Price negotiation is one of the greatest skills every management executive should possess. In negotiation, one brings the other party into a formal communication in order to reach an agreement on an issue; particularly in price negotiation. The parties in the price negotiation seek a price review either upwards or downwards depending on who initiates the negotiation. As much as pricing is a necessary concomitant in business transactions, the art of price negotiation becomes a necessary skill that every management executive should possess if their businesses are to be at the forefront of the competition.
Price negotiations happen in different forms depending on the situation and business environment. In everyday retail business to final consumers in developed countries, prices are fixed and therefore no need for buyers to negotiate price. This is not the same in developing countries where most retail is largely unstructured and therefore prices of local products are negotiated on a daily basis. The situation becomes precarious if the products are perishable and therefore sellers are at the mercies of buyers.
In this instance, the tomatoes seller in a bumper harvest is susceptible to all manner of negotiations. On a typical Saturday night where the market will not operate the following day, the tomatoes seller at 5pm is torn between selling her tomatoes at any price negotiated or keeping the tomatoes to rot before the market opens on Monday. The second option means she will lose everything but selling it at the least price will at least give her something little to cushion the next consignment of tomatoes. In either ways, both seller and buyer adopted a negotiation strategy; this manifested in the agreement reached during the tomatoes transaction in the market.
There are many types of negotiations but they can all be broadly classified into positional bargaining and principled negation. In positional bargaining also referred to as distributive negotiation the strategy adopted by each party in the negotiation is to take an extreme end position based on their wants, needs and limitations. This type of negotiation is “winner” centred where one party in the negotiation is expected to win and the other party lose. The tomatoes seller is a case in point. A buyer who adopts the distributive negotiation style will be at the extreme end ensuring that they negotiate to “win” at the detriment of the tomatoes seller.
In positional bargaining, parties have no concern for the other, they position their mind on winning and strongly commit themselves and focus only on their single goal i.e. to win at the detriment of the other party. Simply put, it’s a one way negotiation with each part taking single position at extreme ends. Only the strong survive.
Positional bargaining is shrouded in lack of trust on the parties negotiating. It is tensed, hostile and usually abusive. It also lacks transparency. The losing party’s relationship with the winning party is strained hence precarious to a future negotiation. In the lean season when same buyer shows up at the same tomatoes seller, she will resist selling to the same buyer and in instances where they are compelled to sell to the same buyers they assume the positional bargaining type because of the previous experience.
The positions adopted in positional bargaining makes that type of negotiation not good enough. But that notwithstanding, there is a time and place where positional bargaining is the best option. In instances where there are tough pricing decisions because of the activities of competitors and also where there are conflicting interest in the transaction and/or the need to get out of an immediate crisis which cannot be postponed, positional bargaining becomes the best and only decision to make by taking an extreme position and maintaining your stance in the negotiation. Yours is to “win”.
On the other hand, principled negotiation also referred to as integrative negotiation is another type of negotiation where the parties in the negotiation work together for a mutual benefit “win-win” approach. Parties in principled negotiation appreciate continuous as well as good relationship therefore they promote value-creation agreement to leverage their continuous stay in business. They create an enabling environment that is transparent, collaborative and mutually beneficial for business growth. They seek lasting solution instead of an immediate gain at the detriment of the other party.
Principled negotiation is analogous to the tomatoes seller situation where both parties will work at mutual interest during bumper harvest and lean seasons always making sure they always think in terms of mutual interest and problem solving. Through this means both buyer and seller are able to create a better business relationship for mutual benefit.
Comparing positional bargaining to principled negotiation, the advantages in practicing principled negotiation far outweighs that of positional bargaining. While positional bargaining looks at the immediate term, principled negotiation looks at continuous long term by creating mutually beneficial opportunity with better gains. In the long term, a “win-win” approach to business negotiation is always preferred to a “win-lose” approach.
5 styles of negotiation
There are 5 styles of business negotiations that parties in negotiation may adopt. These are: competing, collaboration, compromising, avoiding, and accommodating. I have termed the 5 styles of negotiation as “3C2A”. I will explain these styles in the foregoing paragraphs as:
- Competing style of negotiation
The competing style of negotiation is usually characterised by an adversarial approach. Any business transaction approached in an adversarial style is antagonistic which seeks “winners” and “losers”. Competition in business is usually among businesses in the same industry clamoring for a higher market share but in price negotiation between buyers and sellers should not be adversarial as one needs the other to remain in business.
The competing style of negotiation may work in a one off business where a price decision ought to be made for a one time purchase and there is no much variables to play with. This usually happens in price negotiation for a product. When parties in the negotiation are both using the competing style, the negotiation will breakdown causing strain on their business relation because each party will feel cheated and often such approach does not close a business deal.
- Accommodating style of negotiation
As the name suggests, accommodating style is a form of submitting style usually referred to as submissive style. The accommodating style is the one that willingly and freely gives information to the other party in the negotiation to win. They value good working relationship but their style can be disadvantageous when negotiating with a competing style whose interest is always to win.
The accommodating style of negotiation will as much as possible avoid litigation with the other party merely because they want to win the negotiation. Litigation in business can affect the business fortunes. The disadvantage in using the accommodating style is that your business may lose too much revenue when you give away too much information in a negotiation that should benefit your business. The other party may take an undue advantage over your accommodating style.
- Avoiding style of negotiation
This style approaches negotiation in a passively aggressive manner rather than take issues up heads-on. Usually parties who avoid the full negotiation process are seen as having something to hide i.e. less transparent and cannot be trusted. Avoiders do not compete neither do they accommodate. They simply avoid the negotiation.
They are not emotional and passionate about the intricacies of the business negotiations but rather they push the figures to reach an agreement. For them, negotiation is about the figures so they avoid all other issues as not necessary to the achievement of their goal in the negotiation process.
Most of the negotiators who adopt the avoiding style are those who lack effective communication skills. They don’t engage in talks other than the figures. The communication lapses affects their closure of deals and strains business relationships. At the top level of management, communication skills becomes vital for business success.
In using avoiding style, when you realise that the negotiation is not going well due to communication lapses, it is better to rethink your style of communication. Open communication is preferred in business negotiation.
- Compromising style of negotiation
This style enables the parties in the negotiation to meet each other halfway. Both parties must be willing and actually meet each other halfway in other for a compromising style of negotiation to be effectuated. This results in what is simply referred to as a “fair deal”. No particular party wins. The compromise ensures equal satisfaction for both parties.
In the compromising style of negotiation, parties start at extreme ends but are open and willingly work towards meeting each other halfway unlike the competing style where the party that want to win starts at an extreme end and maintain their position till the end of the negotiation.
The compromising style of negotiation help maintain strong business relationship but its results are often not the best agreement for the parties. They simply compromise for the sake of convenience.
- Collaborating style of negotiating
The end result to this style of negotiating is that parties in the negotiation must have their needs met. It is a joint effort by the parties to find solutions to meeting their mutual needs. They go beyond conventional methods to adopt styles which works for both parties. In collaboration, there is value creation for mutual benefit. This style is often favoured by negotiators who supports the principled type of negotiation.
The collaborating style seem to be the most time consuming and engaging since parties are all expected to be actively involved. As good as this style may be, it will not be the best style to adopt when negotiating with the competing style negotiator; they may take advantage of your collaboration to “win” so that you “lose”. Also in collaboration, information is shared freely which can be a potential disadvantage for one party if the other party has an adversarial motives. They may break away from the collaboration and use your information elsewhere.
The 3C2A as I have termed it does not work in isolation, depending on the nature of the negotiation, parties may adopt which style will best fit the purpose. Sometimes a couple of negotiation styles will have to be merged to close the business deal successfully.