Margin negotiation – arguably, it’s one of the most important ways in which firms can protect their profitability, long-term growth and marketplace survival. Without healthy margins, profitability drops. Without profitability, no business has a future.
Yet, in spite of its importance, most of my clients feel this is one of the key areas where performance falls short. Often, I’m told things like “our people haven’t fully mastered the art of negotiation”. “They give in at the first sign of trouble”. Or “giving discounts is almost the default around here.”
In a competitive marketplace, there is no doubt buyers have increasingly mastered the art of negotiation. They’re in charge, and they know it. Yet, when faced with the prospect of a competitor undercutting their prices, most sellers appear to run for the hills a little too soon.
In my experience, across industries, it appears sellers are making three classic – yet easily avoided – mistakes when faced with demands for price reductions from buyers.
1. They give in too soon
Many sales managers (and even CEOs) tell me they are regularly requested to sign off on “special customer discounts”. When they ask “why”, the standard answer is – because the competitor is doing it. But when they dig deeper, it often turns out the seller didn’t ask – but assumed. Consider this scenario.
Buyer: Is there any way you can come down on price ? We’ve received other bids.
Seller: (They’ve received other bids. Oh, no. They must be cheaper. It’s those ____ from ____ again. Always undercutting our prices, trying to lock us out of our own accounts.) “OK. Let me talk to my manager, and see what I can do.”
You’d be surprised how often this happens. In fact, I know of more than a few buyers who regularly use this as a strategy to obtain discounts from vendors – often, simply hinting at the fact that competitive offers are in play is enough to obtain substantial discounts from vendors – regardless of whether or not those offers are actually lower priced and/or more attractive.
Instead, do this: when faced with a request for lowering your , ask your buyer for specifics. How many other bids ? Were any of them cheaper ? By how much ? What kind of a discount would he be looking for ? What would he/she be willing to give up in exchange ?
2. They do all of the talking, and none of the listening
When faced with price objections, many sellers find themselves compelled to justify why their prices are fair. Understandable, but in negotiations, like the old adage goes “He or she who speaks next loses”.
Instead of giving in to temptation, and going on the offensive, take a moment, step back and ask your buyer to offer up more information. Never underestimate the importance of asking a few great questions.
Do this instead: when faced with objections from a buyer, forego your urge to go on the defensive. Instead, ask a question for clarification, or simply remain silent for a few seconds. Your buyer will feel compelled to offer up further information, and “fill the void” created by your silence.
3. They have no compelling alternative
Walking into the negotiation without a strong BATNA is one of the main reasons margin negotiation goes off the rails. Unless you have a compelling BATNA (Best Alternative To Negotiated Agreement), you’ll have no choice (or perceive you have no choice) but to give in to demands for price concessions.
Due to pressure from quota, weak pipelines, insufficient qualified leads and aggressive market penetration tactics adopted by competitors, most sellers throw in the towel too soon. Having a strong BATNA can broaden your options for action, increase your confidence and send a clear signal to your buyer you will stand by your prices.
Do this first: before entering any margin negotiation, ensure you have a clear BATNA. Try to think of at least 1-2 alternatives to cutting your prices, and identify which counter-concessions you can request from your buyer. Find a compelling (and objective) competitive differentiator, that justifies your higher price. Build more value into your service offering. Offer an alternative, cheaper package with similar impact.
You’d be surprised how many times I’ve heard executives and sales leaders bring up the three margin negotiation mistakes listed above. Yet, taking a few simple steps can mean the difference between consistently giving in on price or obtaining a healthy and profitable margin for your business.