Here is a conversation that took place a couple of years ago between two executives trying to put a complex deal together on a con call that lasted about a minute:
“Do you have anything to say?”
“No.”
“Do you?”
“No.”
“I was told to call you.”
“I was told to call you.”
“Do you have anything to add?”
“No.”
“You?”
“No.”
“Well then, Goodbye.”
“Goodbye.”
Not very productive, I am sure you would agree. These are experienced, successful people who may have: a) become successful despite themselves, b) forgotten what made them successful or c) have let their egos get in the way now that they are successful.
There are different opinions about who makes the first move. One school of thought is that you always make the other person go first (as both were trying to do above.) If you are discussing price, say, the idea then is that if the other person names a price first, you have an advantage.
If you are negotiating with a supplier, for example, and they name a price for supply of their product or service that is lower than you expected, then you ‘win’. If you are negotiating with a customer and they name a price that is higher than you expected then you win again.
In both cases, there is a windfall profit and there is one winner and one loser. Now ask yourself the question: What is the purpose of deal making? Is it to win or to arrive at a negotiated arrangement that benefits all stakeholders?
Lawyers can’t help it but they are trained to enter pretty much every situation with a view to winning, thereby creating a loser—their opponent. My brother is a criminal-law lawyer in Victoria-Vancouver who represents persons accused of major crime including murder. Clearly, if he loses a case, the implications for his client are dramatic. So legal training to vigorously defend your position makes sense in these types of situations.
I argued several years ago during the NHL lockout that neither Gary Bettman nor Bob Goodenow were the right people to ‘settle’ the matter between the NHL and the PA. Both are highly skilled lawyers. Both have been trained to fight to the ‘death’ to determine a winner, which they did.
The PA is widely acknowledged to have lost. Bob resigned before the ink was even dry on the new player agreement. There have been three PA leaders since then (all fired) and a fourth is on the way… some day if the NHLPA can find someone willing to take on what looks to be a difficult job with too many constituents and too many agendas both public and hidden.
So the NHL ‘won’ but it probably took longer than it should have to conclude the matter because, in part, you had two lawyers trying to ‘settle’ it. Plus, I think the Commissioner should be somewhat above the fray as in Major League Baseball where he or she is charged with ‘looking out for the best interests of the game’.
If instead you accept that your objective is to arrive at a win-win outcome then you should not be afraid to name a price first. You need to have confidence in yourself to do this—and to be confident, you need to understand your industry and your business in depth so you know, more or less, what a fair price is. You also need to settle (before you enter any negotiation) what your BATNA is. This stands for: Best Alternative To a Negotiated Agreement. This protects you in the event that your dance partner is not a fair person and is only looking to win while you lose, i.e., they are looking to take advantage of you. Your BATNA gives you confidence that you can walk away from the table without a deal and that the sun will still come up tomorrow. It is a powerful psychological support in deal making.
Another result that will happily flow from taking the initiative is that you will, over your career, do a lot more deals. I maintain that you are far better off to do ten good deals than one or two ‘perfect’ ones and, in my experience, the ratio of 5:1 or even 10:1 might be about right when you put skilled, balanced negotiators in charge versus people who are just looking to take advantage of the other party and trying to ‘win’ every deal.
[In Priceless: The Myth of Fair Value (and How to Take Advantage of It), William Poundstone also argues that you should be the first to name a price. His rationale is different; it involves the concept of anchoring. By naming (say) a high price for Product A, you create an anchor price (sometimes called a decoy price) in the minds of the persons you are negotiating with. If you then introduce a second product with a much more reasonable price that is close in features to Product A, it makes for an easier sale.
I have used that tactic on occasion. We built a sub-division in Bells Corners (Ottawa) years ago called Robertson Mews. We built four Barry Hobin-designed townhomes that were all brick and way above the market; in fact, there was no market for them at all. But their selling prices (about double what our 2-bedroom condos were selling for) allowed people who bought those to feel like they got a deal. We called it out 'calling card' for the whole development, a strategy we have used in many developments including Dunrobin Village (where we built a 10,000 sq. ft. mall even before we built the surrounding homes so people would feel like 'shopping nearby' was more than just a marketing slogan. We also did the same thing with Scotiabank Place which has become a huge draw for the entire Kanata West Concept Plan Area.)
Our objective though was not to get unreasonably high prices for these developments; just rapid sell through which is probably more important to a developer than anything else.
By the way, the only way to unload those four towns was to trade them off: one went at a very low price to an employee for great work done, one went to a former landowner in (partial) exchange for his land, one went to a supplier as part payment for the roadwork they did and the last was sold in the marketplace for a close-to-cost-recovery price.]
Prices are usually set through some combination of:
• What a willing buyer and seller agree to without coercion or undue asymmetric information.
• Based on what the competition is charging.
• Based on your costs.
• Based on what the market will bear.
When I worked with Cyril Leeder, now President of the Ottawa Senators, I was concerned in one deal (fairly early on in my career and his) that we had quite dramatically underpriced the sale of a piece of property. I felt bad about the situation because, as a small company at that time, each deal was incredibly important not only to the profitability of the company (which would turn out to be the parent company of the Sens) but its survival as well. Cyril told me not to worry—by leaving a chunk of change on the table for the buyer, we would actually get all of that back and more because we had created a loyal customer for our firm. It turns out he was right. Twenty-five years later, that company is our no. 1 customer in our real estate practice.
Prof Bruce
Postscript: Many business people insist they make rational decisions. That they are using their cerebral cortex rather than the more primitive structures deep within the human brain (basal ganglia). In my experience, this is often not accurate (see, for example, the work by Earl K. Miller of MIT, Primitive Brain is ‘Smarter’ than We Think, Science Daily, March 2005).
Emotional, angry, jealous, envious, spiteful, petty, greedy, self-damaging, egoistical decisions are, in fact, all too common. If you make decisions based on these emotions, you will often act against your best interests.
Instead, I would argue for a combination of gut-based decision-making and rational analysis. Humans are uniquely able to conjure up nuance from the vapour of gesture and other non verbal cues. Listening to your gut feelings is not the same as acting out of spite or greed or jealousy or any of the other negative factors I site above.
Postscript 2: The above just scratches the surface of negotiating and pricing. To be more successful at negotiating, it would help you if you learned something about NLP, Neuro Linguistic Programming. Top poker players use NLP all the time: they calibrate their opponents (James Bond played by Daniel Craig in the 2006 film release of Casino Royale does this to Le Chiffre); they do not play their cards, per se, they play their opponents. If you are interested, please read more at: http://www.dramatispersonae.org/NegotiatingSellingNLPNeuroLinguisticProgramming.htm.