We are always negotiating.
Even in a point-of-purchase decision at a convenience store, a negotiation is taking place. The fact that most of it occurs in the buyer’s head is important in our understanding of how to negotiate verbally.
When it comes to negotiating, most salespeople have been taught to focus on price. However, experience shows that price is rarely the true deciding factor for buyers.
The fact that so many sellers have come to believe the myth that price is “everyone’s deciding factor” is merely a testament to poor negotiating technique and a lack of understanding of the human condition (and perhaps poor sales management).
If you are one of these frustrated sellers, then it is time to reconnect with your inner consumer. You have an opportunity to greatly influence the customer’s views on price long before negotiating begins.
The Place for Price
Customers make decisions based on a number of criteria, and price generally comes into play twice in the process.
In the evaluation phase, a potential buyer assesses what they have learned about a seller and decides whether they can see themselves as a customer. Based only on their experience, the buyer assesses the expected price compared to the perceived value.
For instance, certain luxury car dealers make it clear that they are not selling on low price, but instead are offering extraordinary customer service. A car buyer might choose to shop for a lower price, but the luxury dealer is trying to attract people who value the experience and service more. In other words, some buyers are prepared to pay more because they have high expectations.
The second time price comes into play is at the moment of decision.
Car salespeople understand this, which is why they work so hard for the emotional commitment before revealing the price. In other words, they don’t negotiate the final price until the business is theirs to lose.
If they are really good, the price only has to fall into a range of reasonable expectation and then it won’t be subject to additional discussion.
The Customer’s Internal Checklist
- Good brand and reputation or marketing that suggests the same: This is where most sellers fail to bank enough value and find themselves negotiating on price before it’s time. A good website will contribute to the perception of higher value.
- An initial personal interaction that doesn’t conflict with the above: In other words, you need to know when and how to handle a new contact properly. If your website says “high service, professional, and experienced” and the new prospect is met with “unorganized, inept, and slow”, then you have already compromised your negotiating position. A poorly designed web experience or poor customer service on the phone will reduce the price the customer will be willing to pay.
- The perception of potentially good value: Luxury or Bargain Basement can both represent a good value for the right buyer. It is important that the value you wish to convey is seen by the customer before you negotiate.
- A positive experience in selecting products and getting a quote: This goes beyond the customer service of an initial contact. If the good vibes continue throughout the process, value continues to rise.
- Is the seller consistent after the sale?: If performance falters once negotiations are supposedly complete, the customer may reevaluate their needs and create increasing demands to fill the gap between their expectations and their actual experience. In other words, poor service can compromise the higher margins earned in the negotiating process.
If the above criteria are met, then price will finally come into play. At that moment, it is critical that the salesperson understands the customer’s impressions of the seller in order to craft a response that doesn’t conflict with their perceptions.
However, sometimes our marketing and initial response has not earned enough value to close the deal. Then it becomes the salesperson’s job to reset expectations before proceeding. Unfortunately, most salespersons will simply lower the price until it matches the customer’s existing expectations!
Why The Price Pedestal?
Why do so many sellers, end up negotiating price? Simply put, it is sometimes the only tool managers provide them.
Customers need choices in order to differentiate value. If you offer only one price point, then they have no choice but to consider another seller. Good listening skills are essential for determining which alternatives to introduce into the conversation.
A good negotiating strategy needs 3 things:
- A less than ideal substitute for the product or service being sold: An educated buyer always has an option they might accept, but would prefer not to.
- Something that the client thinks is important and doesn’t want to compromise: Most buyers are quick to present this criteria; others try to keep it a secret.
- Something that the seller feels is a luxury, but would really enhance the experience: This may not even come into play in the negotiations, but be ready to use it to close the deal.
Negotiation is about two parties. Understanding what the buyer wants and needs is important, but sellers need to be self-aware about what they want, too.
If you reduce your needs to price as your deciding factor in the sale, then you accomplished nothing to improve the value of the transaction. We can learn a lot about customers by asking questions and observing unspoken indicators of preference. We can augment our marketing to create a better impression of value. But if salespeople don’t understand their own value proposition, marketing and customer service won’t yield a good return on investment.
Challenges in Negotiating:
- Sellers that do not understand their cost basis: Too often salespersons are educated on price but not cost. Low cost elements of the deal are important closing tools.
- Too much transparency in the market: Do not let yourself be victimized by other sellers’ improper pricing. Redirect the conversation to a big picture issue.
- Reasonable Substitutes can kill a deal: If the buyer is playing their ‘reasonable substitute card’, then the negotiations started too early. The seller’s job is to make substitutes less attractive.
- Lack of patience on the seller’s part: We tend to get caught up in the moment and forget to monitor the signs the buyer is sending us.
I can’t over-emphasize how important it is for the seller to understand his or her cost-basis and know the parameters for profit. Salespeople need to be finance experts on their product or service.
For example, you would think that pricing for Systems’ Integration would be simple. The purchase price of the equipment is easy to access and the company can set a reasonable expected margin. The key skill is the seller’s ability to design efficiently to meet the customer’s expectations without adding costs the buyer won’t pay for.
However, labor is a variable that can undermine both the ability to win a job and to deliver it profitably. Underestimate labor and lose money. Overestimate and lose the job. Therefore a critical skill set of SI companies is their ability to capture data that will help them estimate with confidence. The salesperson can then represent the buyer’s needs to the design team and together they can generate the most valuable options.
Rental-stagers have very different cost-basis for their products and services. One can argue that rental equipment costs are unique to each company and are completely arbitrary. However, the costs are still real no matter how hard they are to pin down.
Staging Sales Managers and Owners often send signals that indicate their pricing decisions are based on gut instinct, which in turns trains the sales team to do the same. This is a formula for disastrous pricing decisions that lead to reduced margins.
A critical skillset for stagers is the ability to pre-job cost events in a way that takes factors like opportunity cost into the equation. Being confident in your pricing is critical to reaching a mutually beneficial outcome.
Creating a good negotiating position requires three things:
- Compelling marketing that is backed up with appropriate customer interaction.
- A concrete understanding of the seller’s costs and expected margins.
- The ability to listen for the customer’s negotiating triggers and include those points in the closing conversation.
At the right time, initiate the closing strategy that best applies to the current customer. If the conversation is about price, then recognize that you are either at the first “price moment” and need to circle back to create the right value, or you have met the buyer’s expectations and they are willing to discuss true value.
There are only two outcomes at this point: Match your products and services to the buyer’s perceived value within your profit constraints or agree that no agreement can be reached.
Tom Stimson MBA, CTS helps owners and management teams rediscover the fun and profit that comes from making better decisions about smarter goals. He is an expert on project-based selling and a thought leader for innovative business processes. Since 2006, Tom has successfully advised over two hundred companies and organizations on business strategy, process, marketing, and sales. Learn More at TRSTIMSON.COM