During covid the world experienced unparalleled supply chain challenges. Ordering something as simple as a new bathroom door could take six months. At one point the cost of sending a 40-foot container from China to the US was 10X what it had been before covid. As I write this blog in March 2023, the world has more or less returned to normal however some remnants of the covid economy remain in industries where demand is high and production still hasn’t caught up.
A few days ago, I had a meeting with the CEO of a parts supplier to the oil and gas industry. The parts that his company develop are highly specialised and bulky, requiring a lot of raw material and expertise. In a normal market an order lead time of 3 months would be usual however currently even this is a challenge.
The CEO told me that one of his largest clients had recently contacted him with an urgent need for a specific part within 30 days. The timeline was impossible for a new part because it simply couldn’t be manufactured in that time however, there was the possibility of finding an existing part with little or no usage that was available, servicing it and delivering as ‘almost new’. To achieve this was a long shot but also the only realistic option.
The CEO’s team searched every possible avenue for the part and achieved a minor miracle in finding what the client needed. With a jubilant feeling the CEO contacted the client only to be told that the client wanted a discount!
The reality was that there were no other options for the client in this situation, so the CEO was well positioned to play hard ball and not move his price. He was doing the client a favour, surely the client should be grateful rather than expect a discount?!
Well, this depends on the individual involved. Some people would be grateful and recognise that a good deed deserves being rewarded. Others will always want to feel as if they got the best deal irrespective of the circumstances. Neither of these is necessarily right or wrong – it’s often a matter of culture.
One of the benefits of working with the same client regularly is that you learn how they operate. Our behaviour tends to follow patterns, the way we respond to a given stimulus will generally be consistent. If we pay attention to our counterpart’s behaviour, we can anticipate it and plan accordingly.
For example, despite being a negotiation trainer I am not an aggressive negotiator. I prefer to state my price and then spend more time creating value by discussing how to make the partnership successful rather than bartering over price. I try to avoid protracted price negotiations. That is not always possible however, sometimes clients insist on haggling because without a token victory on price, they will feel as if they haven’t done their job. In such situations I will fully load my price (while remaining within my pricing model) so that I have built in room to give my counterpart the “victory” they require. This approach is known as ‘baking in the margin’.
Returning to our CEO, he knew that the client was likely to ask for a discount. While he could have stuck to the price in the knowledge the client had no other options, he wanted to give the client the feeling of a minor victory and offered him half the discount that the client had asked for. The client accepted.
However, the CEO was one step ahead of the client as he had baked in a margin that allowed him to give the full discount. By only giving half, the client actually paid more for the parts than he would have if they had been offered at the original price!
There are a few important points to take on board from this scenario:
1. Your habits precede you. If you build a reputation as someone who always wants a discount, your suppliers will automatically adjust their offers to account for this where possible.
2. Managing the client’s perception is one of the most important elements of deal making. It is possible to give a client a great deal but have an unhappy client because they think they got a bad deal – or as is the case with our CEO, take the value for yourself but make the client think they got the better deal!
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