By Daniel Adams, Principal and Founder, Adams & Associates
In my twenty-five years of selling, I’ve honed my theory of successful negotiations into ten best practices or ‘Commandments’. The Commandments are easy to comprehend; following them requires sales discipline!
- Know Who You are Dealing with
Do your homework, know your customer, and know your competition. Make sure you investigate the personalities of all the players. Learn who your customers and competitors are as professionals. What is their negotiation history? What has been your competitor’s sales strategy? What solutions have they offered? Where? At what price? And with what terms?
- Negotiate Only with Decision Makers
Sometimes an apparent decision maker is merely a ‘gate keeper’ in disguise. Ask probing questions to discover who is really in charge. One such question to ask is: “Who has sign-off authority for an investment of this size?” Refuse to negotiate with people who do not have the ultimate decision-making authority.
- Timing is Everything
Do not negotiate if your customer is not ready to buy. Make sure your deal is fully baked! If you negotiate too early you will end up negotiating two, three, four, or more times. If you drop the price any time before the final negotiation, you will end up competing against yourself – a major mistake.
- Preparation – Review All Possible Scenarios
Know all possible moves that the customer may make. Plan your move in advance in each instance. Be prepared to eliminate yourself from the negotiation, if necessary. Review the circumstances under which it would be necessary to walk away from the situation in order to secure long-term relationships and to protect your company’s resources. One great way to prepare is by completing a ’Trade Matrix’. A trade matrix ensures that you have planned ahead for a successful negotiation. In private – the customer never sees this matrix – you anticipate what might happen during the negotiations and what your responses will be.A completed matrix may look like this:
The Negotiation Trade Matrix
||Can’t Touch this!
||Access to software code
||Long term support agreement approved at time of purchase
|Extended Payment Terms
||Multiple orders rather than a single order
||Deep price discount
||Sole Source agreement on next purchase
||Two week delivery
||Three day installation
||Improved payment terms
||Access to senior executives
In column 1, ‘Give’ – you list all the items on which you could give a little, such as price, warranty terms, delivery timing, training, education, options, software, upgrades, and so on.
In column 2, ‘Value’ – you assign a dollar value to each of the ‘Give’ items. Remember, nothing is free. If you decide to give something to your customer, you must first make sure that he or she is well aware of its value. What if something – a quick delivery, for instance – has no price? The superstar finds a way to calculate the cost (to the superstar) and the value (to the customer) of providing quick delivery.
In column 3, ‘Get’, you list the items you would like the customer to give to you. At the top would be a formal, contingency-free purchase order accompanied by a down payment. Other items in the ‘Get’ column could include a long-term support agreement, accelerated payment terms, executive access, reference site status (many customers want to be a positive reference for other potential customers), and financing.
In the last column you list the items that the customer might request of you, but that are strictly nonnegotiable, such as software license agreements, the software code, and any request that could be deemed an integrity violation (for example, kickbacks, illegal requests, lying, and side letters).
The Lone Ranger is Dead
After you compile the trade matrix, review it in detail with your manager long before the negotiations begin. A superstar never conducts a major final negotiation alone. There are many reasons for this:
Customers do not believe that a sales rep has the authority to produce a great deal. Whatever the actual truth might be, they think that unless a manager is involved they will not get a bottom-line deal.
Two sets of eyes and ears can better pick up the all-important nonverbal cues coming from the customer.
The negotiations can get heated. By allowing the manager, at times, to take on the bad-guy role, the superstar can keep his relationship with the customer untarnished (“I wish I could give that to you, but my management won’t allow it”).
Throughout the buying process, the superstar has told the customer that the pricing provided is the very best she can do. If the superstar, in response to the “your price is too high” objection, suddenly indicates that she now has the flexibility to lower the price, this calls into question her integrity. The manager is there to quietly make any necessary concessions and close the deal. When faced with a customer who demands a price too early, the superstar can say: “At the appropriate time, my manager will assist us in reaching a mutually agreeable total investment that is tailored to your needs.”
Understand Your Contribution Margin – Don’t Drop Price
As a superstar you should never drop the price; instead, offer additional products or services that equal or exceed the requested discount. The impact of a price drop on your net income would be substantial, whereas providing a product or service decreases your net income only by the wholesale or internal cost (not the retail price) of that extra product or service. When choosing which products or services to offer in a negotiation, choose those with high contribution margins such as software, maintenance, and warranty.
Give Slowly and Reluctantly
During final negotiations, whenever you offer a price concession, do not make major reductions. Any major shift in price or position signals to customers that much greater concessions could be had for the asking. And believe me, they will ask. During my final negotiations for a software solution at one of the largest food companies in the world, the customer asked my manager and me for a price concession on our $18 million quotation. When my manager responded with a price of $8 million, I almost died. A drop of $10 million in the selling price after I had fought hard for more than a year to sell the value of our offering! What happened here? We lost credibility in the eyes of our customer. After all, what was the value of our offering if we could reduce the price by $10 million in three seconds? Who is to blame for the errors? I am, of course. As a sales superstar, I would have reviewed and rehearsed our pricing strategy to ensure that there were no surprises.
Never Negotiate Piecemeal
Have you met ‘Chip’ during your negotiations? Chip is an expert at piecemeal negotiations. Chip is the purchasing director who continues to ‘chip’ away at your negotiations, asking for one thing at a time rather than getting all issues on the table for review. Maybe it’s “Oh, I forgot, I need more warranty,” or “I’m assuming that you will be including five years of accessories and supplies.” This has the psychological effect of wearing the seller down. She never knows when the negotiations have reached a conclusion; she never knows what’s coming next. It puts the buyer in a much more powerful position.
To handle Chip, a superstar will insist that Chip put all his issues onto the table before addressing any of them. That way, one can assess what’s at stake and fashion an offer, which balances the totality of Chip’s requests with what the seller is able to concede. If Chip presses, an effective reply is, “I may be able to ask my manager to make some small concessions, but until I can entertain all of your outstanding issues, I will be forced to say ‘No’ to each of your requests. Certainly you can understand my position.”
Be Humble – Be an Advocate
Avoid flaunting your superstar status during the negotiations. If you let slip the fact that you are a veteran negotiator who has been through this a million times, you will feel a brick wall rising up between you and the customer. I like to say, at least in my head, “I’m just a caveman.” Present yourself as a non-expert (only with regard to the negotiation process, not to your product or service expertise). You will be astonished at how much the customer wants to help you. The negotiation instantly takes on a win-win feel when the customer does not feel vulnerable. Remind him that you are in this process together, working towards a mutually beneficial solution. Assure him that you will advocate for the best solution your company can offer.
Finalizing the Agreement
It would be a major mistake to make an offer to your customer and let him ’think about it’ for an indefinite amount of time. Each offer must have a mutually determined expiration date. Further, your offer must be all-inclusive. You must specify that any additional items not included in the offer will be available only at an additional investment. This way, you avoid piecemeal negotiation mentioned above, as well as negotiation after the fact. A good way to encapsulate these issues is to provide a Negotiation Follow Up Letter (see below).
Negotiation Follow-up Letter
The terms of any agreement along with the expiration date must be committed to writing in a negotiation follow-up letter. Have you ever heard this complaint from sales reps? “My customer let the expiration date pass, but still expects the same deal!” The fix for this problem is simple. You anticipate its occurrence and announce to the customer certain quid pro quo consequences: a price increase goes into effect as soon as the expiration date passes.
Let’s say that you convince the customer to provide a purchase order on or before December 31 as a condition of your concessions. The moment you agree to these concessions, you also explain that your company is depending on this business and that the concessions are dependent upon your receiving a contingency-free purchase order on or before December 31. If, for any reason, you do not receive the purchase order by that date, the price increases from X dollars to Y dollars.
You may be in a position to explain, “Our manufacturing floor has been loaded based on our agreement. With any change, we would be facing high inventory carrying costs. As a result, I need to make our commitment terms clear.” Or you might say, “Our special offer has been provided because your business is critical to our corporation’s ability to meet its financial targets for this quarter.”
Here is an example of a negotiation follow-up letter.
Adams & Associates
Mr. Lee Gannon,
Senior Vice President,
18 Thorndike Road,
Wakefield, MA 01880.Dear Lee:This is a follow-up to our recent discussion regarding your new Imaging System project. Adams & Associates agrees to lower our price for the Imaging System to $1.5M.
As part of this price concession, ABC Corporation has agreed to the following: Contingency-free purchase order to be received on or before August 3, 2008.
Signed financing documents on or before August 10, 2008.
Delivery and installation of the XXX on or before September 8, 2008.
The special pricing and terms of this agreement are to be held in the strictest confidence.
We also agree that the price becomes $1.7M if the contingency-free purchase order is not received on or before August 3, 2008.
Thank you for working with us to construct an understanding that allows us to deliver an incredible overall deal to ABC Corporation. We are excited about the opportunity and appreciate your business.
Does this letter stop the customer from calling to say he will not have the purchase order by the agreed-upon date? No, but it makes it very hard for him to do so. If he does call to delay, you are in the driver’s seat and can decide exactly how you want to handle the situation. The customer might say, “It was unavoidable. We tried as hard as we could. I’m sure you aren’t really going to raise the price on us, right?” You can respond in a number of ways:
Review with the customer the letter containing the agreed-upon terms and remind him how much the delay will damage his company – for instance, “A two-week delay in signing the purchase order will cost you $50,000 in lost revenue, because the installation will also be delayed.” Use the higher authority close. Tell the customer you will check with your manager before responding to the request to keep the price the same.
Would you stand hard on the price increase outlined in your negotiation follow-up letter? Maybe, but I believe the more prudent move for a superstar interested in nurturing a long term relationship with her customer is to not increase the price. I would however use quid pro quo to get something of value from the customer, such as a commitment for future business, the purchase of additional options, an opportunity to meet with senior customer executives, financing, the purchase of additional support and maintenance, or a customer testimonial. “I understand the difficulties you are having. I wonder if you would be willing to provide certain concessions to offset the difficulties the delay will cause our company to suffer.”
Having condensed the art of negotiation into 10 best practice steps, this aspect of your selling will hopefully progress more smoothly and easily for you. If you follow these concrete suggestions, you will be on your way to superstardom in your sales career! Good luck to you, and remember, “Close ‘Em”!