CREATING VALUE

You should bear in mind three very important rules in regard to creating value in a negotiation. The first concerns the meaning of value itself, which is expressed as Value = Benefit - Cost. We’ve all, of course, heard about sales processes that are supposed to add value but hardly ever succeed in creating real, measurable business value. The Strategic Negotiation Process does succeed, though, because it enables you to add “hard” value (value you can measure) rather than “soft” value. If you can’t put a potential trade through the equation above, you’re not creating value. The second rule is: Never concede—always trade. If you simply concede on an item during a negotiation, you are eliminating the possibility of creating value because value is created by trading items that have differing importance to the two sides in a negotiation. The third rule is: Never negotiate one thing by itself. If you negotiate one item at a time, you will soon find that you don’t have any other items with which to trade, and if you can’t trade, you can’t create value.

Creating value is, of course, something that has to work for both you and your customer, or it doesn’t work for either of you. Salespeople like yourself have two very good reasons to embrace the concept of value creation. First, it makes it easier for you to negotiate with buyers because it’s easier to divide a larger pie than a smaller one. And, second, it enables you to make more money by providing you with the ability to make bigger deals, and over time bigger deals mean more money. However, even though creating a larger pie and a bigger deal is ultimately beneficial to both sides in a negotiation, buyers don’t necessarily see it that way. Because, as a rule, buyers are primarily interested in lower prices, they’re less likely than you to be concerned about value-creating trades. And that’s why it’s often incumbent on you—the seller—to show the buyer how and why creating value can be advantageous to both of you.

As a matter of fact, I was in just such a position myself a few years ago. As I’ve mentioned, I own, and live in, a building with several rental apartments, and when one of my tenants moved out, I needed to find another to replace him. The outgoing tenant had been paying $1,000 a month—the going rate for a two-bedroom in Chicago—and I wanted to get at least as much from a new tenant. Now a rent negotiation would appear to be a “zero-sum” sort of negotiation—one in which one side loses and the other wins, or, at best, you arrive at a “win-win” solution. For example, if I asked a prospective tenant for $1,000, he said he’d only pay $900, and I accepted it, the tenant would have gained $100 and I would have lost $100. All we would have done was “rearrange” value—a zero-sum, win-lose approach.

Let’s say, though, that I’m asking $1,000 a month for the apartment and the prospective tenant can only afford $900, but we agree that the tenant will clean the hallways in return for a $100 discount on the rent. I’m already paying $100 a month for a cleaning service, so by trading for having the hall cleaned by the tenant I’m still getting $1,000 in value, and the tenant is getting the apartment for what he can afford. This is a “win-win” solution. Still, as in the first scenario, although we would have reached an agreement, all we would have done was rearrange value, not create it. But because I wanted something else from a new tenant, I wanted to devise a value-creating deal, so I placed an ad for the apartment that read as follows: “Beautiful, remodeled, 2 BR, 1.5 bath vintage apartment. Hardwood floors. Fireplace. Rent of $1,100 per month with no dog and $1,000 per month with a dog.”

The first few people who called about the apartment said that they didn’t have dogs and that, as there was obviously a mistake in the ad, they assumed they’d only have to pay $1,000. When I told them that the ad was right, they asked why, to which I replied, “You wouldn’t understand.” The next call that came in was from some people who did have a dog. They said they were interested in the apartment, but because they also thought there was an error in the ad, understood they’d have to pay $1,100 a month. “No,” I said, “you get the lower rent.” Although they said they’d take the apartment sight unseen, they were also—understandably—curious about why the rent was lower. “I’ve got a dog myself,” I explained, “an Alaskan Malamute. As you know, Malamutes are pack dogs, and he could use a playmate. Having another dog in the building would be great.” Of course, providing a playmate for my dog didn’t cost the new tenants anything. It did, though, provide me with great value, not to mention the value to my dog. In other words, by trading we had created value in the negotiation.

In fact, we subsequently negotiated an even better arrangement for both of us. It turned out that the new tenants owned a mobile dog grooming business called “Shampooch.” At the time, I was paying $85 a month to have my dog picked up, groomed, and brought home. I learned, though, that it actually only cost my new tenants about $20 to groom a dog. So we agreed that, in return for grooming my dog every month, I’d lower their rent by an additional $50. This trade created $35 of value for me ($85-$50) at the same time that it lowered my income (their rent) by $50. It also created $30 of value for them ($50-$20) while lowering their rent.

Of course, in this instance we weren’t talking about a lot of money. The point is, though, that regardless of how much money is involved, world-class negotiators always look for trades like these that actually provide both sides with more than they were originally looking for. Although from a mathematical perspective it doesn’t seem possible, it is, in fact, eminently possible, as this example shows. Of course, even though I was the seller in this situation, that doesn’t mean that only a seller can create value in a negotiation. There have been many examples of situations in which buyers have presented sellers with value-creating trades. One of my favorite examples comes from Henry Ford. As legend has it, Ford was negotiating the purchase of door handles for his Model T with his usual supplier. The supplier was asking for a 5 percent increase in the price that Ford, understandably, didn’t want to pay. As a result, they appeared to be at an impasse. The carmaker, however, thought of a way out.

At the time, the door handles came to the Ford plant packed in wooden crates. Ford told the supplier he could have his 5 percent increase if he’d agree to change the size and location of the bolt holes on the lids of the wooden crates. Because it would cost him virtually nothing to make the change, the supplier was happy to do it. Ford was happy as well because, as it happened, the floorboards of the Model Ts were also made of wood, and with the modification, Ford was able to use the crate lids as floorboards. The trade did, of course, increase Ford’s cost for the handles, but that increase was far outweighed by the savings he realized by eliminating the cost of raw materials and the processing of the floorboards.

Another example of a buyer creating value comes from an experience we had with one of our clients. The client, an insurance company, was negotiating with the commercial sellers at a large retail home improvement firm for the purchase of carpet to use for the damage claims of its policyholders. The lead item being negotiated was, of course, price per yard. The buyer kept leveraging the volume in an effort to lower the unit cost, while the seller continued to tout the carpet’s quality in order to maintain the price. They attempted to trade warehousing, just-in-time inventory, payment terms, and length of contract, all to no avail. The negotiators on both sides were professionals who were well-versed in big-ticket negotiation, but enough business value wasn’t being created despite their best efforts to offset the gap in pricing both sides wanted. And then the buyer, not the seller, got creative.

Using the Strategic Negotiation Process, the buyer—the insurance company—began to look for trades beyond the obvious ones and after considerable thought came up with one. At the time, the buyer was preparing to purchase data about a specific section of consumers from a data management firm. As it happened, though, the seller—the home improvement firm—had the same data. So for the moment, the price per yard of carpeting was set aside, and the two companies reached an agreement that allowed them to “trade tapes,” that is, to marry their consumer databases. The cost to the supplier was zero; the value to the buyer was immense. But the trade not only reduced costs for the buyer, it also allowed both sides to realize a revenue opportunity, as they used the new joint database for consumer-marketing programs.

There are several morals, if you will, to these stories. The first is that both sides benefit when value is created, regardless of whether it’s the seller or the buyer who comes up with the trade. The second is that even in a simple business deal, it’s actually very easy to find ways to create value. And the third is that in more complex business negotiations, when there are more things that can be discussed between the two sides, there are even more opportunities to create value. If you’re like me, after a while it becomes a personal challenge to turn any apparently single-item, zero-sum, concession-oriented negotiation into a multiple-item, value-creating negotiation.