Negotiation: A Profit Strategy

Negotiation is the most important business skill we'll ever master, yet it is often among the missing in our profits tool box. We think of labor productivity, equipment, and techniques, as our stock in trade. Certainly, all these are mandatory resources to prosper in the business, but none have the single largest impact on profits, cash flow, and long term viability as negotiation does.

Negotiation is a mixture of business arts and sciences that works best when viewed as a set of economic principles. This cost centered philosophy rejects the price obsession that characterizes the business world.

Negotiation is not an argument over price

The financial reality is that a buyer will pay a higher price if it buys a lower Total Cost of Ownership (TCO). Disagree? Let's first distinguish between price and cost from the customer's perspective. For example, suppose you can buy one of two units priced at $750 or $500. If low price is the deciding criterion, no question, the $500 unit wins. However, if the higher priced $750 unit lasts for 2 years and the lower priced $500 unit lasts for one year; the $375 TCO of the higher priced unit clearly makes it the better buy. Lowest TCO is by definition the best value.

Quality, Service, Delivery, and Price (QSDP)

Our negotiation mission is to consistently demonstrate how our lower TCO provides better value to customers. The four elements of cost always present in our negotiations are QSDP. Any cost impact can be slotted in one of these categories. A better trained work force is Quality cost advantage. Superior warranty due to better materials and design are Service cost advantages and a better schedule due to planning and personnel cost advantages constitutes Delivery savings to the owner.

The most frequently cited, yet most elusive goal is to remove price a bargaining point from the negotiation table. It will happen when we focus our negotiation efforts on the lowest TCO for the customer.

Hot Potato tactic

Instead of stressing lowest TCO in the work-a-day world, we fall prey to our own lack of negotiation skill. Here is how the customer out-negotiates us with the Hot Potato tactic. He invites you to his office to "negotiate". He makes you comfortable, shares a little small talk, then looks into your eyes while intoning insincerely, "Your Quality, Service, and Delivery are all top notch or you would not have a seat at the table - so it call comes down to Price. What can you do?"

In one smooth maneuver, the customer has buttered you up and crammed the Hot Potato of Price down your throat. If you swallow it whole, you may convince your self that the customer appreciates your higher value and "in this Price competitive market", you must lower your price.

He won everything, getting the lowest cost and a lower price. Negotiation is never just a matter of Price. Furthermore, for the same reason that we do not buy heart surgery from the lowest bidder (who even compares prices), the other cost advantages of QSDP are more important. Any professional buyer knows for an absolute certainly that she can always get a lower price. He also knows that a low price often come at a high costs.

Strategy over Tactics

The uninitiated think of negotiation as the deft application of tactics and parrying of counter tactics. Certainly, that is part of it. But the focus on TCO yields far better results for these reasons:

1. The customer is best served by the lowest TCO

2. TCO puts all four cost balls in play at the same time, giving us quadruple the negotiating power

3. Everyone knows that higher quality comes at a higher cost - just ask that cardiac surgeon

Some customers will not care about lower costs and only want low prices. You must decide if you want this type of business for what ever strategic reasons you have. There will be customers that you do not want to serve. There is nothing wrong with that and indeed everything right with it. When we delude ourselves into thinking that we need the sale, or the cash flow, or other ways we convince ourselves to take a sale at a loss, no negotiation skill will rescue us from our selves.