In Japan we don’t have the custom of haggling when we go to shop. The price is the price is the price, in the consumer world and if you don’t like it, don’t buy it. In the B2B world though there is often a price negotiation. This can be related to volumes being purchased for tangible goods or it could be for services as well. Tangible products are somehow psychologically easier to price defend than intangibles like service provision. The item is right there in front of you, you can inspect it, weigh it, feel it. Services are rather a mystery when it comes to pricing.
I was coaching a sales team recently for a service offering and this service had a time bound element to it. Time bound can often drive the price up in the case of tangible goods, because it is the last item in the store or in inventory. In this instance, the opposite was the case. They were offering a discount to move the sale forward.
Whenever I hear salespeople are discounting their offer, the bristles stand up on the back of my neck. I don’t like to hear this type of talk. The service has a value and a price has been attached to it and that is what they should be selling. Untrained salespeople however, are very quick to start conditioning buyers to expect a discount by dropping the price immediately. I don’t like that unforced error type of sales behaviour either.
In this case the service price was four hundred thousand yen as the list price and they started their client contact with an offer of two hundred and fifty thousand yen. What a massive mistake. When the price gets dropped so dramatically by 37.5%, without any pushback on the four hundred thousand by the potential buyer, there is no floor established. Now the buyer is lost. They have no idea what this service is worth and the immediate inclination is to be like a shark tasting blood in the water and go for bigger bites out of the pricing.
If the seller can drop the price so quickly, then maybe they can drop it even further, so ridiculous counter offers start to spring up. This seller must be desperate is the idea and now let’s find out just how desperate they are, by driving the price right down to oblivion. Two hundred and fifty thousand yen becomes the ceiling and the buyer explores where the floor is and that means starting super low on the pricing and seeing how much they have to come up. In this example, if it was me on the end of that offer, I would say, “this is not in my budget, so there is no allocation for this service. The best I can do is ninety thousand”. There is no pressure on me and I can nominate any crazy number I like. Now the discount is at 77.5%. The reason I am doing this is because I have no clear idea of the value of the service because the salesperson is only talking price to me and telling me if I take the offer by “x” date, I can get it at this discount. Am I in a hurry – no. Do I care when the cut-off date is - no.
The better approach would be to sell the service at four hundred thousand yen and explain why that number is justified by detailing the value behind it. I wouldn’t even mention the cut-off date, because that is pressure on me and not for the buyer. You could argue that this effort has been previously made and hasn’t produced enough sales, so there is a need for a desperate last push to get some money in before the cut off date. The reason I don’t like this approach is we are training the buyer to slam us with demands for discounts, every time we contact them. When we call next time, all they remember is we are the salesperson with no floor on their pricing and we can push the seller around hard and get a big discount. We would be better to let the money walk away and allow the cut off date to pass. We should try again at another time, when there isn’t any time pressure being applied to us.
If we were going to discount, then where possible it should be in exchange for a volume purchase. The discount increments should be small and the floor price should be set high. We need our BATNA – best alternative to a negotiated agreement. In other words, we fix the minimum price we will sell at and we walk away from the buyer, rather than the other way around. In this example, I would have recommended a discount of only 12.5% which is not insignificant and set the price at three hundred and fifty thousand, only if the buyer pushed back on the price. I wouldn’t have mentioned any deadlines, because that information is giving the buyer more power relative to the seller,
If they still pushed on price after we offered the discount, then the next drop would be ten thousand yen, so the offer is now at three hundred and forty thousand yen. The bottom would be set at three hundred and thirty thousand yen, a 17.5% discount and that would be the end of the discussion. I do this to inform this is a hard floor and I will walk away, if you don’t take this offer, after you have beaten the hell out of me on price. The buyer has to have a sense of a win here and for that to happen, we have to tell them the floor, so that they can calculate the difference.
If we are dealing with a “sports negotiator”, that is someone who wants to make sport of us and use this negotiation to inflate their ego and sense of self-importance and power, then we should stop immediately and end the process. I was negotiating with a businessman here on some training and in the end we were twenty thousand yen apart and I walked away. I realised this was a game for him and there was no point in my playing it. If I hadn’t successfully communicated the value at that price point, then twenty thousand yet wasn’t going to do it. Even if I had accepted his lower price, I knew that wouldn’t be the end of it, because he would come back later for a bigger bite. I had to establish a floor and be prepared to walk away and find another buyer, if he didn’t accept it. If we ever deal again, then he knows I will defend my pricing and he cannot push me around.
Discounting is the sign of a weak value presentation to the buyer and telling them that you are under time pressure is the stupidest negotiating idea ever. Walk away and work on your value presentation skills. Package up your offer to make it more valuable to the buyer and don’t discount.
