In the pre-liberalization era in Chennai, more than a hundred shops lined up on the harbor. The Burma Bazaar on First Line Beach sold all imported goods – Audio Systems, TVs, Fridges, Perfumes and what have you. Surveying the displayed items in a shop, we (me and Vasu) spotted a Sony Two Cassette play audio system and my friend fell in love with it at first sight. Vasu asked the shopkeeper for a price and he requested Vasu to take a shot.
Vasu beamed and said, “4500 rupees it is, down cash and immediate delivery once I check the system”
The shopkeeper thought for a couple of minutes and then said, “Sir, my cost is 4500, and I would have preferred 5000 rupees – but you are the first customer today and take it, sir, with my best wishes”. It was a lightning deal – boom.
You guessed it right! We definitely thought Vasu stated a rather high price – otherwise, why will the counterparty agree to sell on the first count? The deal quickly done and dusted, left us with more doubts, questions than answers and a slightly bad taste of having paid a high price.
Now, let’s say you are negotiating a large contract for your Company. What should you do to arrive at a well-negotiated deal?
Should you never give the first offer?
Are there any situations when you can give the first offer?
What are the consequences of giving the first offer?
While the traditional school advocates to refrain from giving the first offer, I have learnt from experience that there is no hard and fast rule like that.
The first offer is a powerful tool in the hands of a professional negotiator. As in the game of chess or tennis, first-mover opportunity exists in negotiation as well. It serves as a strong anchor to set the expectations from our side – irrespective of whether they materialize or not in the end. A good practice is to state all key issues with an opening offer – price, delivery, payment terms and any other key considerations such as AMC costs, Warranty/Guarantee and things such as Exclusivity.
Much before the meeting however, the first step is thorough preparation in terms of understanding the costs, understanding (supply) market realities to gain a fair idea of an ‘agreeable price level’. Another related consideration is whether one can afford this cost – if that cost is not workable, then work out what is agreeable/workable. We then have a good starting point.
The second important consideration is the BATNA – having clarity on what is the next best option if this negotiation fails. For, a good BATNA is a great aid for a well-negotiated deal. For example, if the item being negotiated can be in-sourced (produced in-house) at an efficient cost in case of a failed negotiation, then it is a good BATNA. Similarly, an alternative supplier or a substitute material is good BATNAs and so on. In addition to this, a good understanding of the counterpart’s BATNA is very helpful to gain a complete understanding of their stakes.
Finally, do you know each other before? Is the counterparty your existing supplier? Is it part of your routine engagement (annual negotiation exercise) with the counterpart? If the counterparty knows you and your approach well, then the first offer can be a little tricky.
A good first offer is something that reflects the realities of the situation – the market, the costs and the keenness of the counterparty to clinch the deal – all three play their part in the final deal. It is generally good to keep your offer within or around the ZOPA, affording a room for concession. Certain negotiators may feel attracted to give an outrageous offer lying well outside the ZOPA to help anchor the negotiation in that direction. However, many a time, I have seen this backfire, because I have come to understand that negotiation is a process of give and take and reciprocity invariably underlines the encounter. You are reasonable and so is your counterpart, you are unreasonable and so is your counterpart. It is possible that when people of certain psychological traits face each other, an outrageous offer was successful – but I am not a great fan of this technique, especially since this is more a shot in the dark than a considered one.
When stating the first offer, you may want to give the underlying rationale as to why your offer is such and so. Be careful, however, not to reveal the BATNA itself to the counterpart – it is very likely it will lead to unintended consequences. We had built good momentum and were negotiating for this plastic product with a reputed manufacturer whose offer was higher than our BATNA. The BATNA was a not-so-reputed manufacturer who cut corners for saving costs. When we inadvertently revealed the BATNA in response to probing questions from the counterpart, he immediately hardened and said that it was wrong to compare him with this counterpart and that he will not move beyond the price and terms negotiated so far! In other instances, revealing weaker BATNAs have led to deals struck very close to the levels of the BATNA itself – an ineffective negotiation.
Recently, I led a cross-functional team to negotiate an important deal for a service related to a premium product. We had a rather weak BATNA and were looking for a good service provider who’s able to give a competitive commercial package. We did a thorough homework, analyzed our costs and evaluated our BATNA. We decided on the ZOPA and possible package at which we can clinch a deal. However, we had a hunch that since our counterpart is from different geography, the pricing can be quite competitive. The negotiations started and we discussed the implementation aspects of the contract and sought alignment on all other aspects except key contractual terms. Well into the meeting, I was carefully deflecting any question related to price and commercial terms waiting for them to make the first move.
And my counterpart said, “Shall we finalize the price and payment terms?”
I said, “Yes – do you have a proposal – you understand your costs and capacity utilization better – so why don’t you go first?”
“Yes – we will – here’s our terms – this is our price, and these are our commercial terms – we need a small advance for facility-related works”.
And it was music to our ears – it was a fraction of our current provider!
Should I tell you that we plumped for the deal?