“I’m not sure where to start. Traditionally, our side always makes the first offer. I’m comfortable with this. But if we start too high, we might offend them and they might not even respond. If we start too low, we might leave value on the table. What should we do?”
Consider these factors:
1. The Expectation in that Environment
How aggressively have others in similar negotiations started? Are there clear expectations in that particular negotiation environment that drive this decision? Find out.
And if you can’t, consult an expert in the area, like a business valuation expert, lawyer, or human resources or industry consultant. There are almost always traditions and patterns relating to where to start.
A year ago we listed some real estate in Wisconsin for sale. We spent a great deal of time with a local negotiation expert, our real estate agent, evaluating where to start.
Specifically, we analyzed the differences between list and close prices in that market and how long similar properties had taken to sell.
After tentatively picking a list price, we added 10%, figuring we could always reduce it if we didn’t get sufficient traffic.
We ended up with a buyer within the first few months – a short timeframe there. It was good we added in that bit at the end, too.
2. Your End Goal
Your goals should always drive your strategies – and your evaluation of your starting point is no exception.
Years ago I consulted on the sale of a high tech company to a private equity firm. While the private equity firm made the first move on the price, my client made the first move on the major non-financial terms (post-sale employment contract, reporting lines of authority, etc.).
My first question to my client here related to whether and how much he valued his long-term relationship with the buyer. He valued it a lot, as he wanted to run a new technology innovation division at the buyer’s company.
His end goal greatly impacted our first move.
3. Your Most Aggressive Independent Standard/Benchmark
Expectations and goals are crucial. But you still need the data to back them up. So research independent, objective standards and benchmarks like market value, precedent, expert opinions,
profit/cost elements, industry standards, etc.
Then pick the most aggressive one that realistically supports your move and tie your move to it.
Many local real estate agents bring this value to the table, both their own experience and expertise and efficient access to this data. The internet provides access to many of these standards,
4. Room to Move
Finally, your counterpart will likely want to see you move off your starting point, sometimes substantially (assuming this pattern also exists in that environment). Incorporate this psychological
element into your initial move.
At the end of the day, your counterparts will frequently need to feel like they got a fair deal. And this feeling often derives from how far you move relative to your starting point.
JC Penney for years had big sales almost every week. And its prices incorporated this strategy, as they marked up their goods so they could mark them down in the sales. Regular JC Penney shoppers knew this, so they always waited for the sales.
But JC Penney spent a lot on those sales in advertising, signage, etc. And it knew its shoppers recognized its “mark it up to mark it down” strategy.
So JC Penney decided to just eliminate the sales and start and finish with one “marked down” price. What happened to its revenue? Plummeted.
Why? Its shoppers needed to feel like they got a good deal. They needed to be able to tell their friends “I got a great deal on this shirt – 50% off.”
So then what did JC Penney do? Reinstituted big sales. Its revenue shot back up.
Amazon.com is struggling with this issue right now, as described in the recent New York Times article “Amazon is Quietly Eliminating List Prices.”
Latz’s Lesson: Where you start will significantly impact where you end – so consider expectations, goals, standards and room to move.
Published July 27, 2016 negotiationinstitute.com