Monday, September 15, 2008

Less Than You Bargained For?

Face it, most of us struggle with negotiation. We like price tags. While we like to shop for a better price, we hate to ask for one. As the kids say these days: “ 'sup with dat?”

Perhaps we can chalk it up to the American distaste for negotiation in general. Travel to Europe, Asia or South America, and you find bargaining and price negotiation is a robust practice in shops and among tradesmen; price tags are merely a starting point. In the U.S., bargaining has become culturally unacceptable, as if there is something distasteful, immoral even, about trying to see how much your customer is willing to pay - opening a negotiation is seen more as the mark of a sheister, or at least a rude oaf, than a polite business move. One of my captains hated dealing with non-members and the issue of payments. It wasn't the customers, per se, but just asking for money made him uncomfortable. He loved doing member tows -- just sign here!

In a free and open society, negotiating is vital to the economy's existence. Even though you wouldn't think of haggling over the price of toothpaste at Wal-Mart, you can bet your life someone in Wal-Mart's supply chain negotiated a better price on your behalf. At the check stand, you may feel removed from the negotiations if it pleases you, but you were deeply involved, none-the-less.

Because we don't engage in bargaining much, I wonder if our industry's small business owners have lost an important skill just from lack of practice. One tower I know claims to send every invoice with an offer of 10% off for quick payment. That may be a good cash flow strategy, but it is not a substitute for negotiation. Rusty Shackle, VP for Mergers & Acquisitions at RedRightReturning explains it this way:

"Sending an invoice for service with an automatic discount is essentially negotiating against yourself. You have no idea of how your customers value your service if you're willing to play both sides of the negotiation. Maybe they would have paid the full price? You will never know. But, now they know that you don't value your service very highly, because your invoice says your service can be had for less. Maybe it can, but don't surrender that knowledge until you have to."

Rusty makes a good point; why would you offer a discount for no reason? Skilled hourly services are not commodities like pork bellies or toothpaste. If you are selling a commodity, there are many good reasons to lower the price, and offer volume discounts – products have expiration dates, and inventory represents capital investment that only turns a profit when it moves. But you don't have a bunch of unused tows going stale on a shelf somewhere. We provide a skilled and highly specialized service, and the value of that isn't subject to fluctuations in inventory, nor does it have an expiration date.

I'm not suggesting that you never lower your price. I'm known to give a guy a break for a cash payment on a quick prop disentanglement. And sometimes I stick to my guns and see if I can collect the full price after being asked for a discount. What I'm saying is that if someone asks you to lower your price, your first reaction should be private indignation. Then you calmly say “Okay sir, how much do you think my services are worth?” This immediately allows you to illuminate the gap between the two parties' understanding of the value of what you are offering.

Notice I didn't say close the gap between the two parties, that comes later. First, we have to define the gap – how far apart are we? This is why offering a discount at the beginning is negotiating against yourself; you haven't discovered what the other person thinks you are worth.

See if the customer will actually give you an answer in dollars rather than just hyperbole like “outrageous” or “too much”. You have told him how much you think your service is worth, and it's completely reasonable to ask him the same question. Shock and indignation are emotions, not offers to reach an agreement.

When confronted with the question “how much do you think my services are worth?”, many customers really have no idea, or they turn to other excuses and pleas for a break. Without any concrete numbers to discuss, the conversation focuses on whether you're being a nice guy or acting like a pirate. These negotiations are now about your character, rather than the value of your service. Always attempt to bring the discussion back to one about value and prices.

Perhaps his anwer is a realistic one, like an offer to pay with cash. At least he's not attacking your character. If a few dollars off here and there makes for quick payment and happy customers, why not? But that shouldn't be your default position. You do believe that you're worth what you charge, don't you? Then you should be willing to fight for what you're worth.

Which is another reason to pose the “what am I worth” question, it leaves you room to make a sales pitch to the customer who really doesn't understand the value of your service. Now we begin to close that gap. You can explain how much you have invested in equipment and training, and inform that customer that we often go days without a paying job, so the hourly rate is much higher than shoreside tradesmen. Or, you can sell the job by comparing the cost to how much the customer has invested in his boat: “So, what you are saying, sir, is that it's not worth $1500 to you to get your $100,000 boat safely back to the harbor?”

Learning to deal with price adverse customers is vitally important in this industry. A disabled boater is already having a bad day, and now he has to pay for his misfortune. This is one reason the memberships networks have been so successful. The membership card avoids all the distasteful and contentious bargaining – just sign here! This is a double edged sword though, because when members end up needing services that are not covered, they feel they are victims of a bait and switch. Never are good negotiating skill needed more than explaining why pulling a boat off a lee shore isn't a free service.

The skills required for negotiating the day to day jobs will serve you well when it comes time to negotiate larger deals, like salvage claims and service provider contracts. First, you have to know what your position is, and be able to back that up. Then, you keep your cards close until you discover what the other party's position is. Every negotiation should begin by defining the gap between the parties. Only then can you begin to move towards a settlement.

Rusty Shackle has a favorite saying: “Never begin to build a bridge until you know three things. 1), how wide is the river. 2) how deep is the water. 3) who owns the land on the other side.”