How to Negotiate Price for Sales
Before you jump in with both feet and negotiate price, how do you know that you've prepared for success?Understand the difference the "what" and "whys" when you negotiate on price. Prepare questions to better understand how to achieve an optimal negotiated outcome that includes your price.
Two sisters have a single orange. Like two well raised sisters, they decide to divide the orange in half. One sister takes the orange, peels the fruit, takes the rind and cuts it up for use to flavour a pie crust. The other sister takes the fruit, eats it, and tosses the rind into the trash.
These two sisters focused on the “what” and compromised without asking the most primary question in negotiating: “Why do you want that?” The consequence is that each sister only got half as much as they might, had they stopped and asked that question. With some sales price negotiation training, each sister would have learned to ask the pivotal questions.
Look at it another way: The “What” is the sales price, contract, job, etc. upon which you have decided. The “Why” is the motivation which caused you to make that decision. Quite a few negotiators make the error of thinking what they want is logical, transparent and important to everyone. A request from the other party for anything else causes the negotiation to deteriorate from solving a problem to arguing about positions.
An example illustrates how this works:
A sales representative for a manufacturing company is making a call on a customer. The customer utilises a part from the manufacturer to produce their finished product. The sales representative has been designated with renewing the contract and getting an 8% price increase.
The sales representative talks the situation over with the manufacturer. The manufacturing executive advises the sales representative. “This is an item with a small profit margin, and you are only one of three companies that makes this product for us, nationally. If you are going to increase your prices, you are out and we are going to give your business to one or both of the other two companies. They have already indicated that they will not be raising pricing, this year.” This is “What”. Price appears to be the main issue for the buyer and seller to negotiate.
The sales representative queried the executive, “I am charged with getting the increase. What would you do if you were in my shoes?” This is inviting the executive buyer to step into the sales person’s world, and will hopefully result in the buying executive starting to understand the salesman’s “Why”. He asked the question to ascertain more about what is really driving the price issue.
The executive responded, “This was a product where we used to have good market share and exclusivity. Other companies have started to produce this, and are doing so at prices equal to and a bit lower than ours. Some of these products are actually superior. We are losing our market share. As a result, in order to compete, we have to keep our prices flat this year. So, you can see that a price increase is not is not something I can negotiate on if you want to retain our business.”
Suddenly, it is not the cost, but market share and survival that are the issues. The “why” opens up a brand new arena to guide price negotiations.
The sales representative returned back to his office and met with the engineers, sharing with them what he had learned. The customer is losing market share while other people are making a better product and their competitors are agreeing to zero increase in the next year. They went to work on the “why”.
The engineers were able to redesign their piece of the product, and saved 15% off the price of manufacturing. The result was they were able to come back and successfully negotiate a new improved product at a lower cost, at an increased margin. This enabled the sales representative to negotiate price in a way that retained his business, but he was able to get an exclusive contract, eliminating his competition.
The sales representative had two choices in his talks with the manufacturer. One was to begin to negotiate sales price, defend, fight, convince, force the issue. The second was to ask questions while learning more about the interests behind the price position. What was learned was that it was market share, competition, and possibly design and technology, more than simply “everyone else agreed to no price increases, so if you don’t, then you’re out.” This totally changed the approach to successfully negotiating an agreement. It is important to note that there were several “whys” behind the “what” of price.
Asking for more information also necessitates good questioning and listening skills:
Price Negotiating Questions
- Before you start to ask questions, understand where you are going. Randomly fired questions, without logic, makes the other party feel as if they are being interrogated and it raises tension.
- Ask for permission to ask them questions.
- State why you want to ask them questions
This maintains safety and lowers the tension for the other party. They want to assist you.
Other ways to discover the “why”:
“Why are you worried about losing market share? Is it due to simply price, or are there other reasons?”
“The product you make is excellent. Costs are rising all over. Why not negotiate for a slight price increase?”
These two techniques are valuable in helping a negotiator better understand the reason why the other party wants something at a particular price point.
Listening before you Negotiate Price
When we are talking with another person, we receive communication from three basic sources. These are words, voice tone, and body language.
The best negotiators are not necessarily the best speakers. They are the best listeners. They are listening for the reasons why the other party is asking such as needs, wants, or they demand something. And they are listening for all the “whys”, not just one. Because they are looking for the common ground from which a successful negotiation can be built. They are also seeking the interests that the other party may have that are not being met, that may get in the way of successfully solving the problem.
What are the listening skills you need before negotiate price:
- Selective listening: listen to everything, then select out the relevant information.
- Responsive: making eye contact with the speaker two thirds of the time, taking notes, “I see”, “Tell me more about that”.
- Paraphrasing: Replay back what you think you heard and seek out confirmation and clarification. “Did I understand what you said?”
As writer Stephen Covey said in his book The 7 Habits of Highly Effective People, “Seek first to understand, then to be understood.” The other party will pay attention to you and work with you if they feel you understand their needs.
Why is this so important?
Typically, when two parties meet to negotiate price, there is an underlying desire to achieve an agreement. Also, many times the “what’s” are diametrically opposed. For example, in a labour negotiation the union desires to get the best price for the members. Management prefers to protect the company. However, each needs the other (no company no jobs, no employees no company), so the effort to uncover the common “whys” will reveal that, in reality, they both want the same thing. Simply put, employees being paid fairly working in a healthy company.
When the “whys” are examined, generally price negotiation common ground is found. These also can be significant in helping solve the sales price problem creatively. Why the purchaser wants something may never have occurred to the sales professional. In fact, it may make the account manager seem as difficult, if not irrational. Many times, not only does this get the buyer and seller working to negotiate the price problem rather than each other, but it can BE the solution. It uncovers the unsaid things that prevent successfully negotiated sales price deals.
Getting the “whys” handled for both parties is the reason we negotiate.
David A.Wachtel is the president of Hautacam Consulting, Inc.