Learning from the Stock Market

Posted on January 11, 2008 | Filed Under Value | Leave a Comment

On the CBOE, the VIX® Index is sometimes said to be a “fear index”.  It uses a blend of buy and sell options for the S&P 500 index to measure volatility and predict stock movement.  At K&R, we find that fear plays just as importantly in negotiations, and leads to certain predictability in transactions.

Often in the Information Technology space, buyers operate under a common fear, “Did I get a good deal?  Should I have held out for more?”  Strangely, an offer of an additional discount to these buyers only emphasizes their fear.  It undercuts any confidence they had that the price was right.  This can have exactly the opposite effect of the intent of the discount.  Instead of motivating the buyer to close, it makes them worry that there is more to get - an even better deal tomorrow.  The discount stalls the decision process.

At the same time, the sellers are thinking, “What if I lose this deal?  How can I get it to close?”  Their fear is stepped up as sales measurement times approach (end of quarter, end of year).  Sellers often rush toward what they can offer - a discounted price.  That is, until they run out of pricing latitude and the deal still hasn’t closed.  Now what?

There is a better way.  First, sellers must move away from thinking that discounting provides an incentive to close a deal - it doesn’t.  After all, an even better discount might be coming in the future.  The seller has to give the buyer a reason to act - a return or value that will accrue if the buyer acts.  Ideally, that return should be quantified, and be far greater than the price of the offering.  This strategy attacks the fear in both parties: the buyer has a positive reason to make the decision, and the seller knows that what they are offering is a good business decision for the buyer - it will logically happen.

Don’t let the fear index drive you.  As a seller, be a better negotiator.  Describe the positive outcomes that will result from a buying decision.  Both sides will move from fear to confidence. (TD)

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