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Career - BLOG

Negotiations Should Never Come Down to Price

Filip Hron, Negotiation Consultant, Lecturer and Author & Horacio Falcão, INSEAD Senior Affiliate Professor of Decision Sciences |

Focusing a negotiation on price puts both sides at risk of leaving out other interests that are more important.

So you are ill? Not to worry, because we have great news for you! We happen to know the cheapest doctor in town!

And you plan to go skydiving when you feel better? Fear not, we know someone who can offer you a great deal and pack your parachute for half the standard price…. And they even offer a full money back guarantee!

Our guess is that you are unlikely to take us up on either of our offers, despite them being the cheapest deals. As it turns out, negotiations are not about price. And when they do include a price, then that price is for something in return. And everyone cares about what they get in return, including you.

What if you deal with commodities?

“But what if you are dealing with commodities? That is, two identical things that can be substituted for one another. Surely then the negotiation comes down to just price?” is a question we get in almost every negotiation course.

Perhaps surprisingly, the answer is still “no”. No on two counts! First, when do you truly deal with commodities? Two vendors offering seemingly non-differentiated products such as electricity, drinking water or coal will differ in their capability of catering to your interests. One will have better reliability. One will have more responsive service. One will have more competent support staff. One will have more flexible billing. And so on. Even in the rare case where the specific product or services you are buying are indeed identical, the total value proposition is or at least can still be differentiated.

Second, negotiations are highly complex and dynamic systems. You cannot change one element of the system without sending ripple effects of reactions and consequences through that system. The likelihood and magnitude of these consequences, when they occur, and whom they affect, will vary. The point the negotiator needs to remember is that changing price will change something else in the negotiation. And if you have not fully assessed what those changes are then your demand for a concession (e.g. on price) will effectively introduce risk – unmanaged risk – into the negotiation. And while you can’t assess all the risks, anticipating some is clearly more sound than ignoring all.

Let’s for a moment consider an example close to home for you, your job. Assume you earn a salary – effectively the price for your services to the company – of US$100k per year. Next assume your boss reduces your salary to US$90k, i.e. a 10 percent discount, because he found someone else who is prepared to work for that amount. As a result of the price change what your employer gets from you will certainly change. You may now feel resentful and less motivated. You may feel less responsible for your work. You may focus less attention on quality and performance – things that may be helpful for a long-term career – and instead focus some of your effort on exploring other jobs elsewhere. And if you have less money in your pocket then maybe things in your personal life outside of work become harder or more time consuming, which may affect the energy and time you allocate to your job. If you stay you probably no longer trust your boss so you double your efforts in building your informal network at work so that you can navigate to another department, and another boss. Maybe other people in the company who saw or heard about this negotiation change their perceptions about your boss…and even about you?

What if price is the last topic?

So negotiations do not “come down to price”. Rather price is merely one out of ten, twenty, or even a hundred interests that you have in the transaction. Yes, price is often dealt with last, but not because “negotiations come down to price”. Rather, from our observations, it appears that most people actually fear the price negotiation. They lack the tools and skills for confidently dealing with it. They push price until the last minute, in a futile attempt at avoiding the inevitable. Their negotiations then start to follow the predictable pattern of “Blah blah blah…” which fades into silence, followed by an awkward “Sooooo…”, followed by a pause, followed by “PRICE!”

But the negotiation still never comes down to price. Because the moment we change the price, we instantly change how well another interest is satisfied in the negotiation – even those already discussed and agreed!

In conclusion

The big problem for many negotiators is that they rarely develop a full understanding of their own and the other parties’ interests. Instead negotiators consistently focus myopically on a handful of salient interests, often centred on price. As a result, negotiators often don’t realise how their apparently successful bargaining on price is potentially reducing how well other important interests are met. Ultimately, negotiators who believe price can be negotiated by itself risk both asking for, and saying “yes” to, deals that are potentially worse for them than before the discount.

Let’s be clear. We are not saying that you should not negotiate for a discount. What we are saying is that you can’t change the price you pay without changing what you get in return. Thus, success in negotiation should not be based whether or not you manage to get that discount or concession. Rather success needs to be based on whether the system is in a more valuable state as a result of what you do. This requires you to think through the consequences and reactions, both positive and negative.

Horacio Falcao is a Senior Affiliate Professor Decision Sciences at INSEAD. He is also the programme director of Negotiation Dynamics, part of the school's suite of Executive Development programmes. He is the author of Value Negotiation: How to Finally Get the Win-Win Right.
 

Filip Hron is a consultant and lecturer on negotiation. He is also the author of Negotiation Evolved.

Comments
Anonymous,

Well done Horacio. Negociating in a system is for pricing as well as for mediation; it is communication. When do we start BusinessMediation at INSEAD ?
Regards Karl F. Brandt MBA '74

Dogor,

Mr Hron and Mr Falcao, it is an interesting view what you are presenting here, but during many years I have learn and confirm economics, price is set by the market (supply/demand), where you manipulate slightly the price base on how the negotiation goes.

At the end of the day you are going to pay for a service or product you will receive, the key aspect is to be clear on the expectations and specifications then no second guesses and you pay the adequate price the market is willing to give.

Regards.

Varun Dave,

Most of the negotiation happens for routine mediocre stuff for which market is saturated and there is high competition. Where the value provided by one vendor can be easily matched by others. So, in such cases, client asks for discounts taking in view the larger interests of the vendor or supplier are at stake (eg. huge volumes, association with brand, long term assurance of order inflows etc.). So, the first argument actually takes, maybe unintentionally, a position which is somewhat adversarial to the free market forces and many new & small players will find it difficult to compete in such situation.

However, the argument is perfectly alright in case of high value and high risk stuff like an expensive piece of equipment or security services of a consultant. In such cases, the experience, reliability and capability of that party in question takes highest priority and price comes second.

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