily basis in order to support decision-making for myself and my teams.

Although the concepts described below may seem at face value to be simple and intuitive, I regularly see even experienced people failing to address the basics.

What does commercial mean?

Commercial topics are all those related to the buying and selling of goods and services. These include issues around markets, competition, pricing, contracts, negotiations and risk.

“Commercial”: concerned with or engaged in commerce.

Definition from Oxford Languages

What you must realise is, for all commercial problems or decisions, there are two sides to the deal: the buyer and the seller. If you want to be an expert in commercial deal-making, you need to understand both sides in detail.

Analysing the deal participants

In order to understand the participants in any deal, you must investigate their individual needs or business models. How do they make money or what do they get from the deal? What is the product or service they provide and how do they generate value from this? Do you understand the technology, process or expertise which differentiates them? Ask yourself where do they add or derive maximum value? After understanding the business model, or use case, you can start to go deeper and assess things like their risk tolerance, key drivers and/or critical requirements.

For example, if we look at a software company which offers a service. Ask questions about whether it is sold as an upfront service or as a subscription and how they guarantee their value add. How do they make more money? Are they going to try and upsell or offer additional services or consultancy? What is their unique selling point? What do their competitors offer?

At this stage, it can be very helpful to write down the answers to all the above questions, and keep these items in mind when determining your commercial strategy.

Pricing

I am often asked how to determine prices when selling. The solution is simple in concept but difficult in its application.

Answer: Your goods or service should be priced at the level that the buyer is willing to pay.

But, how do you know what they are willing to pay? There are two main factors which determine this, the value which is generated and what the competition is offering.

1. The value generated (in monetary terms)

If your product generates revenue, then calculate how much.

For example, a new machine which produces 100 units of product every month. This can be multiplied by the product sale price and you have your revenue. Now take off all the costs associated with each unit and you know the value this machine will bring to the business at a basic level.

If your service saves time, how much time and what is that time worth financially? Saved time can be something as simple as, convenience through location, distance, familiarity or a productivity gain. If you reduce or remove risk, what is the value of this? Usually calculated as cost impact × probability of occurring.

If the deal optimises a process or speeds up work, then determine the value provided by estimating the number of hours of personnel time saved, multiplied by the average salary of those workers.

If your brand is perceived better than the alternatives, what is this worth? Usually, this is translated to a perception of improved value, reduced risk or saved time vs the competition.

2. The price at which others are selling a similar product or service.

Your sales price can simply be determined by what your competitors are doing, especially if you don’t have a differentiated offering.

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On the other side, as a buyer, being able to assess the answers above will also help you to figure out if you are getting a good deal for your money. How much value are you getting from the deal?

What about risk?

What is a commercial risk? It is the probability of an event, or events, occurring that negatively impact your part of the deal and reduce the value you expected to get when entering into the transaction.

Ask yourself “who in this deal is most capable of managing and mitigating the risk?”.

In every deal, there is a pool of value created which is shared between the two parties. Correctly allocating the risk to those best positioned to manage it, leads to better long-term outcomes. Generally, this will allow the deal to generate more value for both participants if the risk is properly managed and mitigated.

Although it might feel good in a negotiation to force the other party to take a risk they can’t manage, it will often backfire for both parties and ultimately harm a longer-term partnership.

What is the role of a contract?

Contracts are simply a tool to describe the deal which both parties have agreed to enter into. It provides clarity on the scope of work, timing, deliverables, price and the allocation of risks.

Most importantly, it is a declaration to the outside world and can be used in case of a dispute in the future.

The most critical thing to focus on when writing a contract is clarity. If a third party could not understand the deal clearly, the contract does not fulfil its primary goal.

Ask yourself “would someone else understand this agreement 5 years from now if they read this document?”.

Decision Path

Below is a simple decision path you should use when assessing a commercial issue and whether or not to enter into a commercial agreement.

I hope the content of this article provided a useful framework, if you like the content please subscribe, comment and share. You can also follow me on Linkedin or Twitter.