Price Negotiations

An independent study by the McKinsey Consulting Group indicates "the fastest and most effective way to enhance corporate earnings is to raise prices."

There are a variety of ways to increase earnings. Obviously a company can raise prices or reduce costs. A company can also often enhance earnings by increasing their volume of business – provided there are no additional costs – this is referred to as "business efficiency." What is surprising about this McKinsey study is the huge impact just a small price increase has on corporate earnings – as compared to the impact for the same amount of cost savings.

McKinsey says that "for a typical S&P 1500 corporation, a 1 percent increase lifts operating profits by 8 percent. This impact is nearly 50 percent greater than what would occur with a 1 percent reduction in variable costs (such as direct labor) and more than three times greater than the impact of a 1 percent increase in sales volume."

So anyone negotiating a sale needs to remember what just 1 or 2 percent can do for the company’s bottom line. Be careful with your concessions. If you are forced to provide a price concession, don't forget to ask for something in return. During your discovery process, search for "Both-Win" ways to help your customer while at the same time enhance the price you are going to get.

And don't give it away! The impact of a few percentage points in price goes both ways. From McKinsey: "A decrease of 1 percent in average prices has the opposite effect, bringing down operating profits by that same 8 percent if other factors remain steady. Managers may hope that higher volumes will compensate for revenues lost from lower prices and thereby raise profits, but this rarely happens; to continue our examination of typical S&P 1500 economics, volumes would have to rise by 18.7 percent just to offset the profit impact of a 5 percent price cut. Such demand sensitivity to price cuts is extremely rare. A strategy based on cutting prices to increase volumes and, as a result, to raise profits is generally doomed to failure in almost every market and industry."

In the course of a business transaction, there are many negotiations taking place where price erosion can occur. There are often a variety of discounts, incentives, promotions and other giveaways that help close a deal. After an order is placed there may also be cash discounts, prompt payment discounts, extended payment terms (i.e. 60-90-120 days to pay), volume discounts or even rebates. Some negotiations even deal with 'performance penalties' that provide customers discounts if for some reason delivery schedules are not met or orders are not filled according to plan. Each one of these elements, if not negotiated appropriately, allows profits to "leak away."

Prices are impacted by hundreds, sometimes thousands, of individual negotiations each day. Standard and discretionary discounts allow percentage points of revenue to drip off the table one transaction at a time. At the end of the day, you have to look at what really the company is really putting into its pocket. With all of these negotiations happening, there are ways to find and capture an additional 1 or 2 percent. It pays to use your negotiating skills!

Women Don't Ask!

In THIS WEEK magazine, May 4, 2007, there is an article regarding woman's pay vs. men's. "One year out of college, women make 80 percent of men's pay. Ten years after college, women make only 69 percent of what men earn."

This may appear to be a social comment, but there is a significant negotiating context at work here.

In a wonderful book called, WOMAN DON'T ASK, the authors cite three studies which support the premise of their title. In one study, the experimenters looked at the starting salaries of students graduating from Carnegie Mellon University with master's degrees. The starting salaries of the men were 7.6 percent higher (nearly $4000) than those of the women. They then looked at who had accepted the initial offer and who had negotiated. Only 7 percent of the female students had negotiated while 57 percent of the male students had asked for more money. "The most striking finding, however, was that the students who had negotiated were able to increase their starting salaries by 7.4 percent, or $4,053, almost exactly the difference between men's and women's average starting pay."

In another study, students were recruited to play a game called Boggle. They were told they would be paid between $3.00 and $10.00. After four games, the experimenters handed each student $3.00 and asked, "Is three dollars okay?" "The results were striking --- almost nine times as many male as female subjects asked for more money."

Subsequent studies verify these results. Women don't negotiate as effectively for themselves as men do. I talked to a female director of a significant institution today and she said, "We do a better job and we just expect to be recognized for that and to be paid accordingly." Is this too passive?

Dare to ask!

Negotiating With My Doctor???

Here's a little reinforcement for you regarding personal negotiating.

In the May, 2007 AARP bulletin there is this header: ASK YOUR DOCTOR FOR A DISCOUNT. "A 2005 Harris Interactive poll found that only one in eight American adults ever tries to negotiate costs --- but more than 60% of those who do said they got a better price."

A couple of tips:

• Ask your doctor before treatment begins.

• Offer to pay cash, maybe even up-front.

Our doctors are business people, just as we are. There is always a better deal for both parties, but it begins with asking.

Negotiating Personal Medical Costs

Many people save money on their medical bills simply by asking their doctor to reduce the bill. Here's some information from a recent article that appeared on AOL about how you might negotiate a reduction in some of your personal medical expenses.

A 2005 Wall Street Journal Online/Harris Interactive Health Care poll found that only 12% of patients tried to negotiate a medical bill with their doctor. But of those that made the effort, 61% were successful. And 67% of doctors say that they provide some charity care, which is defined as free or discounted services, says Alwyn Cassil, spokeswoman for the Center for Studying Health System Change, a nonpartisan policy research center.

How do you negotiate?

When asked, many hospitals will quickly reduce its full price for a medical procedure down to what it charges Medicare, which is considered the benchmark for costs, says Kevin Flynn, president of Healthcare Advocates, a private advocacy firm based in Philadelphia. (You can look up Medicare reimbursement rates on the Center for Medicare & Medicaid Services web site.)

Flynn says that if you're paying for a doctor's visit out of pocket, many physicians will cut their price if a patient offers to pay the bill in cash before walking out the door.

Just last month I got a bill for my colonoscopy. It was over $6,000 and my insurance only paid $285! I called the imaging center, protested, and asked what could be done. They informed me that actually they had a special arrangement with my doctor for his patients. If I would send them the $285 that the insurance company had sent me for the procedure, plus another $500 they would adjust the bill and consider it paid in full.

WOW! Just for asking. I've learned my lesson. Now before paying any medical bill, I'm going to ask.

Stay healthy!

Take the Time

In the May issue of the Negotiating newsletter published by Harvard, there is an interesting study about how the starting time of a negotiation affects the outcome.

I have always believed that Americans get involved in negotiations too late. Usually it is the deadline that drives us into a negotiation. Then, our focus is getting it done on time as opposed to trying to find the best agreement for both parties.

The summary of the study, done by professors Henderson, Trope and Carnevale of NYU states: ".....student subjects in a negotiation simulation made more multi-issue offers and counteroffers and created more value overall when the project at stake was five months away rather than the next day. The students were more capable of abstract, creative reasoning when contemplating distant simulations than they were when considering immediate ones."

So, aim higher to do better, and give yourself more time to negotiate, at least on those issues that will make the greatest impact.

Jim Sauerwein