How Powerless Negotiators Achieve Better Prices

When small industry suppliers are selling into large companies they often feel powerlessness. They believe that they haven't the possibility to achieve a good deal, because they don't really have a good alternative. When you are negotiating a deal it pays to have viable alternatives to fall back on – or at least that’s what most people think.

Over the years, I have been working with all kinds of B2B-focused organisations, from start-ups to small and middle-sized businesses to multinational companies. Quite a few, especially those who acted as an industry supplier dealing with large(r) corporations, perceived some sort of powerlessness during business negotiations resulting in unsatisfying outcomes.
For instance, earlier this year I had a long conversation with the MD of a mid-sized component supplier.  A major part of his business came from dealing with much larger companies. Quite often, due to the perceived lack of negotiation power and the believed dependency, deals turned out being less profitable as hoped for. Quite frankly, said the MD, we don't really have an alternative, we have to accept those deals, as the fall back alternative may be even worse.

Negotiation theory tells you to have a strong alternative, a strong BATNA (Best Alternative To a Negotiated Agreement). The better your BATNA the less dependent you are on the other negotiator for finalising a deal. In fact, many studies have shown that negotiators with better alternatives generally end up with superior outcomes because alternatives offer the possibility to walk away from the bargaining table. So, negotiators are strongly advised to identify feasible alternatives that they can fall back on during a negotiation.
Now, what if your alternative isn't that strong, which apparently is the case in many sales negotiations between SME's salespersons and larger corporation buyers.

Last weekend I saw the film Jerry Maguire on Netflix. It's said that this film, or at least the main character played by Tom Cruise, is inspired by Leigh Steinberg, one of the most successful agents in the history of American sports. Being successful as an agent you have to be a master negotiator. The story goes that when he signed quarterback Steve Bartkowski as his first client in 1975, he realized that the NFL rules allowed him no power to bargain over salary. As the Atlanta Falcons had drafted his client, so if he was going to play professionally, it was the Falcons or nothing. So what did Steinberg do?
He offered Bartkowski’s services to the Atlanta Falcons for an astonishing $750,000—more than any football player had ever been paid. The indignant Falcons countered with an offer of $600,000,  the most lucrative rookie contract in NFL history.
But, what if Steinberg would have had an alternative option. For example, if Steinberg would have had another offer, a more modest offer of, for instance $250,000. Then this weaker alternative offer would have anchored his mind and most likely the entire negotiation would target the much lower alternative from the start. Instead of empowering Steinberg to be bold in his dealings, this alternative offer would have hampered his first offer.

According to research by Michael Schaerer and Roderick Swaab of INSEAD and Adam Galinsky of Columbia Business School being powerless can be quite liberating and help you achieve better deals.( They believe that powerlessness can actually free negotiators from the cognitive biases that normally limit the give and take of negotiations. Amazingly, they found that having an alternative or a fallback option is not always beneficial. In fact, when the alternative option is weak, it can actually be harmful for negotiating outcomes, even more so than having no alternative at all.

What do these studies tell us:

  1. Normally negotiators strive to have alternative options prior to entering a negotiation. However, what is striking is the fact that more than 90 percent indicated that they would prefer to enter the negotiation with an unattractive alternative offer. People assume that having any alternative is better than no alternative.
  2. As one would expect, negotiators with the strong alternative feel the most powerful, followed by those with the weak alternative. Obviously, those with strong alternatives always did the best. If negotiators have no alternative they normally feel the least powerful. Surprisingly, despite feeling more powerful, however, those with a weak alternative made lower first offers than those without an alternative. The study shows the contrasting influence of negotiation alternatives: although alternatives may make negotiators feel powerful, they can also constrain negotiators and reduce the value of their initial bid. In other words, having no alternative can be psychologically liberating and allow negotiators to make more aggressive first offers.
  3. These studies also indicated that negotiators without alternatives would not only make higher first offers but also achieve better agreements than those with unattractive alternatives. Sellers without an alternative offer feel less powerful, but made higher first offers and negotiated a considerably higher sales price than sellers with a weak alternative.

This brings up some questions. Negotiating when being a smaller supplier and therefore less powerful or at least thinking you are less powerful, how do you improve your bargaining position before entering a negotiation? In other words, is there a way to reduce the negative impact of weak alternatives?
The second question could be: What if negotiators shift away from a weak alternative, turn their anchor around and instead of focusing on the weaker alternative, they would focus on the higher price, i.e. the ideal price at which they could sell?

Well, it showed that negotiators with unattractive alternatives only negotiated worse deals than those without alternatives when they focused on their alternative. However, when negotiators focused on their target price instead, there was no longer a difference in their performance.
Therefore, negotiators who are unable to obtain strong alternatives should avoid low anchors. In contrast, negotiators without any alternative should not worry about their powerlessness and instead they should spend their resources on making the right first offer and focus the negotiation on their ideal outcome. In other words, if your alternative is weak, focus on your target price.

Klaas Meekma.



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