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Chapter 14: Negotiation - The Final Hurdle
Overview
The negotiations covered in this chapter center on the conversations that (1) follow the evaluation process and (2) precede the formal customer agreement to move forward. Many of the ideas contained in this chapter, however, have their roots in the concept of quid pro quo, which Customer-Focused sellers use throughout the sales cycle.
Unfortunately, when it comes to negotiating, there are no magic bullets. The salesperson has to be prepared and has to stick to the game plan. A misstep can cause significant damage. If salespeople fail to establish value and earn the respect of Key Players as peers, for example, the buyer has the upper hand when the time comes to negotiate. If the seller has been subordinate throughout the sales cycle, giving whatever the buyer requests and getting nothing in return, who do you think has the upper hand when the subject of price arises?
Sticking with the disciplines outlined in this resource is not always easy, and the stress of negotiating can cause a seller to revert to traditional behavior. But this can be doubly damaging. If during the sales cycle a seller has taken the approach of helping the buyer achieve a goal, solve a problem, or satisfy a need, and then suddenly shifts to persuading, convincing, and "hard closing," the buyer is likely to feel manipulated and begin to lump the seller into the pervasive negative stereotype.
Traditional Buyers and Sellers
Let's consider the positions, expectations, and relationship of buyers and sellers in a traditional negotiation, beginning with the position of both parties at the start of negotiations.
Home teams, as most sports fans know, have a decided advantage. Negotiations are usually carried out at prospects' locations, so these encounters are "away games" for sellers. The seller is therefore at a disadvantage from the outset. Most of the circumstances surrounding the negotiation favor the buyer. The buyer sits in his or her leather chair, for example, which tends to be slightly higher than the cloth chair the salesperson occupies. The buyer is the host, providing all creature comforts; the seller can only accept or decline those comforts.
Buyers are perfectly willing to conclude a potential closing meeting without consummating the transaction. In fact, sometimes they prefer it that way. People buying cars in the traditional fashion understand that sometimes the best way to determine if they have gotten the best offer is to leave the showroom. (Note that car salespeople work on their home turf, which changes some of the dynamics.) If the car salesperson sees the buyer walking out the door, he or she may also see the sale slipping away - and hurriedly start negotiating downward.
Given this phenomenon, many buyers prefer to negotiate over the course of multiple meetings. The starting point for each meeting after the first is the last (lowered) price from the previous meeting. Experienced buyers are fully aware of the quarterly pressures that selling organizations face, and may time the real closing meeting to coincide with that cycle.
Buyers have the luxury of knowing that regardless of how adversarial or personal a negotiation may get, forgiveness is only a phone call away - if, that is, they award the gold medal to the seller they've been battling with. Buyers don't usually have a great deal personally at stake. Sellers, by contrast, have commissions, pride, and career paths on the line - stakes that are heightened in the case of large transactions toward the end of a quarter. The buyer can be patient, comfortable in the fact that it makes little difference to him or her whether the contract is awarded on December 28 or January 10. The buyer can sit back and see how badly the seller wants this deal to happen now.
Experienced buyers know what they want to pay and have a proactive plan for getting to or below that figure. Sellers - wanting to get the deal, and assuming that the negotiated price will be less than the initial asking price - tend to ad lib responses to the buyer's implicit strategies and explicit comments. Smart buyers have at least three vendors competing, know their vendor of choice, and rarely show their hand. Buyers try to keep all vendors paranoid, and convinced that price will drive the ultimate decision. Sellers can seldom be certain that they are Column A, which is exactly what the buyer wants.
As emphasized in previous chapters, the essence of Customer Focused Sales is shaping conversations between buyers and sellers. Not surprisingly, we view negotiations in exactly the same way. Of course, conversations about business issues (framed by title/vertical industry/goal) are very different from negotiation conversations. But the good news is that this latter kind of conversation is easier to predict and script. You have a buyer attempting to get the best possible deal and a seller trying to close the transaction and (in theory) get the highest possible price.
So let's look at negotiation as a conversation the seller has earned the right to have, because he or she has executed all the necessary steps in the sales cycle and has otherwise behaved in a consistently professional manner. While you can seldom be sure you are the gold medalist, Customer-Focused sellers can take heart in knowing that the buyer has already said yes in making commitments at each checkpoint in the Sequence of Events.
The Six Most Expensive Words
Buyers expect discounts. Sellers expect to discount to get the business. Buyers squeeze sellers on price. Sellers expect to get squeezed. It is a generally accepted barbaric ritual of buying.
So it never should come as a surprise when, early in the negotiations, the buyer asks the seller for the "best possible price," or words to that effect. One of the most common, least appropriate, and most expensive responses a salesperson can make to such a request is, "Where do we need to be?" These six words give the buyer the following impressions:
The seller is not controlling the discussion.
The seller has already acknowledged that discounting is necessary and appropriate.
The seller has wide latitude and authority to discount.
Negotiation is not the seller's strength, given the weak opening salvo.
Lawyers cross-examining hostile witnesses are taught never to ask a question to which they don't know the answer. The same holds true for salespeople starting negotiations. Whether a buyer's answer to those six words is reasonable or not, the question allows them to put a stake in the ground that the seller is forced to address. Smart buyers will cite a figure well below what they are willing to pay.
Here are some common errors made by salespeople (often with the support and direction of senior management of the companies they represent) during the negotiation process. Some will be familiar from previous chapters; others are new.
In the absence of an agreed-on Sequence of Events, the attempted closing is timed to serve the salesperson's agenda, rather than the buyer's. The most common way to get buyers to sign earlier than they want is by enticing them with discounts.
Salespeople attempt to close non-decision makers. This can be demeaning to a "buyer" who in fact is merely a messenger. Beyond that, whatever discount is offered becomes the starting point for further negotiations, if and when the decision maker gets involved.
Salespeople selling noncommodity offerings mistakenly believe they can negotiate their way into Column A by treating price as the only variable. Ideally, negotiating should take place after the buyer makes the decision to buy from a particular salesperson.
Many salespeople have difficulty tolerating silence while negotiating. Smart buyers remain quiet for a few seconds after asking the salesperson the price, or after being asked to buy. In the closing process, many sellers experience a marked loss in their ability to listen, understand, and respond (a phenomenon we call vapor lock).
Many salespeople get (unnecessarily) defensive. Defending or explaining the price during negotiation is generally counterproductive. At this stage, the buyer is merely doing his or her job. He or she simply wants the best deal, and really isn't interested in whether or not the pricing leaves your company sufficient profit.
Salespeople compromise their power by saying things like, "That's the best I can do for you." This statement alone can make it impossible to close that day. Smart buyers ask who within the organization can do better - and pointedly instruct the seller to bring that person to the next meeting.
Sellers who are behind quota should not negotiate large transactions without the involvement of their manager. The good cop (seller)/ bad cop (manager) game can be played to the seller's advantage.
While consulting with a client, one salesperson, Bill, seemed distracted for a couple of days. We asked him if everything was all right. He told us that the buyer's decision on a major transaction was being made that Friday. He had quoted $960,000, but his Coach had let him know that the organization had budgeted $850,000 - a price that Bill was ready to meet. The CIO was the decision maker, and had requested a new quote. Bill's manager happened to be a role-play Coach at the workshop, so at lunch, we took the opportunity to brainstorm about how Bill and his manager should proceed.
Bill had come to understand that he was Column A, having initiated the opportunity with a cold call. He was concerned, though, because Column B had been called in, and was the acknowledged industry leader in that market space. Based on our discussion, Bill and his manager agreed on a course of action, which Bill then set in motion before the lunch break was over. First, he called the CIO and said that he was not going to provide a revised quotation. He also asked for a meeting with his manager and the CIO on Friday afternoon at 4:00 PM, and this request was granted.
This was good news. Our sense was that if they were not going to get the business, it was unlikely that the CIO would give them an appointment late in the afternoon on the day the decision was supposed to be made. After making the phone call, Bill looked as though the weight of the world had been lifted from his shoulders. He and his manager had agreed on the proper course of action and were now pursuing it - something that they evidently had not done much of in the past.
We asked Bill to get back in touch with us and let us know how the situation played out. On Monday, Bill called and told us that he had closed the order on Friday for $960,000. He admitted again that he had been ready, and even anxious, to drop $110,000 from the price, and probably would have gone even lower if it had looked like he had to. The result was a windfall of $110,000 that went straight to the bottom line of Bill's company.
While "always" and "never" seldom apply to sales, this situation (and others like it) leads us to conclude that sellers should always negotiate as though they are Column A. Why do we break our own rule in this way? In the situation just described, what if Bill was Column B and had rebid $850,000? That number would have been used to negotiate a better price from Column A, the preferred vendor. When he refused to rebid, one of two things was going to happen: Column A would get the business anyway, or the buyer would come back to Bill because he was the vendor of choice. Therefore, when you are asked for a best and final price, we suggest asking the buyer if (1) you are the vendor of choice and (2) price is the only remaining obstacle to doing business. If the answers are not yes and yes, we suggest that you ask the buyer to get back to you if and when you become the vendor of choice, at which point the negotiation can take place.
Traditional selling behavior dictates that if you are losing, you should discount as much as possible. You will either get the business yourself - by discounting yourself into becoming Column A - or force your competitor into significantly dropping the price. We disagree with both aspects of this tactic. Desperation discounting late in the buying cycle seldom secures the business. And since all vendors drink from a common well of pricing, irresponsible low-ball prices are bad for all vendors.
There is another reason not to offer "fire sale" discounting if you are losing late in the buying cycle. Assume Column B offers ridiculous pricing, but still loses to LMN Company. The following month, the roles are reversed. As Column B this time, the salesperson from LMN Company gets the bad news from the prospect that Column A has been chosen. What is the LMN representative likely to say? How about something like,
I appreciated the opportunity to compete for your business and gave it my best shot. While I don't agree with your decision, I understand that you are doing what you believe is best for your company. And hey - just so you know - last month we were awarded a bid competing against Column A at MNO, Inc., but not before they offered an unbelievably low price. If you want to do business with Column A, you may want to contact Joe Jones at MNO to get details on the pricing that he was offered. In any event, I wish you well. Please contact me if I can be of service in the future.
In other words, the aggressive discount offered in a losing situation now comes back to haunt the vendor who has moved from Column B to Column A. Assume that one way or another, the word will get out as to how your company is selling. If it does get out, will you be happy? Will you be well positioned for your next negotiations? What happens to the perceived value of all the vendors' capabilities in your target markets?
The Power of Posturing
Sometimes the best negotiating stance is not to negotiate - as long as you're in a strong position, and you strike a pose that is informed and reasonable. We call this posturing (without the negative connotation normally associated with that word).
Let's say a Coach asks the seller's best and final price. Wisely, the seller - call him Ben - asks if his company has been selected, and if price is the only remaining open item. The Coach says yes. Now Ben asks, "Doesn't Sherry have final signing authority?" The buyer agrees and sets up a meeting for Ben and Sherry. Not surprisingly, Sherry begins the meeting by squeezing Ben on price:
Sherry: Ben, thanks for coming in today. Our organizations have spent a great deal of time on this project, and we believe that you have earned our business. I compliment you on understanding our business issues and defining exactly what we need to do to improve our results. My staff is comfortable with your recommendation. Having said that, one of the reasons we are even considering your offer is that our margins have taken a beating, and we believe your offering can help. But in this climate, $250,000 is a significant expenditure, and I would like you to sharpen your pencil so we can see if we want to get started.
Sherry has been through negotiations numerous times. Given the size of the expenditure, she already has an idea of what type of discounting should be possible. The vendor decision has been made, and now it is a matter of getting the best possible deal. Ben knows the pricing was presented as a step in the Sequence of Events 3 months ago, and in fact was a delineated checkpoint. By not challenging it back then, the buyer implicitly agreed they could afford it. Now that it is time to buy, though, they want to pay less.
Rather than responding with the deadly six words, Ben surprises Sherry:
Ben: I don't understand, Sherry. We presented pricing 3 months ago. If it was an issue, why wasn't it raised then?
Sherry is somewhat taken aback by Ben's assertive (but accurate) response. Quickly gathering her wits, she counters:
Sherry: Well, I felt the pricing was high when you presented it, but I was sure you left some room to negotiate.
Ben: The pricing is based on our volume purchase discount. Is there anything you want to take out?
Sherry: We need all the proposed capabilities. Frankly, I need you to take out about 10 percent of the cost.
Ben: As I recall it, your cost-benefit analysis shows a payback in 5 months. Doesn't it make sense to get started now?
Sherry: Well, yes. We want to get started, and that is why we scheduled this meeting. The cost-benefit analysis will look even better if you lower your price.
Note that in this dialogue, Ben was pressured for a better price no less than three times. Each time, he postured, using questions that politely said no to each of Sherry's requests. Each "no" was unemotional and was virtually impossible for her to challenge or disagree with. The buyer has already made the decision to buy, but has the emotional hurdle of needing to believe she is getting the best possible deal. By saying no three times, Ben is actually helping Sherry make her decision.
Without getting too formulaic about it, posturing often consists of preparing three questions that politely decline the request for a better deal. These should be planned in advance and customized to each situation. Ending these polite no's with a question puts the ball back in the buyer's court. Our experience indicates that it is impossible to drop price while listening. Here are some examples of polite no questions:
Put it on the buyer's shoulders: "Is there anything you would like to take out?"
Feign surprise: "You've known the cost for 2 months. Why is this coming up now?"
Remind the buyer of the value: "By your numbers, the savings are $36,000/month. Shouldn't we get started?"
Reference buyer goals: "We've spent a lot of time together in the past 4 months because you want to improve forecasting accuracy by 30 percent. Has anything changed?"
Reference usage: "Didn't you say that after calling on customers, you want your salespeople prompted to update pipeline milestones, so managers can help with qualification and you can improve the accuracy of your forecast?"
Some buyers will agree to go forward after one, or two, or three of these polite "no's." If so, the seller receives an order for the full amount merely by posturing - that is, without negotiating. In the example so far, Ben has not yet reached the point where negotiation is appropriate. Posturing provides artificial patience during a stressful time and maximizes the possibility of a more profitable transaction.
Negotiating
In some cases, of course, buyers will continue to press for a better deal, and getting the order will require more than posturing - it will require real negotiation. In real negotiation, there are two key components: get and give. Note the nontraditional sequence of these two words, which is deliberate: get, then give.
Throughout the buying cycle, as noted in previous chapters, the seller should be trying to establish an atmosphere of quid pro quo. This is sometimes hard to sustain, since the buyer has been conditioned to wield disproportionate power with traditional vendors and sellers. But when the seller is offering a way for the buyer to achieve a goal or solve a problem, he or she doesn't deserve to get run roughshod over. Prior to giving, therefore, the seller should first ask for something from the buyer. Why?
Because
If the seller offers a concession, the buyer will take it and still want a lower price.
The psychology is to convince the buyer that he or she is getting the best possible deal. If the buyer first has to make a concession, the seller's concession will appear to have more value.
If the buyer will not agree to a concession, the seller should leave without offering what he or she was willing to give, and without burning the bridge.
Getting the buyer's commitment first allows a conditional "give." This empowers the seller either to get an order or to leave without setting a lower number that will become the basis for subsequent negotiating meetings.
There are many different things a seller can ask for. Our suggestion is that it be something that is of value to the seller that causes the buyer to "put some skin" into the negotiation. Examples could be
A deposit up front, with the balance due in 30 days
A larger transaction (accelerating the order of future requirements)
A longer lease term or maintenance commitment
A press release documenting results
An introduction to another division or department
It should be noted that the seller cannot ask the buyer to commit to providing the "get" that is requested. The question is whether it would be possible for the buyer to do what is being asked. For example:
Seller: For me to consider a concession, I need something from you.
Buyer: What do you have in mind?
Seller: Would it be possible to extend the maintenance contract from 1 year to 2, and for you to serve as a reference for four prospects over the next 12 months?
Buyer: I don't see a problem with extending the maintenance agreement. And, assuming our implementation is successful, l could serve as a reference for you.
Seller: If you extend the maintenance agreement and agree to be a reference, I'm willing to include our forecasting module, which has a value of $10,000, at no additional cost. Would you like to move forward?
Buyer: Is that the best you can do?
Seller: It is. Can we move forward?
Buyer: Make the changes to the agreement, and let's go ahead.
In short, our approach to negotiating makes use of things the seller learned during the buying cycle and attempts to foster a spirit of quid pro quo in order to get to the actual closing under acceptable terms.
The Conditional "Give" and Close
After the buyer agrees that the "get" is possible, the seller then conditionally offers the "give" and asks for the business: "If you are willing to (summarize what the buyer said was possible), then I would be willing to (offer your "give"). Can we move forward?"
After asking this question, the seller must wait for the buyer to speak. Only one of two things can happen at this point: The seller will either get an order or have to walk. If the buyer does not close, we suggest leaving, because at this stage, any sweeteners put the seller back on the slippery slope of traditional negotiating. The seller should also take the concession off the table, out of play. We suggest ending the meeting in the following manner: "That's what I was prepared to offer. While it doesn't appear we can proceed today, this transaction makes sense for both of us. Why don't we give our positions some further thought? I'll call you Wednesday and see if we can try to reach agreement."
The seller's willingness to exit may persuade the buyer to move ahead. Whether it does or not, the intent is to avoid having the failed closing become adversarial, and to leave the two parties trying to move ahead with something that is a win-win. If the negotiating meeting is rescheduled, the seller needs to come prepared with a different set of gets and gives and see if the two parties can come to terms.
When sellers discount, they are giving away bottom-line dollars. If a salesperson averages a 15 percent discount, for example, he or she must close about six transactions to net the dollar equivalent of five undiscounted sales. By any measure, this is costly. If a seller is prepared, he or she can minimize these costs by coming out of the negotiation with a better price.
Apples and Oranges
One standard negotiating technique used by traditional buyers is comparing the price of a lesser offering to the seller's price. If the seller responds to this tactic by posturing, he or she somewhat weakens the position, because the discrepancy between the two offerings has not been addressed.
A more effective countermeasure is to be prepared to cite one of your major differentiators - that is, a capability that you provide that the lesser offering does not. As an example, assume that a sales force automation package from your competitor, the ABC Company, costs 30 percent less - a big difference - but, unlike your product, does not dynamically track close rates by individual salesperson at each stage of the sell cycle. The discussion might go as follows:
Buyer: We like your system, but ABC's offering is 30 percent less than yours. What can you do for me on price?
Seller: You could choose to go with ABC, but have you considered that by having to use standard close rates for each step of the pipeline, a salesperson with a low close rate could inflate the gross forecast by entering two or three large opportunities? Can you see how that could cause you to miss your target?
Buyer: We would run that risk by using standard close rates.
Seller: One of the things we discussed was that when the forecast is being generated, our system can apply historical close rates for each rep at each milestone, so the final forecast will be adjusted. One of your major issues is forecasting accuracy. Are you more comfortable with applying customized close rates by rep?
Buyer: I would have a higher level of confidence.
Seller: So comparing our offering and ABC's really isn't an apples-to-apples comparison, is it?
Buyer: Not exactly, but I would still like to see you sharpen your pencil.
At this point, after neutralizing the unfair comparison, the seller can now begin posturing with the prepared polite "no" questions.
Summary
Few salespeople admit that they are anything but outstanding negotiators - even if their approach is to discount until a buyer says yes. But if a sales cycle has been executed properly, the close should be a logical conclusion, rather than a fire sale or an arm-wrestling contest. Preparation is critical, and the seller should be prepared in advance to execute the following steps, as needed:
Verify that you are the vendor of choice, and that price is the only obstacle to doing business.
Make sure that you are negotiating with a decision maker.
Head off apples and oranges comparisons by having a differentiator and a situational question to highlight the buyer's need for it.
Posture by using prepared polite "no" questions to respond (as many as three times) to requests for better pricing.
Ask the buyer if the "get" you want is possible.
Offer your conditional "give," and be prepared to walk if the order does not close at that point - leaving the door open, of course, for further rounds, but only after taking your concession off the table.
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