Boardroom, 9 Years Earlier
Carl Ritchie is facing two people across the negotiating table. Margaret Peake is leading the discussions with great determination and combativeness. She raises some very tough demands:
Let’s be clear, Mr. Ritchie. It’s out of the question for me to agree to pay more than $72,000 for this product. Furthermore, I will not accept payment terms of less than 60 days. That’s how we operate and you’ll need to adapt to that; otherwise we might as well call this off right now.
The assistant buyer remains silent, just taking notes. When his boss raises her voice, he seems embarrassed and ill at ease. Carl tries to play his hand to the best of his ability. He offers to reduce the initial $87,000 starting price to $82,000, but says he can go no further, although on an exceptional basis he is prepared to accept her payment terms to seal the deal. This proposal apparently falls well short of Margaret Peake’s expectations. She becomes quite aggressive:
We’re wasting our time, Mr. Ritchie, and I have no time to spare. I’ll give you the opportunity to think it over and to come back with a more reasonable offer. However, I must stress that I shall pay no more than $72,000.
With these words, the buyer leaves the room, heading for an “important” meeting. She asks her assistant to make a note of Ritchie’s new proposals and to make a decision, if appropriate. Carl Ritchie sees some light at the end of the tunnel.
The assistant finally speaks up: “I know she’s not an easy person to deal with, but she’s under constant pressure. Please understand her position, Mr. Ritchie.”
The young man thinks for a moment and then announces, “I think your product suits our needs perfectly. Furthermore, you have presented it with great conviction and talent.”
Carl Ritchie tries to stifle a smile of satisfaction, while awaiting objection to the price. But the assistant says, “I’d add that the price seems to be justified both by the quality of the components and by the standard of your after-sales service.”
This time Carl Ritchie breaks into a grin: At last things are falling into place.
“However,” the assistant continues, “my hands are tied by our exceptionally tight budget. Between you and me, I know that we are allowing for a maximum budget of $75,000, not $72,000, as Mrs. Peake claimed. Anyway, under no circumstances can I go higher than $75,000. What can we do?”
Carl Ritchie again tries to stress the benefits of his proposal, but the assistant interrupts him: “I know and I completely share your view, but I’d never get my boss to accept an expenditure of more than $75,000. Can you suggest a solution?”
Carl hesitates: $75,000 is too low a price, but still much more reasonable than the $72,000 demanded by the buyer. An idea comes to him.
“The problem,” says Carl, “is that you’re comparing my product, which has a 2-year warranty, with competing products that only have a 1-year warranty. That makes a big difference!”
The assistant buyer seems to find this point interesting: “I could use that argument to justify my decision to Mrs. Peake. In your view, what is the monetary value of the second year of your warranty?”
Carl opts to bluff a little to bolster his case: “At least $5,000.”
The assistant looks him straight in the face and replies, “OK, Mr. Ritchie; if you cut your price by $5,000 that gives you $77,000. If you then give just a little bit more, I’ll buy that product from you for $75,000 with just a one-year warranty. I’ll sign up right now.”
Carl Ritchie thinks for a moment and then gets out a purchase order.