Friday, August 21, 2009

Negotiating Price

In the old Popeye cartoons, Wimpy never had enough money for a hamburger. He would offer to pay for today's hamburger in the future. Wimpy was trying to negotiate the terms of a fixed price sale.

It seems ridiculous when it occurs in a cartoon. It should seem just as ridiculous when your customers similarly attempt to negotiate with you. When your customer compares your price to a competitor's, is the customer comparing apples to apples or a filet mignon from a nice restaurant with the taco stand? After all, both are using beef. What's the difference?

When your customer wants to throw in something for free or only pay for your hard costs, is this like a consumer asking the hair stylist to add highlights for free? After all, the direct cost of the coloring isn't much. How much of a mark up does the stylist need?

When you customer wants you to cut your price, to "work with you," is this like a consumer asking the DVD store employee to cut the price of a new release by 60%?

If you think these examples are silly when reading them, try watching this video...

Once you offer a price, you simply cannot discount it. For years, Comfortech Idol was held as a competition between salespeople during the HVAC Comfortech Conference. Sales trainers role played as customers and a panel of judges evaluated each salesperson's performance (Greer was in the role of Simon, of course). During one Comfortech Idol, sales trainer Jim Hinshaw, played the role of customer.

"Come on," said Jim, "if you can just come down another $500, I think we can do a deal."

"Done," sighed the salesperson with relief that he finally closed Jim while a hundred of his peers looked on.

Jim rubbed his chin. "Well, you know, if you can find $500 that easily, I'll be you can find another $250..."

Once the salesperson compromised, he acknowledged the price he quoted wasn't the real price. Now, the only question left was how far he would compromise.

How To Discount

In truth, there will be times you will want to negotiate. You will willingly give something up to take the job. Yet, how do you do that while maintaining your credibility?

1. Discount by Addition - Don't change the price, but maybe you do throw in something extra.

2. Discount by Substitution - Substitute a less expensive product, procedure, or materials.

3. Discount by Subtraction - Cut the price, but take something away from the job to justify the cut.

4. Discount by Consideration - Cut the price, but require the customer to do something for you in return (like leave the yard sign up for six months).

5. Discount by Permission - Call someone at the office to get special permission to offer the job at a lower price (note: this won't work for the owner).

These are rational ways to discount. They allow you room to move without compromising your integrity. What if you discount without a rational approach? I'm confronting that very issue from the buyer's side today. Two companies want to print a book for me. The first is a specialist in book production. The company prints lots of books, is professional, and will do a good job.

The second really wants the business. I haven't met the printer, but everyone else in the company has and really likes the guy. He's local, which is a huge advantage. All things being equal, I'd give the job to the local guy everyone likes. But all things aren't equal. His initial price was 60% higher than the first company. When presented with the first company's quote, he said he'd match it.

While the second guy's done good work for us, his expertise isn't book production. Aside from quality concerns, I wonder if I'll get reprints for the same price after his other, more profitable business picks up. I wonder if I'll get prompt turnaround.

Here's the hole the second printer dug for himself. First, I'm nervous that he discounted 60% for this job and wonder if he'll cut corners. Or maybe, I wonder where he'll cut corners.

Next, I wonder if I've overpaid for other work he's performed. After all, he just lowered his price 60%. If he'll compromise 60% on this job, maybe he'll do it on every job. While meeting the first guy's bid may or may not win the job for the second guy, it has made all of his other pricing suspect.

Holding Your Price

Most of the time, you will simply want to hold your price and maintain your integrity. Sometimes this will cost you business. It's wise to continually inform your your customer base about your quality differences. Below is the header of an email marketing piece used by the Service Roundtable(R) to highlight the vast differences in similar seeming services that result in price variation. While you shouldn't go overboard with this message, it is good to remind your customers every now and then that you truly get what you pay for.

Another approach is shown below. This is another Service Roundtable example that was developed at the suggestion of Bobby Ring from Meyer & Depew for commercial service. The strategy here is to compare your service with other industries, such as copier service and forklift service. In light of what other quality service businesses from other industry's charge, your service is probably a good value.

When You Don't Give Fixed Prices

Flat rate pricing makes it easier to hold the line on prices. After all, you and the customer agree to a set price before work begins. Since you will hold that price even if the job runs long, you have every right to expect the homeowner to similarly hold up his end by paying you in full.

If you charge time and materials, it's mushy to the homeowner. There's no commitment on your part, which some homeowners interpret as a call for negotiation when the final bill comes due.

(c) 2009 Matt Michel

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