Monopoly Value, or Not?

Posted on April 20, 2008 | Filed Under Leverage | 1 Comment

K&R believes (and teaches) that you should understand your “leverage position” in a negotiation.  As a seller, the worst position you can have (in terms of the price you can get) is to be a commodity, the best is to be a monopoly.  As a buyer, you will get your best prices and terms when buying commodities, your worst when buying from sellers who have a monopoly position.  The primary criteria in most cases is “will the purchase satisfy the business need?”  Once that criterion is met, the number of available, suitable solutions directly influences the price.  What (arguable) monopolist is being moved down the leverage slope this month?

Monopoly power allows the party who holds it to do things that their client base doesn’t like.  A simple, current example: Microsoft announced some time ago that Windows XP would no longer be available for retail sale (or sale with new computers) after June 30, 2008.  The user base is not so happy about this, as the Microsoft alternative (Vista, in its various forms) has significant issues of support, and requires more expensive systems to run it effectively.  Petitions and user outcry had no impact on the decision.  After all, as pretty much a monopoly in this market space, who can stop them? (Please don’t send us any Apple objections; this article is not about that.) However… 

Enter the OLPC, ASUS Eee PC and others.  Sales are booming, and prices are low.  An entry Eee PC sells for $299.  The OEM price of a copy of Windows XP is rumored to be $120.  The original Eee ran Linux, not Windows.  Windows wasn’t affordable.  The buyers decided that a Linux solution “satisfied the business need.”  The popularity of these machines and the unpopularity of Microsoft’s position combined to break the monopoly pricing position.  As of now, Microsoft is apparently willing to again offer Windows XP to OEMs of similar machines, at a price of about $40, until June 30, 2010.

Realistic alternatives for buyers can have a tremendous impact on prices and negotiating positions (such as dates of sale).  A 67% price drop is a big one.  For Microsoft to hold their price, they needed to convince the buyers that there was something they would get from Windows that they could not get from Linux - they failed at that.

As a buyer - remember that your best friend in a negotiation is a set of realistic, competitive options.  As a seller - remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation - if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)

A Seller’s Market for Uranium

Posted on April 4, 2008 | Filed Under Value | Leave a Comment

On 04/02/08, a New York Times article titled “Report Prods U.S. on Sale of Highly Priced Uranium” inspired us to take a Negotiator’s viewpoint on disparities in value between parties.

The US government is sitting on an inventory of partly processed uranium… formerly viewed as unwanted waste that would cost hundreds of millions of dollars to stabilize and dispose of… BUT… a steep increase in the price of uranium has made it worth billions of dollars.

Clearly this is a multi-faceted issue, with many variables that can affect the final decision.

But then aren’t all issues (aka negotiations) like that?  Since the Department of Energy (DOE) is  now deciding how to proceed, one certainty is clear: by the time they make a decision and gain whatever other congressional and executive approval is required, the price will have changed… AGAIN.

Interesting how expensive waste can turn into attractive goods, but what does that have to do with negotiation?

There are several lessons present in this story that are part of all negotiations:

VALUE versus PRICE: As described in this news article, what you may view as hundreds of millions of dollars of expense, others may view as billions of dollars in value.  In negotiations most sellers’ mistakes are made early in the process, usually out of a desire to seem accommodating.  These accommodating “giveaways” are of little value (cost / expense) to the seller, so WHY NOT?  BECAUSE… it doesn’t matter what it does or doesn’t cost you as the seller…  it matters what the value is to the buyer.  One of K&R’s Six Principles™ to remember is, “Concessions easily given appear of little value”.  Early concessions without any appreciation of value in the client’s eye limit your “Negotiation Capital(tm)” later in the process.  It’s tough to trade nothing for something, if you gave your “nothing” away early without realizing its worth.

LEVERAGE: As a buyer or seller you should understand whether you are dealing with a product / solution that is a commodity (price is the only difference), a monopoly (the “only game in town”), or an offering that provides some competitive differences…  BUT price is still a factor.  The relationship between value and uniqueness is the primary driver of leverage in your negotiations.  Also, evident in this article and true of most negotiations, leverage shifts / changes over time.  Key is being able to assess your position throughout the process and adjust your strategy accordingly.  AND remember your personal / company credibility is an underpinning of your leverage and also can shift based on your actions or reactions.

PREPARATION IS KEY TO A WINNING NEGOTIATION: Another of K&R’s Six Principles™.  Not a hiring criteria for most sales people, at least when I was doing the hiring, but essential skills for an effective negotiator are patience and listening.  One should always be building their information base on a client or situation.  Understanding your “Value Proposition” is nice, being able to articulate that value in the customer terms (reality), and appropriate to each level and constituency within the client…  PRICELESS!  You cannot gather enough information.  Remember to gather information wherever and whenever possible, and utilize it as Negotiation Capital, helping you articulate the difference between “value to them” and “cost / expense to you”.

NEGOTIATION IS A CONTINUOUS PROCESS: Yet another of K&R’s Six Principles™.  As the article discusses, “STUFF HAPPENS”.  The world and circumstances change.  Usually, whatever negotiation you become part of does not start when you arrive.  Your predecessors, or maybe even you, have already set expectations (which you hope are positive ones) that affect your ongoing dealings.  AND it never stops.  Negotiations are indeed an ongoing process.  It’s the continuous nature of negotiations that apply when earlier we noted that before the Department of Energy acts, the price will change… Again.

TWO Points In closing:  First, don’t forget that leverage shifts throughout the negotiation process.  Assess your position and make adjustments accordingly.  Understanding that any actions taken by you and your team during the process, as well as external influences, will effect your leverage position.  Second, remember that particularly early in the negotiation process, information gathering is a better strategy than making concessions you may regret later.  Ask yourself “what problem are we trying to solve” rather than offer “no problem, we can do that”.  Part of every salesperson’s desire is to accommodate the customers requirements.  The danger is giving away real value, and thinking only in terms of cost to you.  You always have the right to give it up but will be more effective if you get something of value to you in return. (ES)

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