Friday, July 17, 2015

A Million-Dollar Coffee Cup

Recently I was buying a car and I was reminded of the story of the million-dollar coffee cup.
I first heard about the cup over 20 years ago when I worked for a large technology products and services company (I won’t mention the name but its initials are “IBM”). At that time, IBM was competing in the mainframe space against a company called Amdahl, which has since been acquired by Fujitsu.
The story was that Amdahl sales reps would try to displace IBM mainframes by undercutting IBM’s price. Because switching mainframes was the technical equivalent of a heart transplant, unseating the incumbent on price was usually a wasted effort.
The Amdahl sales reps would thank the client for their time and, before departing, offer them an Amdahl coffee cup.
“It’s worth a million dollars,” the sales rep would say.
“Why is that?” asked the client.
“Because as soon as the IBM sales rep sees the Amdahl coffee cup on your desk, he’ll know I was here and he’ll drop his price by $1 million if you ask him to.”
The coffee cup is a great example of the power of having an alternative; somewhere else to go to fulfill your interests. Imagine you are buying a car and, like in many cities, the car dealerships are all lined up in a row on a main commercial street. While you are negotiating for a Ford, the Chevy dealership next door and the Chrysler dealership across the street represent alternatives to closing the deal on the Ford. If you can’t get what you want at the Ford table, you can go next door and sit at the Chevy table. If the Chevy sales team doesn’t put enough on the table to keep you there, you can leave that table and sit at the Chrysler table and see what they’ll offer.
The table that represents the best alternative to the table you’re sitting at is your BATNA (best alternative to a negotiated agreement). When you can’t get the deal you want, you go to that BATNA.
In reality, the less expensive Amdahl mainframe was not really a good BATNA to the IBM mainframe because of the switching costs and effort. But that coffee cup provided a perception of a BATNA by having the Amdahl logo in sight. And that perception was enough to provide some economic leverage on pricing.
Remembering the coffee cup story came in handy for me when I negotiated recently for a new car. I went into a dealership, sat down at the salesman’s desk and said, “I am buying X Model car this weekend.” I casually rested on his desk the brochure for the Y Model car from the dealership next door.
It wasn’t worth a million dollars, but having that brochure created a perception of BATNA that made negotiating on price a lot easier.

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