Negotiations are a part of everyday life and something that everyone undertakes everyday. When it comes to price negotiations in the business environment, for both the seller and the buyer, there are a number of factors that can get you the price you want.
For the seller, the key aspect is knowing when to walk away as too much price reduction causes serious contamination effects. Not only does a lower price given to one company in a “one-time special deal” often contaminate the price of other products/services to that customer, but it often spreads to other customers. It’s not uncommon for customers to brag about the huge discounts they’ve gained!
For the buyer, it’s necessary to recognise that many factors – in addition to price – need to be considered: quality, knowledge, relationship, service, etc. Smart negotiation will however help both sides achieve the optimum price.
Before starting any form of negotiation, recognise and learn to avoid some common pitfalls:
- Underestimating own position of power
- Negotiation strategy is not fleshed out – it’s inconsistent and counterproductive
- Value to the key account is not quantified, and not communicated clearly and/or credibly
- Negotiation strategy is not executed and forgotten about in “heat of the deal” situations
- Top executives are involved too early, too often and are ill prepared
- The initial “anchor” offer is set too low
Preparation & Execution
Managing the main pitfalls is a crucial part of negotiation preparation. Investing in preparation means that the execution is more effective and, critically, confidence in the negotiation strategy is stronger.
- Understand and quantify value – know the balance of power
- Know your arguments and counter-arguments in advance
- Decide where you make concessions and how to use them
- Learning by doing; undertake negotiation test runs and simulations
- Anticipate, prepare for and learn to handle common pressure points
- Manage negotiation psychology in all its forms; from being kept waiting, to the key decision-maker walking out during the actual negotiation
The focus of preparation is to have an answer ready for all potential scenarios. This will allow you to stay in the driver’s seat during the actual negotiation.
You have prepared, practiced and planned. The next step is to decide which factors you will concede – selectively and in sequence – during the actual negotiation:
- First – sacrifices. Concede these first, they’re unlikely to make a big difference, but could generate goodwill. Do, however, try to increase their perceived importance.
- Second – bargaining chips. Use your key bargaining chips intelligently, overplay their importance to you and concede these only with a fight.
- Third – battlefield factors. Don’t concede these without getting a lot in return.
- Fourth (and final) – “walk-away” factors. Don’t concede these unless you really have to. Consider walking away if the importance of these factors is too high, i.e contamination effects and variable cost factors.
Don’t give away your strongest offerings first!
The power balance in negotiating a good price
People and organisations have a natural tendency to underestimate their own power and overestimate the power of the other side. However, every seller has certain advantages on their side and must consider these factors:
- Switching costs
- Quality/price balance
- End-user influence (over the buyer)
Equally, every buyer must also consider these aspects in relation to the value assigned to them, their effect on the overall price of the goods/service, and impact on the overarching business strategy; there is little advantage in buying something at a massively discounted price if you have sacrificed the quality/service that the actual users need.
Stephan Butscher is managing partner at global pricing consultancy Simon-Kucher & Partners.