How to negotiate in business part one: Practical strategies.
Negotiation is a critical skill for business owners. Whether you’re securing a deal with a supplier, discussing terms with a client, or negotiating a contract with a partner, your ability to negotiate effectively can significantly impact your bottom line. Drawing on experience from over 30 years running businesses, plus insights from the books Never Split the Difference, and Negotiation Genius, this article provides practical strategies to help you negotiate prices successfully.
1. Prepare Thoroughly
Understand your Supplier
Find out what makes them tick. Your knowledge of them will help greatly. How valuable are you to them? How much do they need you? Are you a big or small customer? Do they already have enough business and won't care if they lose you? Who are their competitors and how do they feel about them? Do they have an oversupply they need to get rid of? Are they happy to offer good deals to increase their market share?
Malhotra and Bazerman emphasise the importance of preparation in their book Negotiation Genius. They suggest that understanding both your and your counterpart’s interests, alternatives, and the context of the negotiation can significantly enhance your bargaining power.
Practical Tips
Negotiate with the right person. Make sure your negotiation meeting is with the right person. You need to be talking with someone who has the power to make the decision.
Gather all the information. Before entering any negotiation, gather as much information as possible. Understand the market value of the product or service, and know your budget.
Know your Best Alternative. This preparation will give you confidence and provide leverage during discussions.
You can read more about the Best Alternative tactic here
2. Build Rapport and Establish Trust
In Never Split the Difference, Chris Voss highlights the importance of building rapport. He uses the term “tactical empathy” to describe understanding the emotions and perspectives of the other party. Showing genuine interest in the needs and concerns of the other party can build trust and lead to more favourable outcomes. For instance, when negotiating with a supplier, show understanding of their constraints. This can help create solutions that work for both parties without compromising your margins.
Practical Tip
Start your negotiations by showing appreciation for the other party’s time and efforts. Ask open-ended questions to understand their needs and priorities. For instance, instead of asking, “Can you lower the price?”, which is a closed question. Instead, try an open question such as, “What challenges are you facing that affect your pricing?” This approach can reveal valuable information and foster a collaborative atmosphere.
3. Focus on Interests
By understanding what both parties truly value, you can explore creative solutions that satisfy both sides.
Practical Tips
Introduce new customers to your supplier. Introduce your supplier to your network in exchange for a price reduction. You may have connections in new markets your supplier is seeking to enter. This can be very attractive to your supplier.
Pay up front. Instead of payment terms, you may be able to negotiate a discount if you pay a percentage (or all) upfront. Make sure your cash flow will allow for this.
Lock in a time-framed contract. Your supplier may be able to offer a discount if you commit to a time-framed contract. The supplier gets peace of mind knowing they will keep you as a customer and you will reduce your costs.
Buy in bulk. If your cash flow will allow it, ask for discounts if you buy in larger quantities. Keep in mind that you don’t want to sit on a lot of stock for an extended period, so choose inventory you know will move fast.
Consider other terms. Instead of fixating on the price, consider other terms that might be negotiable, such as payment schedules, delivery times, or additional services.
4. Use Anchoring to Your Advantage
In Never Split the Difference, Voss explains the concept of anchoring, where the first number put on the table can significantly influence the negotiation. By setting the initial anchor, you can control the direction of the negotiation.
Practical Tip
When appropriate, be the first to propose a number. Ensure it’s ambitious but reasonable, giving you room to make concessions while achieving a favourable outcome. For instance, if negotiating a contract, start with a price slightly higher than your target to allow for adjustments during discussions.
5. Practice Mirroring
The technique of mirroring involves repeating the last few words the other party said. This simple tactic encourages them to elaborate and can reveal crucial information. Use caution with this tactic. Be careful not to come across as patronising and manipulative. You must be genuine!
Practical Tip
During negotiations, listen carefully and mirror the other party’s statements. If they say, “We can’t go any lower than $5,000,” respond with, “You can’t go any lower than $5,000?” This encourages them to explain their reasoning, potentially uncovering areas where there might be flexibility.
6. Be Willing to Walk Away
In the book Negotiation Genius, Malhotra and Bazerman note the importance of knowing your walk-away point. Recognising when to walk away protects you from agreeing to unfavourable terms out of desperation.
Practical Tips
Price match. Call other suppliers to see if you can get a better deal. Then ask your supplier to match it. If they can't you can change suppliers. But make sure you can lock in the new price for a period so it is not just an introductory offer for a short time. Be mindful that the new supplier relationship may not be as good or reliable as your current supplier. Or it may be an inferior product. Weigh up all the pros and cons.
Define your bottom line before entering negotiations. If the terms do not meet your minimum requirements, be prepared to walk away. This not only protects your interests but also demonstrates to the other party that you are serious and confident in your position.
7. Become the supplier
This tactic is a bit different from the rest as it removes negotiation from the equation and you become your own supplier. You may have heard this referred to as vertical integration. Essentially, if you can’t find a supplier with the relationship and price that works for you, it may be possible to become the supplier.
Practical Example
Some of our clients have done this successfully.
A large wholesale food company became its own packaging supplier, rented a factory, bought directly from the manufacturer and now offers that range of products to all its clients.
A lift renovation company became its own lift protection blanket supplier by manufacturing in-house.
A local ice cream company purchased a small farm, which they use to supply their own dairy, fruits and herbs.
A Blend of Art and Science
Negotiating effectively is a blend of art and science, requiring strategic thinking and emotional intelligence. By preparing thoroughly, building rapport, focusing on interests, using anchoring, practising tactical empathy, and knowing when to walk away, you can enhance your negotiation skills and achieve better outcomes for your business.
