Negotiation 101 – back to basics
I thought it might be useful to distil all the thousands of pages on negotiation available on the web, down to three important principles. Overarching all of these, is preparation. People who think they can walk into a negotiation and wing-it, relying on their wits and the benevolence of their opposite number, leave money on the table or undermine the chance of agreement altogether.
Interest vs Position
The easiest way to explain this is by example. Reseller A goes into a negotiation with Supplier B. Reseller A’s position is that they want to buy product C for £10, which is below the £16 price they have been given by supplier B - £16 is the supplier’s position. The rookie negotiator immediately starts haggling over price whereas the veteran will always start with interests. The interest of the reseller is that they know what they need to sell for to win business at a reasonable margin. For this they need to buy at £10. The interest of the supplier is that they load extra features into product C that most of their competitors don’t offer – they can’t afford to sell much below £16. Do reseller A’s customers need supplier B’s extra features? If so, what could reseller A charge for them. If not, can supplier B offer reseller A, a stripped-down version of the product? Initial questions like “why is your target price £10?” and “what is included in your £16 price” are more productive than just throwing numbers around. Ask questions and avoid confrontation.
What is the balance of power?
This is important when you consider what happens if you cannot come to an agreement. Who suffers the most? What is your next best alternative and what is theirs. Take the example above, who has the power? You might think it is reseller A because they have many suppliers to choose from. What you won’t know, unless you ask questions and think through the answers, is that reseller A already buys most of their products from supplier B. The MD has been told by the CTO that the billing system cannot handle multiple CDRs and would need upgrading if they don’t buy product C from supplier B. Also at a certain level of spend reseller A gets a discount on everything they buy from supplier B. Supplier B would like reseller A’s business but the person they are negotiating with is a middle manager with no equity stake in supplier B and no sales target. To them it’s just a job and if they walk away from the deal there are no consequences. However, if they approve a deal below minimum margin they will be required to get permission and account for their decision. You must understand the balance of power before you start negotiating, so do your research and ask questions. Don’t be afraid to insist on negotiating with the decision maker.
Standards
This is by far the most common and most frustrating mistake made in negotiation – and its just laziness. Everything has a market value and with a little effort it’s not hard to work out what that is. Every supplier should know in detail the products and pricing of their main competitors. This is true at every link in the supply chain and particularly important in the channel where there are multiple margins to consider. Lazy product managers apply a cost+ formula to everything without considering first what their competitors sell at or what the end user will pay. In this way, they give away margin in some areas and make products un-sellable in others.
If you are selling your business, find out how recent deals have been valued and what businesses like yours are trading at on public markets (public companies usually attract a premium over private companies because their shares have liquidity). Fine tune your valuation based on how long your customers are contracted for and any intellectual property or other assets you own. I was recently approached by a reseller wanting to sell his base of 200 customers, with a monthly margin of £20,000, for £500,000. I asked him how he arrived at the valuation. His answer was that he had been running the company for five years and paying himself £50,000 a year whereas his estimated his average market rate for that period to be £150,000 a year. (£150,000-£50,000) x 5 = £500,000. The market standard was half this price and we weren't able to agree a deal.
Jola is a channel supplier of internet connectivity, hosted voice and mobile solutions. We try to negotiate the best prices from suppliers to ensure best pricing for our partners. To find out more about Jola...
