Negotiating Price with Customers

Achieving a competitive advantage in the marketplace,

In many instances, customers do not pay a standard list price.  Instead, the final price is determined through a process of negotiation between buyer and seller.

Implicit in negotiation is the assumption that the respective parties desire to obtain an agreement with which all can live.  Such an accommodation is a learning experience wherein the parties may well define their relationship for the future.

Negotiations begin internally

Before examining the nature of the negotiation process between buyers and sellers, it is worth considering what is happening inside the selling organisation.  For sellers to achieve a competitive advantage in the marketplace, a number of key activities must be well co-ordinated.  Research and development, production, finance, distribution, and marketing departments must collaborate in offering product value to customers.  This collaboration is usually achieved through a process of internal negotiation.

A common breakdown in this co-operative relationship occurs because of the competitive pressures salespeople encounter in striking a deal.  Members of the sales force are under great pressure to achieve both their personal goals and the goals of the sales department, to satisfy the customer’s objectives, and to maintain a competitive posture with respect to the opposition.

Often a salesperson will “get out front” not only of the production or financial capacity of his firm but of the pre-existing sales commitments of his or her own department.  Not uncommonly, the salesperson makes the deal, leaving the details (qualifying the customer’s credit worthiness or ensuring production or delivery capability) to the relevant departments.  As a result, the firm finds the cart has been placed before the horse.  The prospective buyer may have an uneven credit history, may demand costly product changes, or may insist on impractical production or delivery schedules.  These and other conditions may result in this sale or future sales unravelling because of poor communication with the other internal players in the firm.

The salesperson must understand the ongoing operational commitments of his or her own firm when formulating sales objectives.  By recognising the firm’s limitations, the salesperson can initiate discussions with a buyer that focus on determining what is possible, and in the process define what is negotiable.  Problems can be minimised if the sales department follows a few simple guidelines:

• Allot time for negotiations with other functional areas of the firm.

• Develop and maintain co-operative relationships with other departments.

• Determine the relationship between specific items in the sales agreement and areas that typically require internal negotiation.

• Verify assumptions regarding the firm’s ability to fulfil terms of the sales agreement.

• Recognise issues in the sales agreement that pose internal credibility problems.

• Manage salesforce enthusiasm in a disciplined and productive manner.

• Stay abreast of internal changes that may affect relationships with customers.

• Keep superiors current on developments in major sales agreements as they occur.

• Be knowledgeable of customer histories as they relate to issues requiring internal negotiation.

• Help customers and internal people find creative alternatives when roadblocks develop.

The salesperson who is an effective internal negotiator is also apt to have more success in customer negotiations.  He or she is likely to have more leverage in bargaining with customers and may well be able to go further in satisfying their needs.  With this in mind, let us turn to a more detailed discussion of the customer negotiation process.

The nature of customer negotiations

Negotiation is concerned with needs of buyers and sellers.  Both parties gain from a transaction.  The customer acquires a product (goods and services) that meets needs, and the vendor makes a sale.  The possibility of mutual gain is what brings the buyer and seller together.  The amount of gain realised by either party creates the conflicts that must be negotiated.  Conflict occurs because the parties find themselves competing for some of the same gains.

In all cases, negotiation involves both science and art.  The scientific aspect involves systematic approaches for resolving conflicts between two parties.  The artisitic side concerns interpersonal skills, the ability to convince and be convinced, and judgement regarding which tactics to use and when to use them.

There is no typical negotiation.  A particular negotiation can involve any number of people and focus on any number of issues.  It can be, formal or informal, lasting hours, weeks, or months.  Most important, the process involved is dynamic, not static or fixed.  The positions assumed by each party at the outset can differ significantly from those held at the close of the process.

These dynamics are strongly influenced by a number of structural and situational characteristics.

A primary consideration is the extent to which the buying and selling representatives have the formal authority to negotiate.  How much clout do these representative have in terms of the issues under negotiation?  Are there conflicts within the seller organisation (or buyer organisation in industrial markets) on some of these issues?

Another consideration is the degree of interdependence between the buyer and seller.  Both parties need each other, so the real issue concerns where the balance of power lies.  Power is a function of dependency.  That is, the more the seller is dependent on the buyer, the more power the buyer has. 

Dependency is determined by how much one party needs the resources (i.e., products,  revenue) controlled by the other party and the availability of those resources from alternative sources.  If the buyer is purchasing a critical item from a vendor who is the only available source of supply, the buyer’s heavy dependency enhances the seller’s negotiating power.

Negotiation can be further characterised by the number of issues involved.  The willingness to pay or receive a certain price may interact with other issues.  The existence of multiple issues to be jointly resolved through negotiation permits the parties to enlarge the size of the total pie before determining how much each side is to receive.  However, it is a real challenge to determine which trade-offs the other party will be inclined to make when multiple issues are involved.

Also, the existence of time constraints should be noted.  By optimally using the time frame available, the disadvantages of hasty negotiation by one party can be averted.  In addition, the degree to which the negotiation is public is important.  If different terms are worked out with various customer accounts, the ability to negotiate flexibly with any one account is affected by how much other customers learn of the tactics used and final terms agreed upon.  Competitors are also in a position to benefit from learning a firm’s negotiation strategy.

Further, negotiations can be repetitive or nonrepetitive.  That is, will this be a one-time sale, or might there be frequent negotiations in the future?  Repetitive bargaining usually finds the parties adopting a more co-operative stance.  Separately, the marketer should evaluate the presence of any linkage effects, that is, circumstances in which a particular negotiation and its outcome are linked to other negotiations.  Obstacles can sometimes be overcome by using linkages creatively.

Finally, the location of the negotiation is a factor.  There may be a psychological benefit, as well as an ability to control the agenda of the proceedings, when the party negotiates on its home turf.

One side can enhance its own bargaining position by negotiating in an environment in which support people are readily available.  Alternatively, negotiating on the other side’s turf allows one to learn firsthand about the needs and capabilities of the other party.

Negotiation objectives

In preparing to negotiate, the marketer needs to consider some fundamental questions.  Of these, the most important are:

•  What do I want to achieve through negotiation, and why?

•  What does the buyer want to achieve, and why?

The answers to these questions will define the negotiation atmosphere.  If they cannot be answered satisfactorily, it may be that one or the other of the parties does not understand their own needs.  Failure to understand needs may suggest that the necessary time and commitments have not been expended in preparing to negotiate.  However, it may be impossible to answer these questions prior to substantive discussions between the parties.  Needs often emerge in the discovery process of give-and-take during preliminary discussions.

Clearly defining needs allows a negotiator to establish meaningful aspirations.  Their level and limit define aspirations.  In a best-case scenario, the level of aspiration is the level of benefit sought, the specific goal the negotiator professes to seek.  An aspiration limit is the ultimate fall-back Position of a negotiator.  It is the irreducible minimum below which he is unwilling to go.

In price negotiations, the needs of buyer and seller are a function of value derived and value imparted (see paper 1).  While negotiations may ostensibly revolve around price, the other components of the product offering (quality, volume of purchases, service delivery financing, return policies, etc.) may be on the agenda of the vendor or the customer.  While buyers will tend to verbally emphasise price throughout the bargaining, any of these product aspects can serve as a negotiable issue while price remains firm.  In fact, market studies have demonstrated that among industrial buyers, premium price differentials of as much as 20 percent are acceptable if accompanied by superior product attributes.  Further, the more issues there are in a negotiation, the greater the opportunities for compromise and creative bargaining.  If price is the sole issue, flexibility may be limited to the various dimensions of price (e.g., volume discounts, time of payment, inflation clauses).  Clearly, then, the negotiator needs to view the bargaining process from a broader perspective.

A Strategic Framework for Managing Price Negotiations

  • Data Collection
  • Organising Facts and Assumptions
  • Prioritising Issues
  • Establishing Settlement Ranges
  • Determining Bargaining Methods
  • Selecting Place
  • Deciding. upon Tactics
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