Truth 40. When negotiations shift from relational to highly transactional

One of my clients, Sam, came to me recently for advice. Sam is the CEO of a small, profitable company that makes highly specialized parts. His key customer is a very large company—which I will call Big Company. For over a decade, Sam has been the supplier for Big Company and enjoyed what he described as a highly personal relationship with the company’s key representatives. Sam was stunned when his long-term customer announced that all future business contracts would be put up for online competitive bid. Sam learned that Big Company had its own website on which wanna-be suppliers would submit bids. Big Company essentially uses this site to get bidders to compete with one another on price. A bidding war occurs when there is one buyer (or seller) and there are multiple sellers (or buyers). For example: When Costco (a really big company) wants to find a source for wine, toys, or toilet paper suppliers, it sets up competition among the wanna-be suppliers to lower their prices—often dramatically—in the hopes of being the supplier of choice.

Sam is not alone. Several of my clients—even large ones—have had the unsettling experience of customers and clients attempting to commoditize their products or services. A commodity is a good or service where there are no special, distinguishing characteristics among individual units of the good or service. Big negotiation deals, like Sam’s, or negotiations such as selling a company or choosing a supplier for all of Europe are normally done in one of two ways: negotiating exclusively with one or only a few bidders (like Sam was used to doing in a face-to-face context) or by running an auction and inviting as many interested parties as possible to bid competitively. Nothing makes suppliers more furious and scared than their products being commoditized because then it becomes what I call a bleeding war: Whichever supplier can slash prices to the lowest level will gain the business. And, then, this same process is repeated again when the contract—often very short—expires.

So, is there anything that Sam’s company can do once Sam realizes he is being dragged into a bidding war? There are six key things to keep in mind.

First and foremost: Know your best alternative to a negotiated agreement (BATNA) and don’t agree to anything less than your bottom line. By technical definition, you should be willing to walk away from the table rather than accept something that is worse than your BATNA. Often times, I see my clients fall into “BATNA drift”: They lose sight of the BATNA and get pulled into the current situation. Practically, this means negotiators should stop rationalizing. I have worked with several clients who have “taken one for the team,” which is another way of saying that they reached a really poor deal in the hope that their sacrifice would be remembered and rewarded at some later point in time. This would make sense if it were in writing, but it is only in the heads of the rationalizing wanna-bes. Unfortunately, big companies don’t have such memories, and even if they did, they are not there to pay it back.

Second, if at all possible, submit bids that are not single issue. By definition, negotiations that involve only a single issue—such as price—are purely win–lose or zero-sum games. There is no possibility for win–win.

Third, make multiple bids with different price points that come with different terms and conditions. By submitting multiple price points and connecting them to particular services and features of your product, you implicitly signal how your product is not simply a commodity. Even more importantly, the likelihood of discovering a win–win value-added trade-off increases exponentially.

Fourth, if possible, ask for feedback on initial multi-item bids and then study the feedback and use the insights to fashion a revised bid. If possible, find out whether there is a real-time conversation stream available; if not, suggest it. Indeed, when conversation and social-emotional components are included in e-commerce negotiations, negotiations go more smoothly.

Fifth, find out what the company’s switching costs are. Big companies often threaten to drop current suppliers unless the current supplier matches or beats what happens to be the most recent competitor’s ridiculously low price—and this creates the bleeding war. However, switching is not easy. Rather, it is often a threat that big companies don’t want to face. How do we know this? Consider what happened to Brady, a senior leader at a major big data analytics firm. Brady was bitterly disappointed when a key healthcare customer chose to go with a lower-cost provider. However, in less than six months, the customer came back, after realizing the hard way that its data management problems were not being solved...and in fact were being exacerbated by the low-cost provider. The competitor’s data analysis did not provide for the nuances unique to the customer’s organization. Brady’s only regret is failing to realize his key point of differentiation earlier!

Finally, don’t panic. Contrary to popular wisdom that auctions mean that sellers get better prices, an exhaustive analysis of 400 companies sold by either auction or classic negotiation reveals that the sale prices were largely the same.³⁵ Why? Well, some companies just don’t put themselves out there, fearing that they may overpay or sell out. And, as noted, face-to-face negotiations often bring in more issues and create more win–win deals. Bottom line: Even big companies should consider engaging in face-to-face negotiations.