Price and Perceived Value

I imagine everyone has heard, "You get what you pay for." In the world of negotiating, we worry about real versus perceptual value. We wonder, "Do people feel better if they pay more?"

The person responsible for pricing at a large California winery once told me, "In the absence of their ability to evaluate quality, people will pay a higher price to insure quality!" Almost everyone has compared two similar items and has chosen the more expensive one so as not to make a mistake. Valid or not? We'll never know!

In the world of the consumer, we have an amazing example of this perception: the hamburger. Years ago, McDonald's decided to capture a larger market share by reducing the price of their hamburger from $0.99 to $0.49 in a special promotion. What happened? They didn't sell any hamburgers. People became suspicious of the product. McDonald's had reduced nothing but the perception of the value of the product.

There is a new hamburger war going on now that is exactly the opposite of McDonald's approach.

2002: DB Bistro Moderne in New York introduced a $29 hamburger. They sold about 200 per day.

2003: Old Homestead Steakhouse in New York introduced a kobe beef hamburger for $41.

Later in 2003: DB Bistro introduced as $50 version with truffles.

2007: A hotel in Jakarta, Indonesia added a $110 Kobe beef hamburger to its menu.

Ok, this is a little silly, but, each of these restaurants sells a bunch of hamburgers each day. Why? There is more to the buying motive than satisfying the needs of form, fit and function. People buy for a lot of reasons we will never be able to measure.

This provides a large "BEWARE!" when we negotiate on the buying side of the desk. There is a war between evaluating Total Cost and Psychological Gratification!

Jim Sauerwein

Is There a Place For a Sense of Humor in Negotiating?

In his first book, What They Don't Teach You at The Harvard Business School, the late Mark McCormick makes this observation: "Other than common sense, the most important asset in business management is a sense of humor. Laughter is the greatest diffuser of business tension and you want to be capable of using it."

Ben Franklin's rules for bargaining include: "Keep your sense of humor."

There is indeed a place for a sense of humor in the negotiating process. I imagine most of us would rather negotiate and do business with someone who keeps the process somewhat relaxed and even enjoyable. Noel Coward gives us some good advice for balance: "Wit is like caviar. It should be served in small portions and not spread about like marmalade."

You may remember that Henry Kissinger's early days in government service were not very productive. It was not until he hired a couple of humor consultants to teach him a sense of humor did Mr. Kissinger become effective. In the book, Travels with Henry, the author reports that some of the arms limitation talks in the Kremlin included laughter and downright silliness. Of course, these were not silly people, it is just that they needed some device for keeping the pressure maneagable and laughter was that device.

Remember, laugh and the whole world laughs with you.....

Jim Sauerwein

NBC and NFL Football Negotiation

Most of us just watched the 2007 Super Bowl. Here's the background on interesting negotiation NBC had with the NFL. NBC negotiated the broadcast rights to NFL football.

It all started with NBC wanting to get their ratings up and deciding that NFL Football was the way to go. This is a great example of a Both-Win corporate negotiation. Sports Illustrated magazine covered it in an article last year.

In any competitive negotiation you must first protect your interests (what's the best deal for me). And at the same time look for opportunities to create an outcome that is good for both parties. The people at Harvard talk about Win-Win ----- Karrass calls this type of negotiation a Both-Win.

After being shut out of NFL broadcasts for nine years, NBC negotiated a six-year deal with the NFL for about $600 million a year. NBC lags in the ratings game and hopes this NFL deal will help them gain ground on ABC and CBS.

What did NBC get with the deal?

• Four hours of potential top 10 prime-time programming every week.

• Two Super Bowls (2009 and 2012) - talk about advertising $$$$.

• The annual Thursday-night opening game.

• Two wild-card games each season.

• A platform to promote NBC's prime-time lineup of shows.

• And the right to choose the late-season games it will broadcast, so fans can see the most competitive games at the end of the season (a right the NFL would not provide before)

Now, keep in mind that NBC is owned by GE.

Here's what else was negotiated into the deal.

• GE Finance will play an increased role in the NFL loan pool financing program that helps NFL owners finance new stadium construction.

• GE's new Security Services Unit will promote and provide stadium security to NFL owners.

• Fans and players will have the advantage of on-site medical technology provided and promoted by GE Medical Products.

• And, it costs a lot to illuminate these football stadiums. GE is the leader in energy efficient lighting technology and manufactures a lot of light bulbs.

The investment firm of Goldman Sachs estimated that the value of these GE add-ons could be worth as much as $500 million in profits to GE.

This was a great example of expanding a negotiation to come up with a creative deal involving much more than just broadcast rights.

Note from the Author . . .

We are very pleased with the readership of this site, but we would like to ask a favor.

If you don't have a comment on a particular article, how about a question regarding negotiation?

Perhaps you would share with the readership a difficult negotiating problem you have or are encountering.

We would like to hear from you. Is there a topic you would like us to discuss?

Jim Sauerwein

Unusual Real Estate Negotiation

This was negotiated as part of a real estate lease contract.

One section of the lease deals with the term of the lease. It states:

"Subject to the provisions of Article XI relating to amendments, this declaration and the covenants herein contained shall be in effect until February 13, 2031. Notwithstanding the foregoing, this declaration shall become ineffective and the covenants herein shall be extinguished upon the expiration of twenty-one (21) years following the death of the last survivor of the following named persons and all children and other issue (including legally adopted children and the issue of legally adopted children) of the following named persons:

Ronald Reagan, Governor of California

John Lindsay, Mayor of New York City

Richard M. Nixon and his Daughters, Julie Nixon and Patricia Nixon

Lyndon B. Johnson, President of the United States, and his daughters Lucy Baines Nugent and Linda Johnson."

Now here's a negotiator that likes to have fun with contract terms.

How do you suppose the parties deal with the uncertainty of when the lease is going to end? I guess it's assumed to be so far in the future that no one really cares.

I'd hate to have to track each of these family trees and try to determine when the lease terminates!

Trade A Paper Clip For A New Home?

Kyle MacDonald started with a red paper clip and ended up with a new home. And the whole negotiation was handled via the internet and on Craigslist.

In July of 2005 this 26-year-old blogger from Montreal set out to see if he could trade his red paper clip for something else, and that for something else, over and over again until he had a house. It took him over a year but he was successful. Here is the sequence of his trades:

He first traded the red paper clip for a fish-shaped pen.

Then he got a small ceramic doorknob with a smiley face on it in exchange for the pen.

A Coleman camping stove for the doorknob.

A generator in exchange for the camping stove.

A 'party package'– an empty beer keg, a neon Budweiser sign and a promise to fill the keg – in exchange for the generator.

A used snowmobile for the beer package.

A free trip to Yaak, British Columbia, in exchange for the snowmobile.

A 1995 van in exchange for the trip.

A recording contract, studio time and a promise to pitch the finished product to music executives in exchange for the van.

A year's free rent in exchange for the recording contract.

An afternoon with rocker Alice Cooper for a year's free rent.

A snow globe depicting the band Kiss in exchange for the afternoon with Alice Cooper.

Actor Corbin Bernsen, a snow globe collector, offered Kyle a paid speaking role in a movie in exchange for the Kiss snow globe.

The town of Kipling, Saskatchewan (Canada), is giving Kyle his house.

The town will hold a talent show for the movie role. The town gets a lot of free publicity and Kyle gets his new home.

Rock, Paper, Scissors Negotiation

You may have seen the rock, paper, scissors TV ad during the 2007 Super Bowl last week. That was all about beer. But here's a real life negotiation that used rock, paper, scissors --

In 2005 Maspro Denkoh Corporation, a Japanese TV equipment manufacturer, decided to sell its corporate collection of Impressionist paintings -- worth around $16 million. Maspro contacted the world's top two art auctioneers, Christie's and Sotheby's, and asked for proposals.

Maspro Denkoh's president Takashi Hashiyama determined that both companies' proposals were so similar he couldn't pick a winner. So Mr. Hashiyama decided the bidders would have to play a game of "Rock, Paper, Scissors" to determine who won the business.

Mr. Hashiyama stated: "It probably looks strange to others, but I believe this is the best way to decide between two things which are equally good." The game of "Rock, Paper, Scissors" is a cultural institution in Japan and something often used to make arbitrary decisions.

Why use the game to decide? The team that lost wouldn't get in trouble with its corporate bosses (e.g. it is important to save face) and Maspro wouldn't have a loser bearing a grudge against them (e.g. we need to preserve future relationships.)

The game was announced on a Thursday and would be played in the Maspro's Tokyo office the following Monday. Instead of making symbols with their hands, as is traditional, he required that the presidents of the Japanese units of both companies write down their choice, in Japanese, on a piece of paper. Per the game's rules, which automatically determine a winner—paper covers rock, rock smashes scissors, scissors cut paper.

Christie's and Sotheby's sales teams scrambled to research the psychology and strategy of the game of Rock, Paper, Scissors prior to the Monday meeting.

Christie's picked scissors and Sotheby's picked paper. Christie's won the business.

Redstone and Murdoch -- The Media Negotiators

These two media powerhouses approach their business negotiations in two very different ways.

The contrasting negotiating style between Sumner Redstone (Viacom, Paramount Pictures, MTV, cable TV and CBS) and Rupert Murdoch (News Corp., MySpace.com, IGN Entertainment, 20th Century Fox, satellite TV) is remarkable.

The Los Angeles Times yesterday took a look at how these two media powerhouses are handling their negotiations in China—obviously a huge market for both of them.

Negotiating deals in China requires extensive personal dealings with government officials and the building of many business relationships. Sensitivity to cultural differences is very important, as many western business people sooner or later discover.

The Times talked with a businessman who has observed both men deal with Chinese officials. He described how Redstone, 83, and Murdoch, 75, responded to questions on sensitive issues like censorship and business dealings.

"Sumner gives an answer right away. He says either yes or no. It's almost an impulsive response. He has a strong opinion."

It's different with Murdoch. "He pauses, and his answers are long and complicated. You feel like he is saying important things, but at the end of his answer you don't have any idea about his opinion. He hedges everything. Murdoch's reserve can strike some as deviousness."

It was reported that Sumner has "a near-photographic memory. A favorite Redstone debating tactic is to recite his opponents' words back to them in perfect detail weeks or months after they were spoken."

Redstone appears to negotiate deals that are very opportunistic rather than strategic. He cuts deals because they are available to him rather than looking at how the deal may fit into an overall corporate strategy. His negotiating style – inpatient and spontaneous.

Murdoch appears to be much more of a strategic negotiator. One analyst called Murdoch "the most long-term manager I've ever seen. He thinks on a 5, 10 or 20-year horizon and has been willing to suffer enormous financial pain to get where he thinks he needs to go.

"I wonder how their Chinese negotiations will turn out?"

Knowing a little about the Chinese and how they negotiate business arrangements, my money is on Murdoch.