Know the Value of Your Product to Your Customer
June 18, 1999 The Business Journal
By Marty Latz
June 18, 1999 The Business Journal
Thomas Edison added up the time and killing pace he had put into inventing the “Universal” stock ticker, a device later used by brokerage houses, and decided he was entitled to $5,000 for it. Ultimately, he figured he’d accept $3,000.
So when General Lefferts, the president of the Gold & Stock Telegraph Co., came to negotiate for the stock ticker, Edison was set to name his price. But he couldn’t, Edison said, because he “hadn’t the nerve to name such a large sum.” Instead, Edison asked General Lefferts to make him an offer.
Lefferts offered $40,000. Edison managed to say he thought that was “fair.”
I was reminded of this story recently when a successful homebuilder told me his father-in-law was selling his house for $225,000. When I asked him for the basis underlying this $225,000, he couldn’t tell me. It was, he said, simply what his father-in-law felt it was worth.
In a free market, the price of an invention, a house or any item depends on a variety of factors. Most important, however, is what someone is willing to pay for it. So if you’re selling something – a car, a house, an invention – how do you maximize its value and negotiate the highest possible price for it?
One thing you don’t do is make the first offer without sufficient information to reasonably evaluate its worth to a potential buyer. Edison would have thrown away $35,000 by naming his price first.
In fact, Edison almost made two fundamental mistakes in selling his stock ticker.
First, Edison didn’t appear to adequately prepare for the negotiation. He figured the stock ticker was worth $3,000 to $5,000 based on the effort he put into creating it.
But what about the stock ticker’s worth to General Lefferts, the potential buyer? Or to other potential buyers? Both Edison’s effort and potential buyers’ need for it and evaluation of its value should be researched – before the negotiation starts.
Second, Edison may not have engaged in enough information gathering in the actual negotiation itself. If he had asked, Edison might have found out important information about the stock ticker’s use and value to Lefferts, or learned other critical factors impacting its value. You can’t find out if you don’t ask. Most fail to ask enough questions in negotiations.
But Edison made up for these mistakes by asking Lefferts to make the first offer. The lesson? If unsure about an item’s value, don’t make the first offer.
This is not to suggest one should never make a first offer. If you have sufficient information to evaluate what others will pay, you may decide to do it. Or it might be traditional to make the first offer, like when selling a house. Or the other side might refuse to make the first offer, and you might be forced to if you want a deal. You might also want to position the other side’s mind set and range for concessions by making the first offer.
In these circumstances, prepare and research as much as you can about what others might be willing to pay – before and during the negotiation. If you’re my friend’s father-in-law, find out what others have recently paid for comparable homes in his neighborhood. Then determine your highest reasonable expectations – and add 10 percent. You’ll probably need room to move.
And when you make your offer, pay close attention to your counter party’s verbal and nonverbal reactions. You’ll probably learn important information.
Edison said General Lefferts’ $40,000 offer was “fair.” It may have been. But I bet he could have gotten more by holding out some. If you want to bet, make me an offer. If you have any doubt, though, try to get me to make the first offer. Edison got Lefferts to make the first offer – and came out much better than expected. Smart move.