December 10, 2007
Supply Chain Digest: When Negotiating with Suppliers, Should You Make the First Move?
By SCDigest Editorial Staff
Through a special arrangement, what follows is an excerpt of a current article from Supply Chain Digest, presented here for discussion.
When conducting negotiations with a supplier or potential business partner, the conventional wisdom has been that it is smart to let the other side make the first move. Why? Because the tendency is to make a first offer that includes some concessions. As a result, the starting point for the seller has now been shifted in your direction, providing a starting point that can be negotiated towards a new middle ground that is more skewed in your favor.
But research from Stanford Graduate School of Business Professor Margaret Neale says buyers and others in negotiations might want to rethink that approach.
Neale recommends instead often starting with an offer that is “just this side of crazy.”
By doing that, the buyer gains the advantage by defining the starting point to which the other side must respond.
In other words, rather than waiting for a price quote from a potential vendor and then negotiating off of that price point, it may make sense to begin with a very low ball, perhaps unrealistic price point that changes the dynamics about where the ultimate price will go. The trick is to pick a point that gives you this advantage without being so ridiculous from the vendor’s viewpoint that they decide the business isn’t worth pursuing.
The only times it makes sense to wait for the other side to make an offer, Ms. Neale says, is when you have information that gives you significant advantage in the bargaining or “when you honestly believe that the other side dramatically values the object of the exchange at a much higher rate than you do.”
In other words, if the vendor clearly is interested in “buying the business” for strategic or other reasons, then it may make sense to let them come in with the first offer on price and terms.
Perhaps surprisingly, Ms. Neale also says the idea of the “poker-faced,” unemotional buyer is also not necessarily the right strategy. She said that “people don’t usually think we use emotions strategically.” Emotions can be powerful pieces of information, she added, citing a recent study that showed that in many cases negotiators who displayed anger during the process created more value than those who were unemotional.
Discussion Questions: As a buyer, when should you make the first offer? Or do you always wait for the vendor to come back with a price first? Have you intentionally used emotions or “anger” as a negotiating strategy?
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When conducting negotiations, the conventional wisdom has been that it is smart for the retail buyer to let the other side make the first move because concessions might be offered upfront. And guess what? Suppliers too have taken all the courses. Shocking, huh?
However, in my “Coffee Talks with David B” workshops, I teach a different approach to both suppliers and retail buyers. I encourage both parties to begin the process by agreeing on the ultimate objectives and goals; then for both parties to work together with give and take, to make it happen. In other words, let’s make the very best use of our time together and agree to agree; and let’s each determine together what needs to happen for both parties to do business. This works very well for everyone concerned and everyone wins, including the third party we call the consumer. It sounds simple, and I don’t have enough space here to give you all the specific examples, but it works!
The old adage “he who mentions price first loses” is still golden. The most important part of the negotiation is not who starts the negotiation, but who finishes it. By having the other party start first with the price, the opportunity to “finish” will always remain with you. Otherwise, you are in a position of weakness, and cannot place the closing bid.
The way I figure it, 100% of retail revenue comes from products we obtain from our suppliers. This means that our future depends on them as much as theirs depends on us. If our overall goal is to work together for the long haul, we must have a healthy working relationship.
Unless you’re the very biggest of buyers, perhaps the best way to know you’re paying a “fair” price is to ask. “Based on the product, payment terms, delivery, and all other aspects of this order, is this price as good or better than anyone else is paying?” Follow this by, “What do I need to do to get a better overall value?” Follow by, “I trust you, but as Ronald Reagan said, we should trust but verify. What documentation can you provide to prove this?”
‘Offer and counter offer’ is so ‘we versus they’ thinking. We should be past this in a post Wal-Mart era.
The approach I recommend is for the buyer to start with the vision. Who they are, where they are and where are they planning to go. It is then the responsibility of the seller to determine how they can help the buyer achieve their vision. Remember, there is much more than just the price of product in a successful relationship. For example on time delivery reduces safety stock and thus inventory carrying charges. High fill rate reduces out-of-stocks, etc.
In one-shots like buying a house or a car, I’m all for using tricks and posturing. When it’s regular, ongoing business, flat-out honesty coupled with regular checking of competitive offerings makes the most sense.
Most suppliers and retailers have to live with each other. The purchase/sale isn’t like buying a house, which would be a once-in-a-lifetime interaction. Instead of playing games, it’s often a better idea to discuss the facts and learn what would reduce costs and improve margins for all concerned. It’s rare that professional sellers and buyers in retailing are unaware of market pricing, anyway. So a party would have to offer something truly unusual to get an unusual concession. Ultimately it may be best to determine a reasonable fact-based position and then stick to it.
David is correct…everybody on both sides (or multiple sides) of a negotiation has probably gone through extensive training on “the right way” to conduct it. So there’s very little element of success involved in poker-game tactics because your negotiating partner knows the same tricks and there’s a lesser degree of chance anyway. Negotiating partners do need to acknowledge that one side may have more power over the outcome than the other, so it pays for both sides to agree not only on the ultimate goals but also to make their expectations clear as to the outcome. Many negotiators have failed to maximize their side’s results by setting the bar too low, and you can’t raise the bar with your mouth closed.
There’s one inherent problem to making the first offer. It suggests that you know the value of said product. That may not always be true. Sales is an art! David is right; the sales guys have taken all the courses. Plus, there are some tangible areas that need to be considered, delivery, customer service, lifetime value, etc. Salespeople always tend to be more pliable on price when they know there is competition looming.
Whoever makes the first offer loses. Just keep that in mind.
Our experience has been to pay just a little too much.
We always seem to get the offers first, leaving us with the knowledge of what is in the marketplace–and the right to walk away!
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When conducting negotiations, the conventional wisdom has been that it is smart for the retail buyer to let the other side make the first move because concessions might be offered upfront. And guess what? Suppliers too have taken all the courses. Shocking, huh?
However, in my “Coffee Talks with David B” workshops, I teach a different approach to both suppliers and retail buyers. I encourage both parties to begin the process by agreeing on the ultimate objectives and goals; then for both parties to work together with give and take, to make it happen. In other words, let’s make the very best use of our time together and agree to agree; and let’s each determine together what needs to happen for both parties to do business. This works very well for everyone concerned and everyone wins, including the third party we call the consumer. It sounds simple, and I don’t have enough space here to give you all the specific examples, but it works!
The old adage “he who mentions price first loses” is still golden. The most important part of the negotiation is not who starts the negotiation, but who finishes it. By having the other party start first with the price, the opportunity to “finish” will always remain with you. Otherwise, you are in a position of weakness, and cannot place the closing bid.
The way I figure it, 100% of retail revenue comes from products we obtain from our suppliers. This means that our future depends on them as much as theirs depends on us. If our overall goal is to work together for the long haul, we must have a healthy working relationship.
Unless you’re the very biggest of buyers, perhaps the best way to know you’re paying a “fair” price is to ask. “Based on the product, payment terms, delivery, and all other aspects of this order, is this price as good or better than anyone else is paying?” Follow this by, “What do I need to do to get a better overall value?” Follow by, “I trust you, but as Ronald Reagan said, we should trust but verify. What documentation can you provide to prove this?”
‘Offer and counter offer’ is so ‘we versus they’ thinking. We should be past this in a post Wal-Mart era.
The approach I recommend is for the buyer to start with the vision. Who they are, where they are and where are they planning to go. It is then the responsibility of the seller to determine how they can help the buyer achieve their vision. Remember, there is much more than just the price of product in a successful relationship. For example on time delivery reduces safety stock and thus inventory carrying charges. High fill rate reduces out-of-stocks, etc.
In one-shots like buying a house or a car, I’m all for using tricks and posturing. When it’s regular, ongoing business, flat-out honesty coupled with regular checking of competitive offerings makes the most sense.
Most suppliers and retailers have to live with each other. The purchase/sale isn’t like buying a house, which would be a once-in-a-lifetime interaction. Instead of playing games, it’s often a better idea to discuss the facts and learn what would reduce costs and improve margins for all concerned. It’s rare that professional sellers and buyers in retailing are unaware of market pricing, anyway. So a party would have to offer something truly unusual to get an unusual concession. Ultimately it may be best to determine a reasonable fact-based position and then stick to it.
David is correct…everybody on both sides (or multiple sides) of a negotiation has probably gone through extensive training on “the right way” to conduct it. So there’s very little element of success involved in poker-game tactics because your negotiating partner knows the same tricks and there’s a lesser degree of chance anyway. Negotiating partners do need to acknowledge that one side may have more power over the outcome than the other, so it pays for both sides to agree not only on the ultimate goals but also to make their expectations clear as to the outcome. Many negotiators have failed to maximize their side’s results by setting the bar too low, and you can’t raise the bar with your mouth closed.
There’s one inherent problem to making the first offer. It suggests that you know the value of said product. That may not always be true. Sales is an art! David is right; the sales guys have taken all the courses. Plus, there are some tangible areas that need to be considered, delivery, customer service, lifetime value, etc. Salespeople always tend to be more pliable on price when they know there is competition looming.
Whoever makes the first offer loses. Just keep that in mind.
Our experience has been to pay just a little too much.
We always seem to get the offers first, leaving us with the knowledge of what is in the marketplace–and the right to walk away!