Purchasing and Negotiation Training

Harry Hough, PhD, founder of the American Purchasing Society

Editor’s note: Dr. Hough is a frequent contributor to this blog. 

The purchasing profession changed significantly between 1945 and 1970. Gratuities and entertainment were commonplace after WWII. By 1970 a high percentage of organizations began to frown on such practices. Buyers from large companies still went out to lunch with suppliers, but the lunches were fewer and of a shorter duration. Some companies banned them altogether. From the sixties onward companies began sending out letters to suppliers before the holidays indicating that gratuities were not to be given to employees.

 The trend since the seventies has continued. Few companies give anything significant to buyers. Any gratuities given are usually in the form of a low cost consumable product or products that contain the supplier’s advertisement. There are many companies that make their living by manufacturing or distributing these low priced “promotional” products. It is therefore unlikely that the practice of giving these types of items to customers will end for a long time to come. 

Purchasing operations became more centralized in the mid-sixties and thereafter. There were periods when the trend was reversed with more decentralization then followed by more consolidation. Centralized operations tended to promote better policies and procedures and more staff functions. Purchase analysis became a separate function in some large organizations.

During the seventies general management began to pay more attention to the buying function. The cost of holding inventory came under scrutiny. Purchasing management started using Economic Order Quantity formulas. Value Analysis was used by large corporations to change the design of products to serve the function required at a lower cost. 

In the sixties and seventies nearly all purchasing systems were manual. Requisitions were written by hand and hand delivered to the buyer from processing. Filing systems were manual. The average paper purchase order was a snap-out form that had five or six copies. There were two copies sent to the supplier, one or two copies for the purchasing file, one copy for accounting, and one copy for the receiving function. 

Most buyers at that time had little idea how much they spent annually or how much was spent with each supplier or for each product. Any statistics needed to be gathered by a long hand process. 

Few purchasing personnel had college degrees except in the large companies. Consequently, pay was lower and promotions into other management functions or general management was rare indeed. 

Communication was by telephone or by regular mail. Of course today, all that is changed. First came the fax messages and now e-mail. The telephone is still used but not as frequently. 

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Today most purchasing professionals can obtain volume statistics simply by asking for them. Many can print out a report on their computer screens or on a hard copy. 

Today purchase orders are increasingly being handled electronically via internets and extranets. Purchase orders are generated by computer programs that minimize typing effort and check for spelling or other errors. Many of the systems tie accounting, receiving, and purchasing together. Some provide the user with the ability to submit requisitions on-line. 

Today more and more buyers are obtaining product and supplier information on the Web or Internet. Increasing numbers are using the Internet to place orders. This may create problems if orders are not properly documented with clauses and terms to protect the company’s interest. 

Too many non-purchasing personnel are now being given the authority to place orders by using procurement cards and to use the Internet to place orders. We are afraid that these practices will cause companies to lose control of their purchase costs. 

There is now a great emphasis on supply chain management. It is not certain if this will weaken the purchasing function. Perhaps this is a fad, perhaps not, but capable purchasing professionals will always be needed. 

There will always be the need for salespeople and buyers to negotiate with them. Such buyers will need to be proficient in use of the computer as well as knowledgeable about negotiating techniques and the legal aspects of business transactions. Surely the requirements for more education and training will equate to higher salaries for the profession. It is almost certain that the better jobs will go to those who are certified and who have a high level of training.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: this is Part 2 of a two part series; it presents the second four of eight popular pricing strategies.  Part I presents the first four.

Revenue Management

This one shines with sophistication.  The transportation industry provides a superb example.  The very name of this strategy strikes mystery and fear in one’s heart, much like lawyers conversing in Latin terms or physicians engaging in pharmaceutical-speak.  Every profession has its jargon to separate it from mere mortals.  As one famous, if quirky American politico once observed though, things are more practical where the rubber meets the road.  We will heed Ross Perot’s advice here and reduce this strategy to familiar terms.  Here is how it works in the case of airlines.

Under certain advance purchase conditions, most airlines offer a super saver fares.  Usually, it is the personal traveler who enjoys the schedule flexibility to take advantage of these deeply discounted fares, especially if they involve a Saturday night stay over.  The fare is often just a fraction of the full coach ticket.  Say that $500 is a reasonable fare for a coast to coast round trip advance fare.

The business traveler, who favors Saturday nights at home, suffers the additional disadvantage of minimum advance planning.  I once had a client call on my cell phone on the way to the airport and drastically change our whole itinerary.  With less than an hour before the flight and in a hot sweaty hurry, I purchased a round trip coast to coast coach ticket for about $3,500.  Can you imagine the conversation I had with the gal who sat right beside me?  She purchased her ticket for $500.  I paid seven times that amount.  Thankfully, she never asked me if my seat was really ten times better.  I also never gave her my book on negotiation.

Yet, the airlines make eloquent and in part, logical arguments that this pricing strategy is not only sensible, but required.  Otherwise, too many passengers would show up for some flights and not enough for others.  Therefore, this strategy, which effectively penalizes the businesses traveler, was actually maintaining order where chaos would otherwise rule.  Well, you be the judge.  The important point is that here is an opportunity to clarify buyer and seller interests.  Large travel brokers smooth out these price swings in fare by purchasing blocks of seats and reselling them.  Consolidators peddle seats on line, to tour agencies, or to the public, thereby filling the gap between the super saver and at-the gate price.  How does your supplier price its product or service?  Is it by some arcane method such as Revenue Management?  If so, this needs to be addressed in negotiations.

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Yield Management

This strategy is totally counter intuitive, and therefore defies common sense.  The hospitality industry is the leading case in point here.  Suppose you operated a 300 room hotel, and one night you had a 50% vacancy.  What is a better for business?  Do you demand the ‘rack’ rate (usually the posted rate), because you need the revenue, or do you offer the lowest rate possible just to get butts in the beds?  The answer is that you give the deepest discounts when the occupancy is the lowest, and demand the rack rate when the occupancy is highest.  It seems odd, I know, but here is how I learned.

One early November weekend in the early 90s, I attended a meeting at a New York airport hotel.  Air traffic was slow in advance of the madcap Thanksgiving Day holiday, so the hotel had many available rooms.  Upon check-in, I asked the clerk about the room rates.  Bear in mind that I had pre-registered at the ‘convention rate’ of $150.  She told me that I could have a room in the convention wing for $135 or in the remote wing for $115.  Curious, I inquired pleasantly about the distinction.  Without further ado, she offered me a room in the convention wing at the $115 rate.  So much for Yield Management, I concluded.

About five months later, I was at the same airport again.  My father and brothers, who lived across the US landscape, were all to meet in Miami to catch a flight to Costa Rica for a four day fishing retreat.  Soon after I arrived at the same NY airport for my connecting flight, a rogue Nor’easter blizzard blew in and all flights were cancelled.  The entire airport was shutdown at 3 pm.  Being a smart fellow and experienced traveler, I immediately hopped the taxi to the same hotel.  Upon arrival, I suffered the indignity of long lines, impudent amateur travelers, and general unpleasantness.

At the check-in desk, realizing the situation, and being the realistic purchasing and negotiation pro, I graciously offered to pay the full price rack rate.  To my chagrin, the clerk guffawed, pointing out to my obvious hick nature that everyone was paying rack rate plus a “weather premium”, unless they had US military clearance.  Having none, I squeaked my willingness to fork over about three times what I had paid for the same room just five months ago.  As they say at Texas rodeos, “Some times you make 8, sometimes you hit dirt.”

Perceived Value

This one is my favorite and a clever, effective reflection of human nature.  Here, the product is so good, has such great rewards, that you don’t even ask the price.  The one word, quintessential example of all time is Viagra.  Who knows the price, and who cares?

Perceived value has applications beyond pharmaceuticals today.  The telecommunications world has many fine examples in the wireless phone and internet connection services.  Here is how it originated.

In the mid 70’s, Tagamet was the leading ulcer medication.  Tagamet’s success attracted competitors.  Soon after, Zantac appeared on the market.  Both products served the same purpose and appealed to the same customer base.  The table below summarizes the performance of the competing drugs in terms of cost.

This is an interesting pricing strategy for a buyer.  Zantac had to find a way to knock off the king of the hill, Tagamet.  The advantage of better quality and lower production costs suggested adoption of the time tested better mouse trap theory.  That is, introduce the Zantac at a lower price in order to capture market share.

That is not what some very clever execs did however.  Instead, Zantac chose to trumpet its ‘Perceived Value” of less drug interactions, fewer side affects and better dosage schedule.  Even though both drugs accomplished the same job, the greater perceived value, reinforced through advertising, of Zantac could be translated to increased price.  That is exactly what happened as Zantac was brought market at a price premium over Tagamet.  Within about two years, Zantac was the best selling drug of all on the planet.

Frequently, new product rollouts or high tech services come to market on this pricing strategy.  Voice mail provided by telephone companies are an example of a high price but low cost service justified by perceived value.  This is not to say that the product or service does not have actual value.  On the contrary, we want to establish a basis for negotiation.  We are interested at least as much at a product’s cost as we are in its price. 

Optimization

This is a relatively new method and is in favored by big retailers with many SKUs.  A software program analyzes an array of variables such as sale history, competitor’s process, even time of day and week to produce a mathematical model that estimates the greatest yield of sales and profit.  Airlines are now getting into the act using it to vary pricing many times per day for the same flight. There are applications for markdown of merchandise.  Further, the software is industry and sector sensitive; within the food industry, sales of generic or store brands of pasta and cereal do not follow the same patterns.

Here are three of the many suppliers of price optimization software

DemandTec

SAP

Oracle

"Shorten your sales cycle & increase your win rate through competitive excellence"

Editor’s note: Stu Schlackman is a frequent  contributor to his blog

My colleague Barry Caponi of the Caponi Performance Group is the guru of appointment making.  As a matter of fact, their approach, The Appointment Making Formula™ (or The Formula, for short) has become one of the most successful methodologies in the industry because it takes a holistic view of the entire process. 

They’ve evaluated different approaches and talked to many who make their living setting appointments over the phone or by canvassing.  Therefore they’ve been able to craft a methodology with techniques that truly works.  They’ve also seen many techniques that don’t. 

Here are the five big mistakes made while attempting to set appointments.  These mistakes are doubly painful as they not only drain away those precious few hours we’ve got to make appointment making calls, but crush the spirit as well. 

1.—–Believing the first (negative) response we hear is true and attempt to counter it with logic – suspects play by two ground rules that we must acknowledge or perish:

• The rule of the ‘Status Quo’ – our research indicates that less than five percent of our universe of suspects is currently in the market for what we sell when we call them… so they don’t think they need to talk to us
• The rule of ‘Workus Interruptus’ – no matter when we call, we are interrupting that person from doing something…so they don’t want to talk to us

Ergo, until we get them beyond the initial ‘conditioned knee jerk’ reaction of saying anything (including lying) to get us off the phone, logic doesn’t work as well as we think it should.

2.—–Tell the suspect all about what we can do for them – remember, they don’t think they need what we’re selling, so why do we think this approach will work?  Instead we should tell them about the results someone else got from using what we sell.  (All of us – ok, maybe just most of us – think that there are others who know some little secret we don’t.)

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3.—–Assuming we can help them do what they’re doing better than they’re currently doing it – “I can save you money over what you’re paying today.”  “I can make you more productive.”  How do we know what they’re paying or how well they’re doing?  For that matter, how do we even know they use what we’re selling in many cases?

4.—–Not ‘owning’ or internalizing our message so instead of sounding conversational, we sound like the proverbial telemarketer reading a script or delivering it in a monotone voice – only 7% of effective communications is derived through the words we use.  The biggest percentage of effective communications on a phone call comes from tonality (38%).  Therefore we must not only ‘own’ our message, but we must deliver it with passion.  You do believe in what you sell, don’t you? 

5.—–Winging it on each call so that our message is different each time – if we deliver a different message each time, we can’t predict and control the responses we’ll get, making the task of handling those negative responses even more difficult.

Visit www.coldcalling101.com to see how to correct these mistakes – and use the code name Caponi Performance if you decide to register for a workshop (you’ll get a discount!).

Editor’s Note: Steve writes, speaks, and consults on customer service.

On a recent business trip, I drove across a beautiful state on the Pennsylvania Turnpike. During my first rest stop, I bought a cup of coffee. The woman who worked the food counter had a great sense of energy and enthusiasm – she was obviously a morning person. “How may I help you?” The pervasive aroma of brewing coffee, fresh-baked pastries, sizzling bacon and fried eggs filled the room and created an appetizing ambiance. When it was my turn, I surrendered a five dollar bill.  As I handed it to the woman, she asked, “Would you like a breakfast sandwich – they’re fresh?” So there I stood, cash in hand, amidst an upbeat person who invited me to taste the food which filled the room with its enticing aroma. A positive response added $2.50 to my total. After she handed me the coffee and breakfast sandwich, along with a nice “thank you,” I stepped to the side to add a little milk to my coffee. I overheard the next transaction in which a customer ordered a cup of coffee and sure enough, this woman made the same suggestion which resulted in another breakfast sandwich sale. This added another $2.50 to her cash register. Being curious, I waited in the lobby, ate my breakfast sandwich, and watched this counter person serve more customers. She sold an additional four breakfast sandwiches in about five minutes. This woman’s sense of timing was outstanding. She waited until a customer’s wallet or purse was out, with cash in hand and then she asked her upselling question along with the value proposition, “They’re fresh.” Wow, I thought – that’s an additional $10.00 every five minutes which could translate into $120.00 an hour. As I walked back to my car, I remarked to myself that this woman understood how to upsell. For many professional upselling is one of the least understood business behaviors, which can have a most dramatic impact on revenue and profitability. Opportunities to upsell abound in every segment of business. When executed with courtesy and skill along with a good sense of timing, upselling can add significant revenue to orders.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: This is Part 1 of a two part series; it presents the first four of eight popular pricing strategies.  Part II presents the second four. 

The Cost/Price Myth says that Price is related to Cost.  Make anyone who says that prove it.  As Ronald Reagan liked to say, “Trust, but cut the cards”.  This should be part of every negotiation.  Whenever someone says, “Higher Price means greater value,” or “You get what you pay for,” think of mandatory Price Analysis.   

Ask ten people how a price is established and nine will say that the supplier takes its cost and adds a percentage for profit.  That percentage may vary, depending on market conditions, and other factors, but basically Price is considered to be computed as some multiple of cost.  We will use 10% for simplicity.  If the supplier’s cost is about $0.90-$0.91 per unit, then a 10 % profit means that the Price should be $1.00 each.  

There is a good reason why buyers have been trained by sellers to think in this cost plus percentage mode.  The seller has a ready answer to the buyer’s price reduction demand.  “Look”, the salesman can offer flatly, “I cannot possibly reduce the Price because I have so little on it now!” 

 The origins and evolution of prices is usually not quite as simple as the cost plus percentage chestnut might suggest.  One of our first tasks in negotiation is to ascertain how Price is established.  This process is called Price Analysis.  The following list comprises the eight most popular strategies for pricing of products andservices.  We will examine each for their negotiation value.  

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Eight Popular Pricing Strategies 

• Cost plus a mark up
• Survival
• Target
• Traffic
• Revenue Management
• Yield Management
• Perceived Value
• Optimization

 Cost plus a mark up 

This is the by far the most predominant of pricing strategies and for good reason.  Many products and services have been around for a while and may have lost unique character.  Expiration of patents and emergence of competitive and/or replacement products are two illustrative reasons.  Any mature product or service in a mature market probably falls into this category.  Portland cement, high heel shoes, thermo set plastics, laundry detergent and automobiles are common examples with which we can easily identify.  In these markets, the bloom has long fallen from the rose in terms newness, mystery, and applicability.  Stated in another fashion, these products and services no longer lend themselves to exotic forms of pricing.  The buyer has extensive experience and knowledge of the product and market and thus the range of Price is relatively constrained.  

As a product or service matures over time, market equilibrium sets in and the price truly becomes related to the cost as margins become regular and costs are managed better and buyers and sellers settle into a comfortable cost plus percentage mode. 

Survival 

Many are familiar with this pricing strategy that results directly from competition, usually in the form of a lower cost supplier, in the market place.  A good example is Southwest Airlines.  They have made low cost reliable air transportation their hallmark.  No frills, usually timely, and certainly a challenge to their competitors, they caused huge ripples in the market when they expanded nationally in the 90’s.  

Southwest’s low cost structure translated directly to lower priced air fares, which upset the pricing systems of competitor airlines.  Fare prices of the larger national competitors fell to meet Southwest’s market challenge and had no relationship to the costs.  Rather it was a matter of survival.  If Southwest could capture market share with low prices, then they might be able to capitalize on connecting flights and that would seriously threaten survival of the hub and spoke airlines. 

This pricing strategy can be dangerous for buyer as well as seller, particularly if the price is driven too low.  The supplier might not stay in business, and the buyer might induce Robinson-Patman (link) problems in the purchase of goods.  

Target 

Target pricing might not be obvious to the buyer who may even think that it is something she has done to deserve preferential treatment.  More likely, the buyer has nothing to do with the supplier’s pricing.  The pricing depends upon a strategic decision by the supplier to capture a market segment. 

 Suppose that you are a school book publisher.  Your ideal customer is a school district that buys 1,000,000 books annually.  Assume further that you want to neutralize certain aggressive competitors who have been nipping on your heels, cutting into your customer base. 

 An effective strategy for corralling the best prospects while icing competitors may be to target certain customers who appeal to your strengths, produce the greatest return for the least investment (cost) and who can bring you other customers as a result of your low priced sales initiatives.  Meanwhile, the seller is mining every opportunity to generate future business from similar customers.  The seller approaches similar customers with verifiable success stories of how you, a very similar customer, has been well served and thus should join you as another preferred customer.  The seller’s motivation could be customer size, industry, location or other factors.  The point to keep in mind is that this is a common pricing strategy and one that needs to be identified by the buyer as a negotiating tool.  

Traffic 

We have all heard about “what the traffic will bear” as a pricing strategy.  That usually means that the seller is gambling that the market is good and therefore the law of supply and demand swings in its favor.  This strategy is merely a variation of the cost plus percentage mode as a ‘normal’ markup is augmented by a premium to reflect market conditions.  The science of economics predicts this swing, of course, but as with so many factors in negotiation, economics may not tell the whole story.  Might the supplier have other motivations?  What about the salesperson in front of you who wins the contest for a trip to Hawaii if she makes this next sale to you.  Supply and demand, margin, and even pride all fade in the glow of making this sale. 

 Once in my home neighborhood, we had a door to door newspaper subscription hawker who was offering coupons at a local restaurant if we would subscribe to the paper.  It did not matter if we actually paid for the paper after the test free period as long as he got credit for writing the subscription and we did it now.  Feeling suspicious, I phoned the paper.  A helpful but naïve fellow explained that the two local competing papers were being audited.  Higher subscription counts bring higher advertising rates.  So my subscription Price, whether I continued or not, had nothing to do with the paper’s costs.  Sometimes, this Traffic strategy is not all that it seems.

Part II discusses the four pricing strategies of Revenue Management, Yield Management, Perceived Value, and Optimization

"Shorten your sales cycle & increase your win rate through competitive excellence"

Editor’s note: Stu Schlackman is a frequent contributor to this blog.

Recessions bring on employment worries that impact our performance. The mortgage and credit crises Washington’s stimulus package show no signs of resolution.  All this “stuff” puts fear, uncertainty and doubt (FUD) into the economy. Worse, this FUD is putting the brakes on corporate investment – reducing spending and directly impacting our prospects.

What can we do to improve this dismal outlook?

How can we target and improve our selling efforts to exceed expectations? When the World Trade center was destroyed, President Bush’s answer to ‘what could the American people do to fight back.’ was “continue to spend”. The foundation of America’s strength is still our economy which remains the envy of the world. This puts the sales pros in the front line troops for the war on recession. Bush’s “spend” message was more than a recipe for main street stimulus; it reached to the core of American values: optimism for our future. Our economy is a self fulfilling feedback system. If we believe times are good, we spend and the economy is stimulated.  If we believe bad times are around the corner we cut back and the economy tanks. So when bad times arrive, we must change that negative-feedback behavior to affect a turnaround. We need to be optimistic so things can improve. We need to convince our customer’s to spend now.

How do we position ourselves to be the partner of choice with our customers and prospects? These three issues are crucial: (1) Value Proposition, (2) Personality Influences, (3) the Customers’ Perspective.

1.     Value Proposition

What worked prior to the recession might not work now. Customers have different priorities and strategies when economic times are challenging. Your value proposition uniquely differentiates you from your competition. It needs to address both the real and the self-perceived needs of your customer. What is their main priority – beyond survival? How do they plan to pull ahead in these turbulent times? Is it their plan to increase revenue, cut expenses, or increase customer satisfaction?

Fine tune your value proposition specifically to each customer, knowing that each customer has a unique set of needs and plans for their projects. Be specific in what you are offering and make sure you can be explicit with tangible value. Provide references that back up your success claims. Show customers and prospects how your product and services increased revenues  or cut expenses.

2.     Personality Influences

Second, customers buy for two reasons – personal and business. Overall these split 50/50. Right brain dominant people lean towards the personal side: looking more at the intangibles and the subjective reasons to purchase. These are the Orange and Blue personalities. The Green and Gold personalities, being left brain dominant, will lean more towards the business side, the tangible and objective reasons in their decisions. In periods of FUD and downturn, all personality styles lean towards the business issues at hand.

Why? Executive management mandating cut backs in budget and a refocusing of their efforts can cause a change in priorities. Their personality styles have not changed, but the environmental pressures on them have changed. Discover what has changed for them. Perhaps, with revenues uncertain or turning down, cash is king and keeping expenses under control is paramount with your customers. Alternatively, perhaps they see the downturn as an opportunity to gain ground against weaker competitors. Understand your customer’s priorities and don’t present benefits of your solution that don’t matter right now. Find and present the benefits that do.

However, decisions are still made by people and people also react individually to our economic downturn and increased pressures from management. It is more important than ever to discover who makes the buy recommendations and the ultimate buy decision – and ease their worries.

• Blues fear lack of safety and security: for their business, their colleagues, and themselves. More than ever they want clear, positive messages and directions. Blues despise fear and worry the most; focus on alleviating their fears with compelling value and building trust.
• Gold’s business fears center on financial stress, but their personal fears are about things being out of their control. Golds will overcome these fears themselves; give them the actionable levers to pull.
• Greens business fears are about missing key information but their personal fear is about being wrong with resulting dire consequences. Greens will analyze and assess their fears, over and over again, captured in a loop; give them the information needed to pull out of this loop. Then they will act.
• Oranges fear losing the business and also losing face. Oranges will face their fears head on; leverage their optimism.  

Third, resist the urge to view each and every sales opportunity as: ‘how will gaining this business benefit me?’ View it through our customer’s eyes. How will our service benefit them! Rather than fret about the time lag in making a decision, investigate why the delay is occurring. Do not just assume it is the bad economy.

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3.   Customers’ Perspective

If necessary, get your company to engage researchers or business development specialists to help tune your message. A relatively small investment can help focus your value message. Just as investment drives the economy, strategic focus and clear market intelligence information can drive your company’s success via your successful sales.

Recap

For this economic downturn, focus on fine tuning your value proposition, give specific tangible benefits of your solutions, and view the situation from your customer’s perspective. Build the client relationship by understanding their personality style and stay optimistic.  So, what conditions/motivations will trigger similar optimism in each personality color group? And how can we help trigger that optimism?

• Optimism is triggered in Blues through healthy relationships and trust. Work with them to earn that trust.
• Golds naturally are pessimistic but feel good when concrete things get completed. Create with them a bulleted plan and tick things off to their satisfaction.
• Greens are optimistic when they figure out something new and innovative. Send them new feature perspectives, and even better, entirely new directions to investigate.
• Oranges always see the glass half full, but look on the opportunity to fill the glass up. They are excited by new things.

So fill up that glass with positive expectations and a renewed, and enlightened, commitment to success.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

The wisdom of the so called, “Restock Fee” charge generates a lively and fascinating discussion in purchasing and sales negotiation seminars.  A threshold question to resolve, however, is its justification.  Sellers insist that the charge covers the expense of putting the product back in stock but is such justification ever produced or is it buried in the “standard charge” pabulum.  Customers suspect, quite correctly in many cases, that the charge is little more than a thinly disguised penalty for a canceled sale.

Professional buyers are a cost focused group; as such, we look to a cost justification for the restocking charge.  We certainly do not want to inflict financial harm on a good supplier but neither should we tolerate being hosed by an arbitrary charge.  

In order to evaluate the reasonableness of the Restocking Fee, let’s first establish the parameters and then look at how the standard 15% Restocking Fee applies to two situations.  

• A common steel commodity with no fabrication or value added sells for $1.00 per pound
• Our sales department obtains an order from a new customer that requires purchasing to buy this steel
• Purchasing buys the steel but sales informs that the customer has cancelled the order, forcing us to return the steel before we even unload it
• The supplier charges a 15% ‘standard” restocking fee

Two situations:

• 1. The purchase price of 10,000 pounds of steel @ $1.00/lb = $10, 000.  At a standard 15% Restocking Fee, the charge is $1,500. 
  2. The purchase price of 20,000 pounds of steel @ $1.00/lb = $20, 000.  At a standard 15% Restocking Fee, the charge is $3,000.   

Is this reasonable? 

The only way to know is to resort to Cost Analysis  to determine the reasonableness of the charge.  We investigate and learn the following facts that represent the costs involved. 

1.      Delivery        Either steel order is delivered by a $100/hour truck and driver that requires a one hour round trip      Cost   $100

2.      Handling      Either steel order is loaded and unloaded by a $100.hour overhead shop crane; allow 15 minutes for each pick or one half hour total      Cost   $50

3.      Administration       There is an embedded cost of doing business.  Assuming this transaction was accomplished the old fashioned way , and not via electronic or P-Card means, let’s allow $100 for the transaction costs

4.      Opportunity     the steel is not special and easily reusable so a $10,000 order that is unavailable for one hour.  Assuming a 10% borrowing rate, $10,000 @ 10% is $1,000 per year, $2.73/day or $0.12/hour

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 Total cost

 1.      Delivery                $100

2.      Handling                $050

3.      Administration     $100

4.      Opportunity          $000.12 

TOTAL                             $250.12          and, this is for either order!

 The supplier is charging the customer about 6 times its cost for the $10,000 cancelled order and 12 times for the 20,000 pound cancelled order.  If we assume a 5% profit on the sale, it is clear that the supplier made more by canceling the order than if it had been completed.  

It is time to call the supplier in to negotiate doing business on a more mutually beneficial cost based business.  Lay out your cost facts and ask for their explanation.  This is an ideal opportunity to discuss business going forward and using a cost up versus price down basis of negotiation.   

What do you think?  

This is but one model for determining the cost justification for a Restocking Fee.  Whether you are a buyer or seller, how do you handle these situations?

Steve Hague, author, speaker, and Certified Purchasing Manager

Editor’s note: Steve Hague is a frequent contributor to this blog.

 Auto dealerships like other businesses are in business to make money. They are performing a necessary service and offering a needed product so we should not have a problem with them making money.  The problem is that like some other businesses, there is no limit to the amount of money that they can make on any negotiation so it’s up to you to know what to do and what not to do. 

1. Don’t buy on emotion!  Buying a car is a very emotional experience. It’s hard not to be excited when buying a car, but the more interest and satisfaction you show to the salesperson, the less likely you are to get the best deal.  Remember, act like it’s business, not personal at the dealership. 

2. Don’t believe a salesperson that tells you other places can’t match their price.  They may be telling you the truth, but until you actually find out for yourself, you won’t know. There’s no harm in checking on what they tell you. 

3. Don’t Buy The First Time You Go In. (See Mistake # 1 above.) There’s a lot of information and emotion: sights, sounds, smells (new car interior), etc. when visiting a car dealership. It’s usually not a good idea to purchase the first time you visit, even if you find the car of your dreams!  Make sure to “sleep on it” and let your subconscious mind work on the information.  You may be surprised that you remember an acquaintance that had a problem with the car or a quality issue on the news…. 

4. Don’t Buy a car without an MSRP window sticker.  If it doesn’t have an original window sticker from the factory, it isn’t new. Case closed. 

5. Don’t give a deposit until you’re sure you will buy.  Giving a deposit is a psychological buy-in or commitment that you make which is sometimes difficult to reverse. 

Contact Steve to avoid sticker shock

6. Don’t let them use information from your driver’s license.   If they take a copy of your license for a test drive, have them destroy it or take it with you when you leave so that they don’t try to use it to run a credit check.  

7. Don’t give them your personal information until you are buying from them.  If they ask for your name and number or to sign in at the dealership, you can kindly decline and tell them you’ll contact them if you’re interested. 

8. Don’t let them de-value your trade-in.  If you know the trade in is worth much more than they’re offering you, tell them the deal is off and you’ll take your business elsewhere. 

9. Don’t be a payment buyer.  You need to know how much you can afford every month as a payment, but never tell the salesperson. Be sure that the car payment is factored into your overall budget now and over the next few years. 

10. Don’t be upside down on your loan.  If you owe more money on a car that you’re selling or trading in, you’re upside down. This means you owe more than the car is worth. Wait until you pay off more or all of the loan before taking on another. 

It’s not always what you need to do when buying a car, what you don’t do is almost always as important.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s Note: This is Part 2 in a 5 part series on negotiation tactics and counter-tactics.  Part I deals with an overview of negotiation tactics. Part 2 explains the first category of Maneuvers. Part 3 deals with Flyers, Part 4 with Gambits, and Part 5 with Ruses. 

The Maneuvers include

• Higher Authority
• Split the Difference
• Trading Concessions
• No Statement 

Higher Authority is the familiar tactic of the car salesman.  It is the buyer’s duty to establish the authority of the seller in advance of any meaningful talks.  Yet, it happens that the seller extracts our best offer and then claim that she must check with the manager and get back to us.  What should we do in the jaws of this trap?  Immediately suspend the talks by saying, “Oh, I did not realize that you did not have the authority to make this deal.  Everything is off the table now because we might be guilty of bargaining in bad faith and we don’t want to do that.  I tell you what.  Get your boss down here today and we’ll try to wrap this up.  Otherwise, we may have to make entirely alternate plans.”  If the seller’s tactic was an honest mistake, she stands aware of the problem.  .  If not, the tactic has been exposed and a warning issued for future dealings.  The best route is to avoid the trap by qualifying the authority in advance. 

Who has not used the Split the Difference?  It seems honest and innocent enough and often it is.  It has powerful impact in the hands of the artful because they know that only one out of 100 possible splits are 50/50.  You never want to be the first to offer to split the difference.  It transfers veto power to the other side and may worsen your position.  This is another of those actions that confuses the other side, much like a seller conceding price reductions in successive increasing amounts.  Instead, get the other guy to offer to split the difference.  Here is one painful example.  I once had a customer who bemoaned the fact that we were so close, and how he hated to see the deal fall apart.  He walked me down the aisle, extolling the virtue of our work together and how badly he felt about not being able to accept what he knew to be a fair offer, but the budget was under funded…   In a misguided gesture of conciliation and without getting conditional agreement first, I offered to split the difference.  The next day, he told me that he had considered my offer, but still could not go along, but we were so close…  I offered to split it again, to which he reluctantly agreed.  Doing the math, he gave 25% and I gave 75% in this ‘split’.  

The Concession Trade Off  is a very seductive maneuver.  It seems entirely justified that one good turn deserves another.  The stumbling block here is “perceived value”.  You need not reciprocate with a concession for every one you earn because you do not know the actual value to the other side.  Gift certificates provide an excellent example.  Merchants love to sell these because they are priced at retail, bring customers back, and have a low rate of redemption.  As part of a settlement negotiation with an unhappy customer, gift certificates are a common concession.  The customer may never use it, but it satisfies the demand that the “You owe me” debt be paid off.  Thus they concede a high perceived value item at a low actual cost.  Many skilled negotiators build in concessions of little actual value into their negotiation plan.  This is a good idea as is the related concept of planning to lose on some battles.  

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The No statement is a big tactic with a little name and it packs all the potency of Napoleon.  Powerful in itself, its seeds spread over a field of equally effective tactics.  Faced with “No” for an answer, we can ignore it, react angrily, accept it without challenge, ask for more information, or some combination of the above.  All have merit for different reasons, making this tactic one of the most common in negotiation.  Sales pros tend simply ignore the ‘No’ statement.  They learn early on, or understand intuitively, that no means maybe.  In some cases, it seems that they have grown a membrane in their inner ear so that every time the word ‘No’ forms on the buyer’s lips, it is immediately interpreted as ‘Maybe’.  Everyone involved in negotiations would do well to emulate such wisdom.  ‘No’ is nothing more than an opening position. 

 As a counter the ‘No’ statement, apply technique of neither agreeing nor disagreeing.  We are interested in learning more about what motivates the ‘No’ position.  Now is a perfect time to promote elaboration by invoking the “Tell me about it” technique.  The announcement was intended to claim certain inviolable territory, but the assertion may be in earnest of a form of posturing.  In either event, we want to determine what motivates the statement.  Suppose your counterpart states, “We can negotiate anything but delivery in less than 6 weeks”.  Doesn’t this strike you as curious?  An immediate reaction is to discover exactly what this time limitation means and why it is put into play on the first pitch.  It could indicate that orders are backed up for production but advancement to the head of the line could be arranged if we pay for the additional freight and a convenience fee to bump down some other orders already in place.  It could also mean that the advance time cannot be compressed by any method whatsoever.  Perhaps it is even a High Initial Demand designed to flush out our reaction and thereby gauge our must have position.  Any response but the flat invitation to expound on the position by telling us more about it falls into one or more traps. 

Non negotiable positions are one of the seeds of the ‘No’ statement that grow to take on a significance of their own.  An aggressive proclamation of boundary limits warns everyone that the very mention of certain topics will not be tolerated.  Is this a bullying tactic?  Maybe, or it could be borne a feeling of inadequacy.  This person is fearful and probably doubts his ability to handle the negotiation in a more subtle manner.  This is our signal to approach this person in the personality style they find most suitable.  Doing so lowers the communication barriers for your counterpart and helps them to express themselves after overcoming the initial terror.  

Here is one example of how the result is better for both parties when an earnest application of the non-negotiable position is clarified by learning the underlying motivation.  The seller says that the price is fixed and not up for discussion.  Well, that ‘No’ statement bounces off our ears and excites our ‘maybe’ bone.  Why is the price fixed?  If the quality, service or delivery parameters changed, wouldn’t the price change to reflect the shuffled cost constituents?  Of course they would, in any logical set of circumstances.  If the seller is envisioning a one shot deal and you have more extensive quantities in mind, the price won’t be fixed for very long into the discussion.  

Another related tactic is to introduce a host of non-negotiable demands, many of the straw or red herring variety.  The purpose of this ‘No’ statement overload is to withdraw these later in exchange for the elimination or reduction of more legitimate demands of the other side.  This is often an effective tactic.  To counter it, keep a supply of your own non-negotiables ready to insert in the talks.  Your efforts at being reasonable by keeping your non-negotiables off the table may not work in the face of unreasonable demands from the other side.  Expect this tactic more often in Win-Lose strategies.

Linda Byars Swindling, negotiation authority, former employment attorney, and author

Editor’s note:  Linda Swindling is a frequent contributor to this blog.

Here are nine simple tips to jump start your negotiation and influence results.

1—–Go face to face

  We communicate through technology that focuses on short, quick responses. So much of the rapport-building opportunities have been eliminated. You deal with different people each transaction and there isn’t the time to really form long-lasting relationships. Look for those opportunities to persuade on a personal level. Try to find ways to actually talk to human beings instead of pressing buttons and filling in forms. Invent ways for the other party to put a face with your voice or a voice with your email message. 

2—–Watch your manners

Most people are starved for respect. Many of us will go the extra mile for people who are simply considerate to us. Just showing common courtesy and listening to others will increase your results.

3—– Start asking

 Make outrageous requests. See what happens. So many of us stop ourselves by thinking “this person will never do that” or “I’d never give someone that” and this self-monitoring keeps us from getting the deals we could. Ask and see what the response is. (See related post on High Initial Demands) 

4—–Involve the other party

 Ask the other party what is important to them. Stop trying to be a mind reader and making decisions in a vacuum. Tell the other party your concerns and ask them for help solving them. Find out what other people have asked for or done. The old adage “people will support what they help build” works in negotiations as well. Let others help build or participate in the solution. 

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5—–Stop looking in the rear view mirror

 Stop limiting yourself because of a past mistake or a response you didn’t like. We keep living in the past. If you made a mistake or someone didn’t give you a request, let it go. Today is a new day, with new people who don’t know that you made a mistake five years ago. 

6—–Don’t be lazy

As pressed as everyone is for time, it is tempting to stop once a solution is found. Don’t. There are many options in most negotiations. Once you find a possible solution, document it, put it aside and continue to brainstorm. 

7—–Determine the worst case scenario

Figure out what is the worst result that can happen. If you can live with the outcome, go negotiate. If you can’t, go back to the drawing board and create some options.

8—–Have a sense of humor

We can turn a negotiation into something as fearful as a firing squad. Lighten up. Most of our negotiations are not rocket science, thank goodness.

9—–Practice, practice, practice

Your first goal should be to practice on strangers. Go to flea markets, garage sales and yard sales. Ask for an outrageous bargain or for something you stand no chance of getting and then see what happens. Practice with hotel front desk clerks, restaurant wait staff and service providers and practice. Practice on your family. If you can persuade your own family to help you out or do something, you can persuade practically anyone.