The 1 Thing You Really, Really Need to Know About Price Negotiations

The 1 Thing You Really, Really Need to Know About Price Negotiations

With the possible exception of closing a deal, there is no single element of a sale that's more important than negotiating the price. One could

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With the possible exception of closing a deal, there is no single element of a sale that’s more important than negotiating the price. One could argue that price negotiation is MORE important because it determines the amount of profit a sale will generate.

The Wrong Way to Negotiate Price

Here’s how most people do it:

  1. State the list price. (“Here’s the sticker price.”)
  2. Justify the list price. (“Here’s why that’s a good deal.”)
  3. Discount the price. (“I can give you an even better deal.”)

That kind of price negotiation is easy to understand and execute, but if you’re negotiating price for anything that has price elasticity (like business services, customized software, etc.) it’s leaving money on the table. 

The Right Way to Negotiate Price

Here’s how smart sellers do it:

  1. Reach agreement on results. (“How will things be different after you buy?”)
  2. Have customer estimate value of results. (“How much is that difference worth to you?”)
  3. Quote price far below estimated value. (“Here’s what I charge for that.”)

This type of negotiation keeps your price high because, rather than comparing your price to alternatives, it compares your price to the financial impact of buying (usually expressed in terms of either revenue growth or cost-savings).

Example of the Right Way

Here’s a real-life example. I know a consultant who is really good at helping companies get more meetings with prospective customers. He used to negotiate price by tellin the prospect how many hours he’d spend and how much he charged per hour. 

Most of his sales engagements made him about $1,000 because most projects were about 4 hours long and customers would almost inevitably choke when he explained that his rate was $250 an hour.

Then he wised up and stopped talking about hours and rates. Instead, he had sales conversations that went like this:

  • CONSULTANT: How many meetings with potential new customers are you getting every year?
  • PROSPECT: About 20.
  • CONSULTANT: How many of those meetings result in a sale?
  • PROSPECT: About ten.
  • CONSULTANT: What’s the average value of a sale?
  • PROSPECT: About $50,000
  • CONSULTANT: So if I can double the number of meetings you’re currently getting, it would be worth half a million dollars to you, right? (10*50,000=$500,000)
  • PROSPECT: That’s correct.
  • CONSULTANT: I charge a $5,000 straight fee plus 5% of the increased revenue. How does that sound?
  • PROSPECT: Let’s do it.

Do you see what just happened? The prospect (now a client) is only risking $5,000 to increase revenue by a potential $500,000 (minus the 5%), which is an incredibly good deal for the client. With $500,000 to gain, who cares about hours spent or per hour charges?

Meanwhile the consultant, who otherwise would have gotten $1,000, is now getting a minimum of $5,000 with an upside of an additional $25,000. Assuming the consultant can deliver, the consultant is making 30 TIMES MORE (!!!) than he’d otherwise make.

All because he negotiated price the RIGHT way.

So this in a nutshell, dear reader, is the one thing that you really, really need to know about price negotiations: Establish value BEFORE price. (Hey, tweeters, no spoilers, ok?)

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

This article is from Inc.com

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