How Do You Apply Golden Rule No. 1 When Things Get Difficult?

When the other party is in a strong position, it can seem unrealistic to start by quoting high.

Three specific examples show us that it is precisely in such situations that Golden Rule No. 1 proves the most useful, provided that you master a few tactics.

Example 1

The purchasing director of a major corporation trading in products for farmers is welcoming the representative of one of his main plant pesticide suppliers. Their task is to negotiate the commercial terms applicable for the forthcoming year: volumes, schedule, and promotions but, above all, the end-of-year discount. Having obtained 10.5% the previous year and anticipating an upturn in business activity, the purchasing director has set himself the objective of using these negotiations to push that discount up to 12%.

The seller starts by presenting a summary of the collaboration between the two corporations over the year just ended. He then unveils a proposal on commercial terms that make the buyer jump. While keeping the level of the discount at 10.5%, he is now proposing to pay that discount in the form of fungicide stocks.

The buyer deems this proposal unacceptable: She says that the annual discounts must be paid by check on January 15, and there is to be no change in that.

The supplier then explains his commercial policy in detail, including the strategic importance of fungicides in the market. He refuses to back down on this issue.

After more than three-quarters of an hour of negotiations, the buyer can barely contain her anger: “I’ve had enough of your pointless arguments! Let’s call a halt for today. Either come back with a serious proposal or I shall have no option but to end all our commercial relations with your company.”

The seller then agrees to adopt a more flexible stance. The discount may be used not only in the form of fungicides but also in the form of other products selected from the supplier’s product line.

The buyer again refuses and the negotiations are very close to breaking down when the seller seems to “crack.” With his head bowed and shoulders hunched, in a weary voice he states that, provided the discount rate stays at 10.5%, in order to maintain their commercial relationship, he is prepared to allow the discount system to keep operating via a check payment. The buyer then tries to obtain a higher rate of discount, but ultimately accepts the seller’s proposal.

Lesson 1: When things get difficult, and you have little room for maneuver on price, it may be a smart move to be very demanding in an area other than price.

That is what this pesticide products seller succeeded in doing by demanding that his customer change the form of the discount in order to be better able to stand his ground on the rate of the discount. Such very tough demands on a nonprice factor gives you access to a “safety valve”: Experience proves that, under these circumstances, the other party will devote his energy to reducing that demand and will simultaneously reduce his own aspirations on pricing. This is an extremely powerful tactic, but one to be used with caution. It can be effective, provided that it does not go beyond certain limits by making excessive demands with regard to volume, payment terms, delivery deadlines, and so on. Of course, there is no question of claiming unreasonable advantages in order to then accumulate concessions across the board vis-à-vis your counterpart.

The full tender should encompass “areas of inflexibility” on which almost no concessions are possible due to the nonexistent gap between the level of the opening bid and the target, or even between the target and the “bottom line.” These areas of inflexibility make your offer more credible: Your counterpart needs to feel that the proposal made is a serious one and that there is no need to verify or renegotiate each word of the contract in order to achieve acceptable terms.

As stated under Golden Rule No. 1, the tender must also include “areas of flexibility” on which concessions will be possible without relinquishing your objectives. Thus the approach to tabling an offer leads you to determine

• all items subject to negotiation,
• a clear definition of your priorities,
• a precise objective to be achieved for each element of your offer,
• bottom lines clearly indicating areas that are “off limits,”
• opening bids that free up room for negotiation on certain aspects of the offer.

Example 2

The managing director of a small industrial firm wants to invest in some new equipment that is liable to depreciate rapidly. As the firm does not have the necessary funds at its disposal, he decides to call on a bank to fund the investment. He contacts two banks in order to make the situation competitive and to obtain the best possible terms.

The first bank that he contacts offers a 5-year loan at a rate of 5.5%. The second institution takes a different approach.

Customer: I’ve now given you all the information about this deal. What are your terms for a 5-year loan?

Banker: Before we do anything else, let’s just check that a loan is the best solution for you. What you want is to protect your liquidity and to fully finance the investment, while not loading too many liabilities onto your balance sheet, is that right?

Customer: Yes, that’s right.

Banker: I would advise you to choose a different option from that recommended by the other bank: I’m talking about leasing. (He then describes the benefits of such a financial arrangement.)

Customer: What rate are you offering for such a leasing arrangement?

Banker: When it comes to leasing, we don’t talk about rates, but about monthly repayments.

Customer: So let’s compare the monthly payments.

Banker: Here again, I have an alternative solution. Rather than make fixed monthly payments, I suggest that you opt for variable repayments to suit the seasonal nature of your company’s products; that would be perfect, wouldn’t it?

Customer: Indeed, but I can’t compare the prices. So, just assuming that the monthly payments were fixed, how much would it come to per month?

Banker: I’ll quote you the figures, but they will not be meaningful, because my lease extends over 4 years rather than 5 and includes the cost of insuring the equipment, together with special benefits in the event the equipment is sold during the repayment period.

The businessman senses that the second offer might work out to be slightly more expensive but is unable to determine this with certainty. He opts to sign with the second banker, whose solution seems to meet his needs.

Lesson 2: Whenever feasible, you need to present the other party with an offer that makes it impossible to compare with other proposals.

Thus you can offer a special feature, a different warranty period, or you can simply formulate the commercial terms differently.

This tactic comes with two crucial benefits:

• It allows the negotiator to justify his refusal to adjust their offer: to match his lowest-priced competitor, in the case of a seller, or to match the amount agreed on for an apparently similar deal, in the case of a purchaser.
• It can also help each negotiator justify his decision within his own organization.

Example 3

One of the divisions of a leading industrial group used to manufacture 2-liter metal cans to hold motor oil. For several years the marketing departments of the oil companies had been encouraging buyers to purchase stock in plastic containers, which come in a greater range of shapes and colors than the traditional tinplate packaging. So the market for the latter had shrunk and a few specialist manufacturers were waging a merciless price war in order to shift their output.

The division’s main customer was a multinational group that “consumed” 15 million metal cans per year, at an average price of $0.40. The previous year that customer had opted to make the division its sole supplier, from whom it would buy all its tinplate packaging.

When it was time to negotiate price adjustments for the upcoming year, the divisional director opted for a “hard-line” strategy—a sharp price increase—gambling that their competitors would adopt the same policy in order to avoid a price war. He visited the offices of the oil company, accompanied by his sales manager, resolved to announce an 8% price increase in the hope of achieving 6% after negotiations. He was convinced that he would retain his company’s status as that customer’s sole supplier. There was a lot at stake: not only his division’s profitability but also dozens of jobs directly connected to the outcome of the negotiations.

When they arrived, the divisional director and sales manager were met by the purchasing director of the oil company and by his counterpart from their “lubricants” subsidiary and his assistant. The five men took their seats in a large meeting room, around an oval mahogany table.

While the divisional director was getting ready to speak, the assistant purchasing director placed a small cardboard box on the table, from which he produced a dirty, greasy oilcan. He placed the oilcan on the table and, without saying a word, rotated the can so that the divisional director and his sales manager could see the defective weld on the packaging seal, which was responsible for the leak. Still without a word, he placed two more dirty, greasy cans suffering from the same welding defect on the table.

It was the purchasing director who spoke first, calmly and with great firmness: “Gentlemen,” he said, “here you see the quality that we have been receiving from your factories. I hope that you have come with some convincing explanations, if you want to have a chance of featuring among our can suppliers next year, that is.”

The sales manager thought the floor would give way beneath him. He was secretly praying that his divisional director would have the sense to give up on achieving an unrealistic price increase, which might lead to the worst possible outcome, bearing in mind what had just happened.

Against all expectations, the divisional director stood up, picked up the three greasy cans and put them at his feet, under the table. He briefly promised to have an expert assessment carried out on the packaging, while stressing the importance that the group attached to quality and their achievements in this field. Then, almost without pause, he moved on to announce the price increase: “and in view of the economic climate, an 8% price increase seems to us to be both fair and unavoidable.”

The discussions turned aggressive, almost violent. The session ended with the parties agreeing to disagree. However, over the following days, the sales manager and the assistant buyer spoke over the phone to try to prepare the ground for a compromise. The buyer and the divisional director ultimately ended up reaching an agreement on terms that effectively left the division as sole supplier, with prices rising by 6% (the only concession made by the divisional director was the precise schedule for the application of the increase).

When the sales manager asked him for an explanation, the divisional director explained, “In negotiations of that sort, everyone is trying to set the bar very high so as to create room for maneuver. Yet everyone also knows that the other party is going to try to set the bar high. So it makes sense for the buyer to try to intimidate the seller in order to make him lower the bar a bit.”

He added, “I suspected that something would happen: an offer from a competitor, a quality problem. If you allow yourself to be affected by that and reduce your demands, you’ve lost before you start. Whatever happens, you need to quote the terms that you intended.”

Lesson 3: Expect your counterpart to try to intimidate you in order to get you to reduce your demands.

For example, from the outset a buyer may adopt a very demanding approach (“I can tell you straight off that I won’t accept a discount of less than 15%”). Under no circumstances must you start off by reducing your demands: Always quote the price that you intended.

In Conclusion

To start negotiating with an offer that is completely acceptable to the other party is to commit a serious error. If you are then pressured over an aspect of that offer, either you will frustrate your counterpart through your refusal to compromise or you will have to back down, and the deal will be sealed at a price below the optimum level achievable, even though your initial offer was perfectly acceptable to the other party.

Being realistic, therefore, involves demanding the impossible: opening negotiations with an offer with certain aspects that you know will arouse opposition from the other party—and that will lead to negotiations.