Deal with the $$$, Not the Percentage

Emotions and Negociations

There is an emotional being in all of us. There is also a negotiating animal in all of us.

For sure we all had a situation where we asked for a discount just for the purpose to have the satisfaction of getting one. It didn't matter if you got 1% or 10% discount, the fact is that you got one.

As a matter of fact, all good salesman know when they are facing such situation where the customer is asking a discount just for the sake of asking one. In those situations, a salesman says something like: "Ok, I give you $1,000 discount but that is coming from this week's salary". It just connects the negotiating animal with the emotional being inside us, and we close the deal.

Dollars and Percentages

Many times we deal in percentages rather than absolute dollars, euros or yens. You should always deal with absolute amounts rather than percentages. Percentages are what mathematicians call an "calculus instrument". It just serves the purpose of simplify analysis and communication. If you have your sales commission defined in the terms of percentage of the gross revenue, then you don't have to define all possible combinations of commissions for each scenario of gross revenue.

But what does matter to the sales guy is actually the amount of money he brings home.

When negotiating a contract you should always negotiate discounts and translate them in the absolute amount. Even if you are asking in percentage. Only this way you will have the full picture.

Time well spent

You will soon discover that the "3%" you negotiated when you bought your car worths about 15 times the "10%" you negotiated for the insurance of the same car. But you took 1 hour negotiating your car and you took the same hour negotiating the insurance.

Clearly, all percentages don't worth the same. The "car percentage point discount" worths 50 times each "insurance percentage point discount". ( being A the "car %" and B the "insurance %", the equation is 3A = 15 * 10A).

It means that if you spent 1 hour negotiating the car you should only spend at most 4 minutes dealing with the insurance discount.

Sourcing Analysis

Thus, doing a sourcing analysis is critical to decide where to invest your precious time in negotiations. If it is obvious in which products and services you should concentrate ( typically where you spend more money) , less obviously is prioritizing them.

Maybe with Machines you can only achieve 3%, and you are saving $100,000, where with Flower you get a 0,5% but you are saving $500,000.

Doing sensitivity analysis you provide you a means of quantifying the time effort.

And you actually should drop negotiations of low value. Your management time will be better used in something else. If not you can always just negotiate a downsize of your negotiating team.

Buying the Unknown

Many times the SMEs know they need something. But that's it. They don't know what they need.

Let me give you an example: company Beach, who manages a concession in Sunny beach needs to buy chairs for their customers.

The company Beach starts a procurement process for acquiring those chairs with a single phrase: " Please quote 100 white beach chairs for placing them in Sunny beach in 4 weeks". Does this look familiar to you?

The suppliers receive this "RFP" and start asking themselves: "are plastic or metal chairs?", "are adjustable or fixed?", "more durable or less durable?", "in a lease mode?", "support and replacement services?"

The problem is that company Beach doesn't have the know how yet to create a detailed RFP that addresses all those questions. The nearest competitor that has the Turtle beach, near to Sunny beach, is not willing to provide such information, because he is a direct competitor.

So, what to do next?

Call To Action

Find a similar business that it is not a direct competitor to you. Since you are a SME a good option is to find a company that it is geographically away from you. Ask them for help. Sure you will owe them a favor later on, but meanwhile you are better off since you got a good RFP. This type of collaboration will provide insight not only about the RFP but also of the current market prices and conditions.

Rankings -Where to Get Them ?

Ratings and Rankings

We are used already to get ratings for products or for services that available to consumers. We can get ratings for TVs, Hotels and Restaurants or Airliners.

But what about business to business services and products? It becomes much more complex because those products and services are many times tailored to a specific need. You cannot browse the web and get the rating you are looking for.

And the number of ratings is directly connected with the presence of the product. Smaller companies have smaller exposition and it is unlikely that a large group of people talks about their products and services.

The way to pass through this is to use vertical portals. But again usually these portals are destined only for consumers. Have you ever come around a rating for an hotel talking about their conference and meeting services ? No, what you get is ratings about individual rooms and consumer amenities.

SMEs are all alone out there

Small and medium businesses are on their own. Nobody speaks of them and they cannot find rating and rankings of others SMEs. The first issue limits their market exposure and thus limit growth. The second limits their purchase options and decision quality.

For those SMEs to expand rapidly they usually have an outstanding product or service. It has to be far better than the average quality of the products of the bigger players, so that the consumer and other companies decide to opt for that product rather than for the well known brand.

Internet comes to rescue

Collaboration within SMEs (read the older posts) is one of the big problems. But internet offers now a solution. It provides a low cost collaboration structure where SMEs can share their views regarding their suppliers and customers.

By sharing that information you are increasing a common wealth that will serve you in choosing better your suppliers and making more educated decisions about products, risk, price or delivery.

You can see the internet for SMEs as the intranets of the large enterprises, where internal systems for providing ratings for suppliers and customers are already in place.