6 Simple Rules for Optimizing your Negotiating Strategy
Many have written volumes on how to negotiate. It’s all good, but sometimes you don’t need to understand the details of Tzu Sun’s “Art Of War”... it's really about a few fundamentals.
Following these six simple rules over my career has gotten me great results and I've used the same rules for small deals of a few thousand dollars, to those that approached $100 million dollars:
- Start with the customer
- Have credible justification for pricing and terms
- Negotiate every element as a “give something / get something”
- Everything has value
- It’s not about your cost
- It’s NOT a game
A little more detail on each step:
Start with the customer
If you can’t provide a good proposal to the customer, then you have nothing to negotiate! I always work to a “customer value proposition” which I define by the following criteria:
- It addresses the stated needs specified by the customer.
- It does not fall short, at least in any areas of significance; and it does not over-deliver!
- Doesn’t over-deliver? This may sound strange as we hear the mantra “under-promise and over-deliver” all the time! But I find that just provides the customer with negotiating fodder. It follows that if I “over-deliver” I must be giving the customer more than they need, and if I’m doing that; I’m probably charging for it in some way. There’s an exception to this rule that I’ll speak about under the rule “Everything has value”.
- It uncovers REAL NEEDS that were not originally specified by the customer but are relevant to their “total solution”. It meets those needs as well those specified. You find these ... you vastly improve your chances and add to your negotiating leverage.
- It identifies needs in the original customer specification that are not necessarily significant to them in terms of their needs. They may know it in advance, they may not. We find it and point it out. And that provides a starting place for negotiations.
- It provides funding in a way that allows the customer to do business with us. It’s not always just about pricing, more likely the way the pricing is executed. For example, a customer that requires an unexpected $1 million building repair that effects the safety and operations of their business, but has only $250k in their current budget; will not benefit from a 50% price reduction from $1 million to $500k. They still don’t have the money! But, that $1 million proposed as 60 monthly payments of $20k is affordable even if the customer is in the first month of their budget year as the payments still don’t exceed the $250k budget they have (12 x $20k = $240k).
- It delivers the real value in a way that allows the customer to do business with us. If the customer is a retailer and a new shelving system must be installed, it schedules the installation off-hours, and perhaps in phases resulting in no disruption to normal business and especially no inconvenience to their customers.
- It is as good or better than the customer’s alternatives which include “do nothing”, “do it themselves”, “change the spec” and of course traditional competition.
I know I have provided a good customer value proposition when my “customer” starts seeing me as a “partner”.
Have credible justification for pricing and terms
Demonstrate to the customer how your solution provides value. Show them a real payback or some sort of ROI. If you can demonstrate sound financial benefits, better than the customer’s other alternatives; and you show them how they can take advantage, you will be in a much stronger position than having not shown. The key here is credibility; and this is especially true these days as an increasing number of large opportunities are being managed by procurement teams where the decision-making is based more on business benefits and less on personal/professional relationships.
And don’t forget; not all negotiation is about price or funding. There are many non-financial elements that are important to the customer and can demonstrate value. Quicker shipping, another seat or two in training, 24/7 tech support, payment terms, off-hours installation, extension of warranty, etc. All arrows in your negotiations quiver.
Bottom line here; forget the BS and fluff, work in the world of fact!
Negotiate every element as a “give something / get something”
Everyone has heard the “wet towel” story; but just in case here's a quick overview … what happens when you wring out a wet towel? Water comes out. Then, you wring it again … and again, some amount of water comes out. You keep wringing the towel until no more water comes out. That’s what a negotiator will do to you if you simply lower price without getting something in return. You will be wrung repeatedly until you can give no further reductions. At that point, your prospect is likely to go to the vendor they preferred in the first place and ask them to match your “wrung out price”. Regardless, you lose!
I said earlier that one indication of customer value is that you’ve provided what the customer has specified and nothing more. For the purpose of this explanation, lets let go of that hard-line and modify that a little bit. Consider a little over-engineering of the solution and make sure you’ve priced it into the total solution. Explain the additional benefits (credibility) to the customer, they may go for it. But in the more likely event that your solution price is too high, it’s now easy to remove that little extra, and assign a value to it. The value you deduct as a result of the removal of that extra bit; doesn’t necessarily have to correlate … it can be a little more or a little less. The key is, you reduced your price, but you also reduced the value of the solution. You did not mislead the customer; you did not get “wrung”.
Everything has value
If it doesn’t, it should not be in your proposal.
Though a training class or seat, delivery terms, discounts on after-hours or time and material, tech support, extended warranty, etc. may not have a specific price associated with it (for example, it may have “pricing” but how does a customer know what a “time and materials” cost might be until something breaks); it will be perceived to have a value to the customer. Determine the customer’s perception of that value and use it in your negotiations.
“Can you take $5,000 off the price?” - I can’t do that, it’s already a very fair price; but I can discount your hourly service rate by $50/hour. You’re likely to have more than 100 hours of service, so this has the potential to provide the benefit you’re looking for, and even some upside additional benefits.
It’s not about your cost
Your cost has nothing to do with price and value. At least it shouldn’t!
If you can’t deliver good value to your customer and also meet the profitability and strategic goals of your company; then walk. Figure out why you couldn’t deliver value, so you’ll be better positioned for the next opportunity.
It’s Not A Game
Leave the “gamesmanship” to the used car dealers. Remember, you want your customer to be your partner. I’ve found that most customers understand that you are not a benevolent organization, and that you don’t do this for a hobby! In fact, those of you that work for public corporations provide your profit margins and business strategies through annual reports and financial filings. So – it’s no secret you’re trying to make a profit. Don’t be embarrassed about that … everyone else is also trying to make a profit!
Think about what you’re saying to your customer when you negotiate by simply lowering your price … basically; that you were playing a game. And heaven help you if you told the customer upfront you were giving them a great deal, and then you lower pricing … in this case you’ve basically admitted to them that you were lying! Partnership? I think not!
Operate honestly and sincerely under the doctrine of fairness or as we sometimes like to say “win-win”. You will “win” more than you “don’t win”. And a “don’t win” is not the same as a “loss”. Not winning a particular deal but negotiating in a professional and honest manner gets you invited to the next opportunity and perhaps even some clues from the customer as to what you have to do to win. They will want to work with you - that’s been
Thank you for reading my article!
If you would like a No-Charge overview and evaluation of your current strategic selling and negotiations process, please reach out through LinkedIn Messaging; I'm happy to help.
Stew
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