Wednesday, April 18, 2012

Top 5 Rules In Price Negotiation

Beginning entrepreneurs too often are just happy to be at the negotiating table, which gets them a lot of trouble. I recall "negotiating" a contract back in my early days where I blurted out a rate without giving it much thought. All I had was a vague idea of what the client was used to paying. In this case, it was not a direct customer but a large company wanting to sub-contract my services. Well, I later found out I could have charged a much higher rate. I violated a basic rule of rate negotiation that I was not aware of at the time. This post highlights the top 5 rules in price negotiation that have helped me secure more lucrative and rewarding contracts over the years. If you find yourself feeling taken advantage of following difficult negotiations, take careful notes and apply these rules starting today.

Rule Number 1 - Whoever Says Price First, Loses

That's it. It is just that simple. I later found out the company was willing (and expecting) to pay me at a rate more than 25% above my "negotiated" price. Had I been able to get the guy across the table to say his price first, I would have walked away with a far more lucrative contract. But how do you get the other guy to say his price first? You ask! So let's do a bit of role playing just to make sure you get it.

Example 1: The Wrong Way

Them: "What's your rate?"
You: "$85 per hour."
Them: "Deal!"
You: Damn

Example 2: The Right Way

Them: "What's your rate?"
You: "What's the budget?" Or "What are you looking to pay?"
Them: "We can do up to $110 per hour."
You: "I was looking for something closer to $130 per hour."
Them: "I can do $115."
You: "How about $125?"
Them: "Let me see what I can do."

At this point they will either agree to your rate or come back with something slightly lower but still higher than your starting point. But what if they will not budge on saying their price first, which does happen from time to time? Then you have to ensure you have a price with plenty of cushion because you have no way of knowing their starting point. So, if you planned on starting at $130 per hour, bump that rate up to $140 or $150 per hour. Most importantly, do not be afraid of saying your number. Experienced negotiators can sense lack of confidence and will use it against you. The most common tactic is to pretend to walk away or the whole "I'll have to consult with my manager" routine. When this happens simply smile, thank them for their time and tell them you look forward to hearing their counter offer.

Rule Number 2 - The First Price is not the Best Price

Experienced negotiators never start with their top limit price. I have dealt with so many of these negotiations over the years, especially from head hunters for big projects, that it's just boring now. The person on the phone or across the table will test your metal by insisting they cannot go hire than X amount. This is always untrue. Read that sentence again. I'll wait.

Rule Number 3 - Know Your Number

This is common sense but is often overlooked. Do some research before negotiating and understand what the market is willing to pay for your services. If you bring some extra competitive benefit to the table, which you always should, you can go even higher than the market price. You should always have two numbers:

1. The price you really want - $150 per hour for example.
2. The price you are willing to take - $135 per hour for example.

Understand however, that the second number should be a number that makes you comfortable even though it is not your preferred higher number. Be firm on these numbers once you know them. However, you better be sure you are worth the price you are asking.

Rule Number 4 - Don't Be Afraid to Walk Away

This is the hardest part, especially for beginning entrepreneurs. If you are unable to at least get your minimum price, then you must be prepared to walk away. This is not a negotiating tactic but a rule of engagement. There is always something better. If you accept a price far below your limit, you will be miserable and it will show in how you deal with the customer or company. You will have a hard time shaking the thought that you were somehow taken advantage of. In reality, no one took advantage of you.  You just negotiated poorly and have no one to blame except yourself.

Rule Number 5 - Negotiate from a Position of Strength

In a word, confidence. Never feel desperate and certainly never show that you are desperate. Negotiating from a position of strength means knowing in advance exactly what you are worth and being confident in your ability to either get it or move on. This is a powerful negotiating position that the person across the table can sense right away.

Apply these rules and watch your revenues increase almost over night. Do not think of a "lost" negotiation as a loss. Think of it as win because you may have averted a difficult situation that allowed you the opportunity to pursue far better deals.

Godspeed and I look forward to seeing you in The Players Lounge.

See Also...

3 Tips for Beginning Entrepreneurs to Increase Revenues
An Open Letter to a Beginning Entrepreneur

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