The Art of Negotiation.

Today’s Wednesday Morning Struming comes from the thoughts of Mike Michalowicz, author of the “The Toilet Paper Entrepreneur”. Pricing is always a challenge, particularly for professional services. What is the value of an “intangable” service?  It always comes back to value. Here are Mike’s tips and thoughts. Good stuff.

At what point in a negotiation do you show your hand? Most people believe if they know what their prospective client is thinking it will give them an advantage. So they wait to quote a price. They do their homework. They look for clues. Sometimes they just come right out and ask: “What’s your budget? Are you looking for great quality, a fast turnaround, or do you plan to go with the cheapest option? What number are you thinking of?”

Big mistake.

If you want to come out on top, use this simple shortcut: Be first. No dancing around the issue. No hemming and hawing. Just give them a number right off the bat. In doing so, you’ll set the starting point for the discussion, from which all further discussions will stem.

If you quote, say, $8,000 to complete a project, your prospective client may want to negotiate the price or other parameters of the deal, but all negotiations will start at $8,000. You may come down a bit in price, or agree to different payment or delivery terms, but if she hires you, you’ll get a number close to $8,000. On the other hand, if you wait for her to tell you she expects to pay $2,000 for a project, you may be able to negotiate an extra thousand or two, but you’re never going to get the $8,000 you feel you deserve.

But what if she can’t afford to pay more than $2,000? Well, can you do the work for $2,000 and still buy groceries? Probably not. (Ramen noodles don’t count.) So what difference does it make if you scared her away with your reasonable price?

Divergence is a huge time waster. If a prospect can’t—or won’t—pay a fair price, why would you spend one more second trying to land her as a client? Even if you lose the deal because your price is too high, you still come out on top because you haven’t invested much time trying to win her business.

Another common mistake is to do “the range thing,” which is to ask prospects to tell you the range they are willing to spend, or for you to give them a range they can expect to spend. For example, say your prospect needs a new phone system for his office. You do the dance, avoid the giant dollar sign in the room and eventually say, “This will cost you somewhere between $100 and $400 per phone.” “Great,” your prospect says, thinking he’s getting a new phone system for only $100 per phone. “Great,” you say, thinking you’re getting $400 per phone. From that moment on, no one is happy. When your prospect sees the written quote, which of course reflects the price you expect to get, he’ll grumble. He heard $100, you heard $400, and now you’re both frustrated. Even worse, you probably won’t get the deal you desire.

How many times have you entered into a deal that you later regretted? When you try to read a prospect’s mind or wait for the person to reveal what he or she expects, you invariably end up doing more work at a discounted rate. How are you going to make it using this old negotiation strategy? (Hint: You won’t.)

Be first. When I started applying this negotiation shortcut, I was able to increase my prices by nearly 50% and filter out prospects who were not a good fit. No more laboring over proposals for people who couldn’t afford my services. No more playing guessing games with myself, trying to figure out what my prospects wanted. No more saying yes to low-ball deals that kept me working 100-hour weeks just to get by.

When it comes to successful negotiations, the single most important matter isn’t what your prospect is thinking. It’s how fast can you get your number on the table. The person who goes first wins. Period.

Do you agree? What’s your experience in pricing strategy? Feedback is always appreciated.

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  1. Keith says:

    Totally agree Lonny. We try to take the same approach as you have recommended here. While price is always and uncomfortable topic to discuss and people often don’t want to show their hand….when as a company you have nothing to hide and know your services are worth the cost, you shouldn’t be ashamed of sharing it. It’s up to you to at least have a better understanding of your industry’s rates more than the client as well, and act as a consultant at first in sharing that information.

    • Lonny Strum says:

      Thanks for the feedback Keith. Pricing of professional services is always difficult. The price of services is always directly related to their value. Best to start the dialogue early.

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