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Do the Unthinkable by jigordon
May 20, 2008, 9:32 am
Filed under: audit, negotiation, pricing, risk

In the movie version of negotiation, Party A makes an offer, Party B makes a counter offer (rejecting the first offer). The first set of offers are the extremes, say for example, really low for Party A and really high for Party B. Then, through a series of back and forth discussions, each party slowly moves towards the other in measured, predictable steps. Finally, there’s some huge heroic leap made by one party to accept the other’s “final offer” to successfully conclude the negotiation – both parties smiling as they walk away from the table, arms around each other, glad that they were able to come to terms.

The reality is a little more tricky – and a lot less “clean” in terms of where offers come in relative to what their opponent has proposed. It’s hard work to predict the future, even if you’ve done all of the Information Gathering and Strategic Thinking in the world. And when you have a feeling that you’re really far apart from the start, it can even be worse. So, I’m going to suggest a tactic that you may have considered but never used – one designed to help bridge the initial gap to get both sides thinking about “real” numbers (while I’m a huge fan of negotiating the language of a contract and spend a lot of time doing it, this is really a tactic regarding money).

Let’s set up the problem. First, we have two parties; Buyer and Seller. Buyer wants to potentially purchase a set quantity of licenses. Seller, of course, wants to sell Buyer a much larger quantity of licenses. Thus, there will be two numbers that factor into how much the Buyer pays the Seller: the number of licenses and the cost per license. Buyer believes that they need X quantity of product at Y cost per item. Seller thinks it’s M quantity of product at N cost per item.

To get the negotiation started, Buyer could do one of two things: make an initial offer, or request the Seller to make an initial offer. Most negotiators suggest that you always let the other side go first. In this case, it might be better for the Buyer to go first based on the strategy I’m going to propose. So the Buyer needs to come up with the first offer. Lowballing (or coming up with a ridiculously low offer) isn’t the goal in this strategy. Rather, come up with a “reasonable” offer – one that is based on logic and some consideration to the other party’s beliefs. In our problem, this would mean calculating a dollar value based, perhaps, upon the X quantity but somewhere closer to the N cost. In other words, you already concede a point. (This, by the way, would initial have the appearance of a win-win strategy. In fact, it has the side-effect of testing to see if the other side is going to play that way, too.) So the Buyer’s first offer is $P. (X times N).

$P isn’t a great first offer from the Seller’s perspective. In this particular example, the quantity numbers are where the “real” action is – so the Seller is most likely going to respond with a calculated offer based on the M quantity (regardless of the cost per item). And, in fact, the Seller even thinks that the cost per item is probably too low, too, as it’s based on some discounted amount, not the current retail cost of the item. So from the Seller’s perspective, they have a few choices: 1. They can accept the offer. 2. They can counter with a new calculation by using M times N (their preferred numbers). 3. They can counter some other combination of quantity/cost with numbers between X – M and Y – N.

Or they can try to gain leverage and choose option 4: They can try to highball (take their preferred quantity M times the retail cost). This would create their highest calculable dollar amount and is probably an order of magnitude (add a zero) higher than the M times N number. Remember when I was talking about win-win? If the Seller believes that the Buyer’s first offer was completely unreasonable, there’s a good likelihood that they’re going to respond in kind – and this is the flip-side of that coin. If, however, the Seller believes that the Buyer’s first offer was made in good faith, they’ll mostly likely start with M times N.

So as a negotiator who is properly doing Strategic Thinking, you’re hoping that M times N is the Seller’s highest choice. But what if they come back with M times 10N? How do you respond? You do the unthinkable and LOWER your next offer.

Yeah, you heard me. LOWER it. Your next offer will be X times Y (your preferred numbers from both categories).

But wait! you say. Isn’t that being unethical? uncooperative? unproductive?

No. It’s not any of those things. As I said before, you tried acting in a win-win model. You calculated your price based on part of your preferred position and part of your opponents (based on a reasonable estimation of what that position would be). You presented an offer that, while lower than what the other side would want, was reasonably calculated. But the response you got back was not. Thus, to reset expectations and bust through the unreasonable highball offer, you have to lower your current offer to your best-case position.

The likely result is that the other side will panic. It’s quite rare for a second offer to go DOWN. They’ll accuse you of being uncooperative and unreasonable. They might even say that you’re not operating in good faith (ignore the comment). But a highball offer is a ploy, just as much as your actions are tactics (for a discussion on ploys versus tactics, see The VMO-Blog). You simply need a way to get to the real numbers and doing the unthinkable will help.


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2 Comments so far
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Hi. I am a long time reader. I wanted to say that I like your blog and the layout.

Peter Quinn

Comment by Peter Quinn

Jeff:

In this situation, I’ve come close to this approach, but not quite there.

Instead of responding with a lower offer, I tell them that they need to try again. Then I take them through how we came to our offer and how reasonable a first offer it was. Then I take them through what their calculation must have been, leaving the implication that their first counter is not even remotely close. I say something along the lines of having to bring real offers to the table to elicit counter-offers, then take them through the math that you set out above as to what my logical response ought to be — that if they are going to bring ridiculous offers to the table, I should lower mine until they get reasonable.

Then, if the person who came up with the number is not the negotiator, I usually try to drive a wedge between the negotiator and the decision-maker. I may do this my sugggesting how stupid the negotiator will look having to take a lower offer back to the decision-maker. I may also suggest that the negotiator position as having flown a test baloon with their champion inside our organization and that the private advice was that it wouldn’t fly. This gives the negotiator some leverage to get a better first offer.

The logic also applies to non-price terms. I’ve used it on indemnity provisions, for example.

Chris

Comment by chrislemens




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