Price Negotiation
Q. In my business, I have to negotiate price with my prospective customers. Do you have any tips for concluding the negotiations successfully?
A. Last week we covered when your business should negotiate. This week we'll look at how to negotiate successfully.
Negotiating price can drive all of the profit out of a deal. Conclude the negotiation successfully by following these tips:
Don’t go below your reservation price – The reservation price is the price at which you are indifferent about doing the deal. Perhaps it’s the break-even price or when your profit margin shrinks to a specific level. Determine your reservation price. Never go below it.
Focus on value – Focus the discussion on value delivered and customer benefits, rather than price. If the conversation is only about price, the low bid wins. Instead, point out the things that make your offering different and better. Focus on the value of these benefits. Make the discussion about why your product or service is worth a premium.
Don’t negotiate with yourself – You’ve proposed a price. You’re asked, “Can you do better?” You respond with a 10 percent lower price. You’re the only one putting offers on the table. You’re negotiating with yourself. Instead, respond by saying, “What would it take to close the deal right now?” You’re asking for a counter offer. This sets the floor for the negotiation. Respond to the counter by saying, “I can’t do that, but I can meet you part of the way.” Instead of just lowering your price and your profit margin, you’re meeting the customer in the space between your ask and her offer.
Justify your price – If you simply propose a number, it’s arbitrary. Surely, you could offer a lower price, and you’ll likely have to do so. People are much more comfortable with a price when there is a rationale. You might say, “Look, you want a fair price. I know you can understand that I need a fair profit. I have a family to feed just like you. This price is fair for both of us.” Additionally, you can point to the benefits your product delivers and explain that they justify your asking price.
Claw back money in other areas – In many industries, customers make the buying decision on the purchase price but don’t pay much attention to the other costs. Airlines have learned to offer low-ticket prices because that’s how cost-conscious consumers make the buying decision. Airlines then claw back money by charging for checked bags, seat upgrades, early boarding privileges, entrance to their club, cancellation fees, change fees and snacks. Yes, it can be annoying, but it works. If it didn’t, airlines would quickly change their policies. Think about other ways you can extract value from the deal, while keeping your price low.
Reduce the cost of doing business – Don’t let a maniacal focus on price blind you to other ways of creating value. We worked with a company that delivered its product on pallets. Their customers then paid to dispose of the pallets. By taking the pallets back free of charge, customers saved the cost of disposal. Further, our client increased its profit by reusing the pallets. It was a win-win.
Discount the next purchase – If an oil change costs $29.99, the mechanic shop can reduce the perceived price to $19.99 by offering a $10 discount coupon on the next oil change. When it’s time to change the oil again, the customer will calculate that with the coupon, the cost will be only $19.99. The mechanic shop seems to discount both oil changes by $10 when on average the discount is only $5.
Offer something that includes breakage – Particularly if the coupon has an expiration date, many of them will go unused. While it’s a $10 coupon, on average it won’t cost $10.
Negotiating price can suck profit out of your business. Following the tips above will help you protect your bottom line.