8 Pointers for Setting a Price in Negotiations
Setting a negotiation price is critical for entrepreneurs. After all, this one factor in negotiations can drive the profit in a deal.
Here are eight tips for successfully negotiating the price of your product or service:
1. Don’t go below your reservation price.
The reservation price is the price at which the seller becomes indifferent about doing the deal.
Perhaps it’s the break-even price or the point when the profit margin shrinks to a an undesirable level. Determine your reservation price. Never go below it.
2. Focus on value.
Direct your discussion with the customer to be on the value delivered, rather than the price.
If the conversation is only about price, the low bid will win. Instead, point out the things that make your offering different and better. Focus on the value of those benefits. Make the discussion about why your product or service is worth paying a premium.
3. Don’t negotiate with yourself.
You’ve proposed a price. Then you're asked, "Can you do better?"
Let's say you respond with a price 10 percent lower. If you’re the only one putting offers on the table, you’re negotiating with with yourself.
Instead, respond by saying, "What would it take to close the deal right now?" That way you’re asking for a counter offer. This sets a floor for the negotiation.
Respond to that counter by saying, "I can’t do that, but I can meet you part of the way." Instead of just lowering your price and profit margin, you’re meeting the customer in the space between your ask and his or her offer.
4. Justify the price.
If you simply propose a number, it might seem arbitrary. And sure, you could offer a lower price and you may have to do so. But people are much more comfortable with a price when there's a rationale.
You might say, "Look: You want a fair price. I know you can understand that I need a fair profit. This price is fair for both of us."
Additionally, you can point to the benefits your profit provides and explain that they justify your asking price.
5. Claw back money in other areas.
In many industries, customers make a buying decision on the purchase price, but don’t pay much attention to other associated costs. Airlines have learned to offer low-ticket prices because that’s how cost-conscious consumers make their buying decisions.
Airlines then claw back money by charging for checked bags, seat upgrades, early-boarding privileges, entrance to their club, cancelation and change fees and snacks. Yes, it can be annoying to the customer but this works for the airlines. If it didn’t, airlines would probably change their policies.
Think about other ways to extract value from a deal, if you kept your price low.
6. Reduce the cost of doing business.
Don’t let a maniacal focus on the price blind you to other ways of creating value.
We worked with a company that delivered its product on pallets. Its customers then had to pay to dispose of the pallets. When the company changed its practices to retrieve the pallets free of charge, the customers thereby saved on disposal costs. Our client increased its profit by reusing the pallets. It was a win-win.
7. Discount the next purchase.
If an oil change costs $29.99, the mechanic shop can reduce the perceived price to $19.99 by offering a $10 discount coupon for the next oil change.
When it’s time for the next oil change, the customer will calculate that with the coupon, the cost will be only $19.99. Thus the mechanic appears to have offered a $10 discount for both oil changes.
8. Figure in the expiration date.
If prepaid coupons are offered with an expiration date, many will go unused. While the coupon may offer a $10 discount, on average it won’t cost the merchant $10.