How to Negotiate the Best Deal for Your Business
Your business offers a great product or service. Your business also needs to buy services and products. You must get the best deal for your business in both cases. You can do this by:
- Only dealing with clients who fit your target market (there is no point in negotiating with people who don’t need or can’t afford your product or service);
- Choosing suppliers who are the right fit for your business; and
- Negotiating the best deal with both clients and suppliers.
The best deal is not necessarily the cheapest one, but the one that offers you the best value. Whether you are buying or selling, pricing is very important, but you must consider other things as well, when striking a deal.
Negotiation is not haggling. Haggling is where you are trying to reach an agreement solely based on price. Typically, this is where someone is buying a standard product (e.g. food, a piece of furniture etc) and both sides are haggling to get the best price. Haggling is more suited to the street markets than the boardroom.
In this brief guide, you will discover how to negotiate the best deal for your business, whether you are buying or selling. We will cover:
- What is Negotiation?
- A Successful Outcome: Start with the End in Mind;
- Preparing for the Meeting;
- Opening Positions;
- Making Proposals;
- Closing the Deal;
- The Final Agreement.
Reading time: 5 minutes
What is Negotiation?
Negotiation is a process involving two or more individuals or companies who are looking to come to a mutually beneficial agreement.
Negotiation has to involve at least two variables. In business, money is almost always one of these variables. The other factor or factors might include things such as:
- Time (when will the products be delivered or the project completed);
- Features of the product or service (e.g. basic, standard or premium);
- Who will do the work (senior partner, partner, junior person etc.);
- Payment terms;
- Guarantees, after-sales customer service and support etc.
There can be, and often are, many factors involved in negotiating a deal, but the minimum is two.
A Successful Outcome: Start with the End in Mind
With two people or businesses negotiating, there seem to be four possible outcomes:
In reality, there are only two outcomes:
If one party “wins” at the expense of the other, then you can guarantee that the loser will make the “winner” pay, whether it is in terms of poor work, bad customer service etc from the supplier’s side, or unrealistic demands, not signing off on work, late payment etc from the buyer. This type of reaction is part of human nature.
So you must always seek a win-win outcome and if you can’t reach this then you are both best walking away from the table. But what is a win-win outcome? It is simply where both parties are happy.
For example, you are negotiating with a web design company for a new website. You are happy to pay up to £4,000 for what you need. The designer would be happy with £3,500 to deliver a site with reduced functionality and support as well as closing the deal on a fully functional website with 24/7 support, which he initially quoted £5,000 for.
So, if the website is agreed with an acceptable level of functionality and support at a cost of between £3,500 and £4,000, then both parties will be happy and this is a win-win scenario. As the buyer, how close you can get the seller to his minimum £3,500, while retaining the desired functionality and needed support, depends on how good a negotiator you are.
This leads us onto our first step in the negotiation process.
Preparing for the Meeting
Good preparation is absolutely vital. You must do your research before you meet.
The two important things to work out:
- Your Ideal Deal; and
- Your Fallback Position.
Your ideal deal is the best deal you can realistically achieve. You can’t get a great product or good work done for nothing. Nor can you charge the earth for a simple product or service.
In our example, the website designer had worked out his ideal deal and quoted £5,000 for the full package. Note, a common error is to start at a much higher price, say £8,000, so you can then be “negotiated down” to the £5,000 you wanted. This is a major mistake, as the prospect will know that you over-inflated the price to start with, and they will start to wonder what your offering is really worth.
As a rule: If you reduce your price during negotiation you must explain why, e.g. reducing functionality, delivery taking longer etc.
Your fallback position is the minimum you are willing to happily accept. You must not go below this. It is vital that you know what this is before you meet otherwise you risk walking away with a deal that you later regret.
The gap between your Ideal Deal and Fallback Position gives you a negotiating space. If your negotiating space overlaps with the other party’s then you can reach a win-win deal. The question is how close to their Fallback Position can you get the deal?
The first step when you meet is for both sides to state their opening positions. This is where you both share what you want and your ideal deal.
You are not bargaining at this point, but it is important that you:
- Clarify their position by asking questions as needed;
- Agree a joint agenda for the meeting;
- Define the parameters of the negotiation (i.e. what is in and out of scope).
Note: it may become clear at this point that there is no possibility of agreeing a mutually beneficial deal. For example, your website budget is £2,000 and the designer is asking for £10,000. This should have become clear earlier but, if not, now is the time to end the meeting, for you to look for another supplier and for them to look for other customers.
This stage is the bridge between the opening position and bargaining stages. Here you are indicating your readiness to bargain by making non-specific proposals in return for matching concessions. The language used here includes words like:
- Look at.
For example, “We could consider lowering our cost for the website if you were willing to look at reducing its functionality and support levels”.
It is important at this stage to acknowledge if something will hurt, but focus on the longer term benefits. For example, “We know that this might seem expensive, but it might be worth paying the extra for 24/7 support, if it is important to your business that your website is always up and running”.
You should now have a clear picture of where they are willing to give some ground and what they won’t move on and vice-versa.
This is where you trade one factor off against another. For example, “If you are willing to wait 3 months for your website, then we will reduce the cost to £4,000.”
It is vital you use specific and quantifiable language. You must make explicit conditional statements linking what you want with what you will do in return. A common statement is:
“If you will ….., then we will ……”.
You must always put what they have to do first, otherwise they listen to what they will get and forget what they need to change to get it.
It is always good to have some low cost-high value bargaining chips. These cost you little, but are worth a lot to the customer. For example, adding some functionality to a website (such as a live Facebook feed) might take you only a few minutes but it could be worth a considerable amount to your customer.
The secret to the bargaining stage is listening. Often the other side will inadvertently tell you their fallback position. You just need to be listening for it.
Closing the Deal
You have to close the deal at some point. This may be during your first meeting or after a number of discussions.
You must watch for the buying signals and then stop selling the deal. You will usually sense when you are close to agreement, as things will be calmer and more relaxed than they were at the start, and you will be discussing the relatively minor and finer points of the deal.
At this point it is worthwhile summarising what is on offer and how far you have both moved from your opening positions. It is also a good idea to identify the benefits to both parties of reaching a final agreement, as well as the cost associated with failing to do so.
The Final Agreement
Great, so you have reached an agreement. The very important final stage is to get a contract drafted, agreed by both parties and signed. Things sometimes need further discussion at this stage, as both parties often have a slightly different idea of what was agreed. This is perfectly normal on minor points. If it is over a major point, then you will have to meet again, but it is usually something minor which can be sorted out with a phone call.
It is always a good idea to get the final contract drawn up by an independent solicitor, as this ensures impartiality and that the deal will reflect the understanding of both parties involved.
We hope you found this brief guide useful in negotiating better business deals.
Else Solicitors is experienced in helping their clients to negotiate the best commercial deal and finalise business contracts. If your company would like some support in this area then we invite you to contact Adam Gilbert, Head of Corporate and Commercial and Partner at Else Solicitors on 01283 526 229 or at email@example.com.