Wednesday, March 2, 2011

Truly the Best Part II

Verdi was having a cup of coffee with Tyler Gitou. “You may recall we had a meeting with my client where we proposed a best and final price for the components they wanted?” Verdi asked.

Tyler nodded. “I do. You had offered the components for $1 million and the client said you had to reduce the price by 10 percent or they would go to another supplier.”

“That’s right,” Verdi said. “The only way we could reduce the price by 10 percent was to use lower-quality parts. So we told the client that and their negotiation lead said, ‘Well, you have to make it work.’ So what do I do now?”

“That’s the response I expected, Verdi. What the client is asking you to do is bid against yourself. You offered two options: quality for $1 million or less quality for $900,000 and the client has summarily rejected both and said, ‘come back with another answer.’ What do you think they are expecting to hear?”

Verdi thought for a moment. “I know this guy pretty well and have played his game on other deals. He is looking for me to say same quality, split the difference at $950,000.”

“Why do you think he’ll say that?”

“Because that’s how we’ve done business before.” Verdi said.

“So you’ve trained him that the way you negotiate is to say ‘no no no … yes’. And now you can’t afford to say ‘yes’ this time because you can’t deliver the components at the quality they want for $950,000.”

“I guess that’s right.”

“Let’s talk about their interests for a moment. Who is focused on quality? Is it the lead negotiator or someone in the business who actually needs the components?”

“It’s the vice president of manufacturing.”

“And what happens if you deliver components of a lesser quality?”

Verdi thought for a moment. “Well, his concern is that the failure rate for the product will go up. They pride themselves on the quality of what they sell. So if we provide lower quality parts in these machine components, he risks his company’s reputation because the product fails more often. That will have a big impact on his whole product line.”

“Do you think the lead negotiator knows that?” Tyler asked.

“Absolutely. He is the buyer for all the components for this line of products.”

“OK,” Tyler said. “So what’s the client’s BATNA?”

“Their what?”

“Their best alternative to a negotiated agreement. It’s a term that means where the other party will go when they walk away from you. If you can’t reach agreement on the price for the components, what alternative does the client have for filling the need for these components?”

“Gosh,” Verdi said. “They don’t have one. Our components are the only ones that meet this spec. They have to buy these from us.”

“So they are up against a wall. Why is the lead negotiator asking for the discount then?”

Verdi looked sheepish. “Because in the past I’ve always said ‘yes” after he asks enough times.”

“So you could go in and say, ‘No discount! Pay me $1 million’. But that would hurt your relationship. So you need a couple of options. First, you need to find a way to say you have no room to move on the $1 million. But it sounds like he’s put himself out on a limb by demanding the cut, so you need to find a ‘golden bridge’ for him to retreat over; some counterproposal he can say ‘yes’ to so he can save face.”

“Well,” Verdi said, “if he increases the order I can give him a volume discount of 3 percent.”

“Good!” Tyler said. “What else?”

“If we change the production cycle by two weeks I can produce the components more efficiently. That may drive another 2 percent.”

“Now you’re thinking. So what you need to do now is put together your most creative counterproposal to offer as another option for the $1 million deal. Your goal is to demonstrate your efforts to try and meet his interests of high quality at the best price you can offer. Providing transparency into the levers he can pull to change the price and provide discounts will help him understand you have done all you can and give him options for a better deal. This way you can build trust by showing your commitment to make him successful and begin to retrain the client to your new collaborative negotiation style. This is the end of ‘no no no … yes’!”

No comments:

Post a Comment