How to Negotiate Pricing
Our article on how to negotiate prices and manage sales pricing pressure. Learn how to win the sale whilst giving away as little as possible.
How to Handle Pricing Pressure
As a salesperson, sooner or later you’re going to find yourself being pressured to reduce your price. How can you win the sale but give as little money away as possible?
In any purchasing negotiation, pricing is sure to be an issue, and the larger the contract price the bigger the incentive to haggle, and the greater the expectation that the price is negotiable.
If you are selling commodity CRM systems for a few dollars or pounds a user, then most customers will understand that there isn’t room for negotiation. If you are selling a nuclear power plant that doesn’t have a fixed price, the negotiations could go on for years.
So how do you handle price negotiations for a product or service that falls somewhere in middle of those two? Here are some rules:
Price Negotiation Rules
The first thing to do is to find out how serious the prospect is about not purchasing at list price. If they don’t have a viable alternative then their scope for negotiating is limited, if they have any at all. They could of course delay purchasing.
If they are quoting competitor pricing to you, ask them who and what exactly is that price for, it may not be a compatible alternative. Some people just love to negotiate for the sake of it, love to do a deal when in reality they are happy with the list price. They just want the fun and kudos of getting another 10% off.
The next thing to do is to know what your back stop is. This may be decreed by your company, but you need to know at what price you should walk away. If you don’t know that, then you can’t negotiate.
If you want the business and have to give a discount then:
Just say No – they may be bluffing. Just leave the door open so they can come back.
Go in small steps. If they reject your offer of 10% off, don’t offer 20%, offer 11%. That will pass the message back that there isn’t much fat in this price.
Tie the discount to something in return. Faster payment terms, a customer testimonial.
Throw something into the deal that costs you very little but is worth something to the customer. Another software module, for instance, or an add-on product that you sell at a higher markup to the base product. Car sales people are good at this, they have more margin to play with for dealer fitted accessories.
Play the “refer to a higher authority” game. “I’m only able to give a maximum discount of 12.5%, anything over that needs my manager/CEO/board approval.” That will shorten the negotiating cycle, the prospect will know that if you ask for approval for a 15% discount, and the prospect then asks for more, you can’t go back again. You can have lots of fun with this process, “A discount that size needs CEO approval, and he has just gone on holiday for three weeks, can’t ask him until he gets back.”
Whatever you do, don’t allow the CEO/Managing Director to negotiate the price. They are the ultimate decision maker, they can’t hide behind not having the authority to approve a larger discount.
De-scope the offering. “To meet your budget, we can’t sell you the premium product but the basic one should be fine”. This allows for upsell later.
Offer better financial terms, like delayed, staggered or easier payment terms, or financing.
For recurring revenues, offer three months’ at a discount or free rather than a discount that lasts forever.
Get something back for the discount: customer testimonial, upfront payment. referrals, purchase order this month rather than next.
Offer a tiered discount depending on usage, which is what we do for large CRM deals. “The first twenty users are at list price, the next 20 5% off, 10% off for any over 40″. This has the advantage that if they don’t take up the usage, they haven’t got an unwarranted discount.
If the offering is a mix of once-off and recurring revenue, discount the once-off part only. Oracle, the database vendor, is a master at this, sales people can offer eye watering discounts on the product, especially at year and quarter end, but are never allowed to discount the annual maintenance contract, which is the most expensive in the business at an eye-popping 30%. One of the many reasons that our CRM system doesn’t use Oracle databases!
Slow the process down – their pressure for concluding the negotiations may be greater than yours. The Japanese are famous for this, they are still “thinking” about the deal and your ‘plane leaves that evening!
If they are quoting a lower price from a competitor, check the competitor’s web site to see if the price is for a comparable product, or ask to see the written quotation.
Of course, the ultimate trick is to – increase the price! Instead of giving them a 15% discount off what they want, offer them a more expensive option with a great discount, that comes to more than the original quotation. That way the customer gets a great discount and walks away happy, and you increase rather than decrease your sales revenue.