Golden Rule No. 1: Have the Courage to Set a High Initial Demand

It is not a case of transferring the techniques of a carpet salesman in an Oriental bazaar to the business world, but of creating some negotiating space, allowing yourself enough room for maneuver to avoid ending up with your “back against the wall.”

Quite clearly, “setting the bar high” comes with a risk, which must be calibrated. Research carried out at Harvard University reveals that the ability to take certain risks is a quality shared by the best negotiators. Other studies, particularly those carried out at the University of Southern California, confirm that a negotiator’s effectiveness is largely connected to the level of his initial demand: It should be as high as possible, commensurate with market conditions, and credible.

Determine the Level of Your Opening Bid

It is important to choose the negotiating margins within which you are going to operate by submitting an offer that is deliberately distinct (on certain points) from the actual, real objectives. For the seller, the critical point consists of defining the price to quote: To announce an unnecessarily low price will clearly undermine your profitability, while gambling on an excessively high price might lose you the opportunity immediately.

Let us suppose for a moment that all the other elements of your offer are quoted at your “target” level, as defined in phase 3 (see chapter 4). The price quoted initially can then be defined thanks to two “thresholds”:

1. The competitiveness threshold. We are talking here about the threshold beyond which the supplier would be eliminated from the negotiating process. Depending on probable offers from competitors, the customer’s negotiating methods, and the relationship established, you need to gamble and accept a certain degree of risk.
2. The credibility threshold. This threshold falls into place, depending on two criteria. First, you need to calculate the percentage price reduction that can be envisaged during the negotiating process but that remains reasonable and credible to the customer. This percentage may vary from 1% to 30%, depending on the sector, the country, and the customer. Quite clearly, your knowledge and awareness are crucial to the success of the negotiations. Can you imagine a seller offering a 30% discount to a Swiss industrialist during discussions, or, on the other hand, limiting his price adjustment to 1.5% when dealing with a negotiator from the Middle East? Thus the credibility threshold is an essential safeguard. It is calculated as follows:

credibility threshold = minimum price / (1 − acceptable percentage reduction).

For example, if the price set as your bottom line (phase 4; see chapter 4) is $80 and the acceptable percentage reduction is 20%, then the “credibility threshold” is $100. By setting your first offer at $99, you know that under no circumstances will you have to justify a reduction of more than 20%.

The credibility threshold is also—and above all—evaluated according to the seller’s ability to deploy credible arguments to justify her opening bid. Thus preparation of your initial demands must go hand in hand with preparation of the arguments that will allow you to justify them.

Once you have calculated the “credibility threshold” and the “competitiveness threshold,” your opening bid must be set just below the lower of those two thresholds.

Suppose, for example, that you have a target price of $8.70 and a bottom line of $8.00, with a credibility threshold of $10.00 and a competitiveness threshold of $9.30. It will be in your interest to pitch your first offer at about $9.25. For the buyer, the approach is slightly different. Any target price quoted must actually create maximum tension on the supplier’s side. So you need to go beyond your target and her bottom line, while doing so to an extent that is sufficiently reasonable to allow a compromise to be reached later on.