If you run a business of any kind, it soon becomes apparent that the ability to negotiate effectively is a pretty important part of your daily job. Negotiations affect everything from managing client contracts to paying for your telephone bill; poor negotiation skills are, at best, a hindrance?and, at worst, a complete disaster.
Even if you have never run a business, though, negotiations are part of everyday life. It pains me, then, when I realize that so many adults are horrible at negotiating, simply because they are never taught to do so effectively. In fact, society actively teaches us to shy away from negotiation (which is, after all, a form of confrontation), so that those who understand its principles can easily take advantage of those who don?t.
It?s curious, incidentally, that the ability to negotiate seems to be innate in humans. Many children are far better negotiators than adults precisely because they have not yet learned the ?rules of polite society? that make negotiations so hard for grownups.
Definitions of ?negotiations? abound, usually by people who have made the study of the latter their lifetime ambition. I, being the simple, uneducated person that I am, am perfectly content with an equally uncomplicated description: A negotiation is an attempt to reach a point of equilibrium at which all parties believe that continuing to bargain will result in a more negative outcome for them. In other words, everybody haggles until they feel that haggling further will make things worse for them, at which point they either accept the resulting outcome, or give up.
There are a number of important consequences that stem from this definition (which is why it works so well for me), and I will get at them in part two of this post. For the moment, though, I want to focus on what isn?t a negotiation, because recognizing ?false? negotiations is much more important than mastering the real thing.
Note that the verb ?to believe? figures prominently in my definition above. A negotiation is, by definition, an imperfect and highly personal process that relies significantly on perception. When you negotiate, the fact that you feel like you?ve gotten a good result is often very important to you, regardless of whether the actual outcome can be measured in a way that confirms your hunch. This makes detachment and objectivity two all-powerful tools at the disposal of the skilled negotiator. I will show you that, for many people, ?winning? a negotiation is far more important than actual deriving a positive result from it.
This means that the personal nature of negotiations gives the skilled salesperson a tool to drive unsuspecting customers into a purchase process in an unorganized and highly emotional way, resulting in outcomes that are (usually) detrimental to them.
Consider, for example, car sales. If you look at a car dealership in a dispassionate way, its business model is absurd; the car dealer has ridiculous upfront costs (large warehousing space, lots of staff, expensive products that must be bought and transported, etc.), very stiff competition, both external from resellers of other brands and internal from resellers of the same brand, and absolutely no product differentiation, because the car you buy from, say, Toyota Dealer A is exactly the same car as the one you buy from Toyota Dealer B.
All these factors should conspire to drive the price of a car down to cost-plus?since the only thing that dealers can really compete on is price. ? You should be able to walk into a dealership, look at the manufacturer?s price of a car, and buy it a discount that leaves the dealer with enough money to pay said manufacturer, plus enough to pay for the dealership?s running costs, plus a very small profit. In a free market, any attempt to make you pay more will immediately be destroyed by competitors looking to make a sale.
And yet, many people actually pay above sticker price for their car?they just don?t know it. How is this possible?
It is possible because the car industry has turned a purchase into a negotiation process?and they are making buyers negotiate against themselves. They utilize a number of different techniques, like the infamous four-square, to confuse the unsuspecting buyers into thinking that more than just the price of the car is at stake: They bring in trade-in value, financing APRs, downpayments, and monthly payments so that it looks like more than one variable needs to be addressed, and that variance in the amounts the customer has to consider is small.
To make things better?or worse, depending on the point of view?they also appeal to a person?s sense of decency and fair play. If you walk into a dealership and lowball a car price, they?ll start complaining about how you?re trying to take them for a ride, how their children need feeding, how their houses are falling apart, and what not. Never mind that you?re probably standing in a dealership that cost millions of dollars to build and the owner drives a Ferrari? if there is a car dealer who does not claim to live in absolute misery, I have yet to meet them.
All these tricks are aimed to crank up the stress level of the buyer, turning what should be a straight purchase?no different, really, than walking into a grocery store and buying a few pounds? worth of Apples?into a complex faux-negotiation. Best of all, the process is guided so that customers are, effectively, negotiating against themselves by trying to tweak the various artificial parameters of the purchase instead of focusing on the one element that matters.
This is not a negotiation, nor does it have to be. Here?s how I buy a car:
Pick a model. Obviously, I need to figure out what car I want. I?ll look around, narrow my decision down to a couple different models, and take them for a spin, taking care never to sit down with the dealer for any ?negotiation.? At this time, I also pick out the exact configuration that I want, and establish what the manufacturer?s recommended price (the ?sticker price?) is by visiting their Website.
Figure out a base price. I then pick ten or twenty dealerships in my area (I live in a big city, so that?s not that hard to do) and send them a fax, asking for their best price for the exact model and configuration that I want. The list of dealers excludes the one from which I think I will eventually buy the car (typically, this is the one I did my test drive with, unless they really pissed me off).
I usually get a good return rate?responding to a fax costs the dealers nothing, and could bring them a sale, so they usually oblige. The lowest price quoted has two important functions. First, it establishes a ?fall-back? price?in the absolutely worst case scenario, that?s how much I?m going to pay for the car. Second (and more importantly), it provides me with a starting point for haggling with the dealer.
Deal with the bank. Unless the manufacturer has a ridiculously good financing offer (such as, say, zero percent), I prefer to finance the purchase with my bank. In either case, my goal is to walk into the dealership with a firm financing deal in place, be it an offer from my bank or an advertisement from the manufacturer. In my experience, dealers will often try to claim that an advertised deal doesn?t apply to the car I?ve chosen, so I usually also give the manufacturer a call to confirm that it does, at which point the dealership usually backs down.
Obviously, if you don?t need financing, you can skip this step.
Figure out the book value of my used car. You?ll never get book value, of course, and, if you can be bothered with that process, the best way to get the most out of your used vehicle is to sell it yourself. I can?t be bothered, though, and I use book value as a reference point, knowing that I will likely get less, but, at least, aware of how much I should be getting.
Buy the car. With my homework done, I walk into the dealership and start the ?negotiation? process. The salesman will usually pull out their foursquare and ask me something like ?So, how much would you like to pay a month??
I typically ignore all this, pull out the fax with the best offer, and politely tell the salesperson that I don?t know, and that there really is no need for us to dwell too much on the monthly payment. The only thing that matters is whether their dealership can beat the best price I have.
At this point, two things could happen. The salesperson is in trouble, and they know it. If they are a somewhat decent human being, they will capitulate, walk into their manager?s office, and come back with a typewritten contract for their best offer. I am happy if they match the best price, and ecstatic if they beat it, even by a few hundred dollars.
If they aren?t quite ready to give up, they?ll try to appeal to my emotional side, complaining that the price is too low, that they cannot possible afford to sell the car for so little, and blah blah blah. At this point, they know their game has been called, and any amount they can squeeze out of me is a bonus for them. I find this a little off-putting?I figure that they should show me the courtesy to recognize the fact that I know what I?m doing?but remain completely unfazed.
You may think that my lack of sympathy for the salesperson is the result of having learned to remove emotion from the negotiating process, or having somehow come to terms with the fact that a successful negotiation must be conducted in an amoral way. That, I assure you, is not the case, because, you see, I am a fundamentally honest person and it would cost me way too much emotional capital to ?win? a negotiation by crushing an opponent into a completely unfavourable position. I derive no pleasure from the misery of others.
Remember, however, that this is not a negotiation. I have done my homework and discovered that another dealer would be perfectly happy to sell me the car for a given price. Therefore, if this dealer cannot do so without incurring a loss, I can simply take my business elsewhere and not cause them any damage. If they can, then there is no reason why they shouldn?t. Either way, nobody has to suffer, and everybody comes out a winner.
As you can see, by removing all superfluous variables, what looks like a negotiation on the surface turns out to be a much simpler exercise. I have used this approach to buying cars for years, and it has always worked perfectly?not only by helping me pay less, but also by removing all the stress that people needlessly allow to be attached to this process.
You?d be surprised how easy it is to encounter faux-negotiations, and how easy it is to avoid them. Whenever all subjective variables can be eliminated and all that is left is a measurable, objective metric, there is no need to negotiate.
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