To a certain degree, having a lousy deal is better than not doing a deal at all. However, there will be times when we might be hard pressed for time or in desperate need of resources, so we end up selling a product at a vastly discounted price or even at a loss. Of course, this scenario is not ideal and could demonstrate a lack of planning and preparation.

In this article, Alexander Zhang, Senior Consultant at The Gap Partnership, will reveal strategies and tactics for crafting effective negotiation strategies in such scenarios.

Despite there being macroeconomic factors at play contributing to the capability of firms deploying price displacement tactics, it is still possible that there might be some techniques, tools, and strategies available that negotiators can use to circumvent these situations. However, there will inevitably be situations where in fact a “no deal” situation is a possible outcome, and it is up to us to recognize when those instances arise.

Let’s use China as an example to illustrate a scenario when a deal simply cannot be done. Nepoleon Bonapart once said, “Let China sleep, for when she wakes up, she will shake the world.”

When the nation started introducing economic reforms in the 70’s, the sleeping dragon did start to wake up and was indeed restless. By 2010, China overtook Japan to become the second largest GDP economy in the world. Today, China is gunning to establish itself as a global superpower on both political and economic landscapes.

As China creeps out of its Covid slumber caused by protectionist policies, the tactics used by Chinese firms are once again hard felt by competing firms outside China. Putting geo-politics aside, one resounding tactic deployed that has been and is still widely felt by the global business community is displacing prices and disruptive technology. Bill Fishcher and Denis Simon wrote a joint article published in the Harvard Business Review in 2016 exploring the notion that displacement and disruption are distinct from each other and when used in tandem, have a more adverse impact on their competition.

An example of price displacement tactics that are commonly deployed is when firms undercut prices and flood the market with cheaper alternatives. This could come from the sheer economy of scale which manufacturers produce at: lower labour costs, cheaper access to raw material, or simply deployed as a tactic to capture market share. From this, the common sentiment and argument is that we cannot expect quality when we pay a low price.

This might hold true, until the very products sold under a price displacement strategy start having disruptive implications. This is where manufacturers start to improve their quality by technological advancement and innovation which meet the industry standard, if not surpassing it. An example of a Chinese company in this space is Lenovo, where in 2021 it became the world’s number one in personal computer brand in terms of units sold.

Considering this, it is very likely that more Chinese companies will start to place more emphasis and investment into improving their technological advantage and quality, whilst having a pricing advantage.

My clients ask how they could even start to negotiate with their own clients when they face competition that deploy price displacement strategies and have a comparatively similar or in some cases differentiated product. The price competitive behavior of Chinese suppliers has driven down the perception of the market price by flooding the market with cheaper alternatives and demanding that

their price is also reduced during the upcoming contract negotiations. In contrast to this, my clients face price increase pressures due to their internal challenges with price increases of raw material, cost of labor, and inflation driving up total cost.

This inevitably begs the question of whether a deal can be done or not. The Hard Truth is that, looking at the situation ONLY at face value, the answer is NO.

So where do we go from here?

Let’s dissect the situation:

• Our client, let’s call them party X, has been pre-conditioned to expect a price decrease from their counterpart, let’s call them party Y, and they’re starting to worry about it. Maybe they’ve become trapped in their own head, and the notion of a price reduction is simply their perception of the situation.

• If one party proposes a significant price reduction while the other party suggests a price increase, in the absence of a bargaining range, it becomes theoretically impossible to reach a deal. This is the hard truth we must face.

Although I cannot provide a specific course of action for every scenario as they require a more in-depth specific understanding of the situation and context, we can explore potential tools andstrategies to address the situation based on the known variables.

This knowledge and implementation of techniques and useful tips are a core part of The Gap Partnership’s negotiation training solutions and consulting services.

Pre-conditioning

Party X has been successfully pre-conditioned prior to the negotiation that a price decrease is to be expected. Hence, I would argue that party X should have taken the first step to pre-condition counterparty Y that a price increase was pending. The idea is to pre-empt party Y to think in party X’s terms and react to our strategy rather than the other way round.

Secondly, during the actual negotiation, a price increase does not come as a shock as party Y would have time to digest and formulate a strategy around that. In addition, since party Y had made the first move and we replied with some pre-conditioning of our own and a negotiation date was still set, then perhaps their requirement to decrease price is a fabrication.

Balance of power analysis

Unless actual power exists, power is typically just a perception. Therefore, it is up to us to create that perception for us to dictate how we want to negotiate. A power assessor tool can be accessed through our Gap Tools which asks a series of over arching questions that ultimately computes a power balance metric that we will use to help us make more informed decisions on what and how to communicate to better position ourselves.

Trust building initiatives

Firstly, we need to be clear on the type of negotiation scenario we are engaged in as this dictates the appropriate behavioral and tactical strategy. In this case, a value creation type scenario was established.

This means that trust is paramount and hence, everything that we say and do needs to be built around that. It might be the case that party Y is coming at with hostile, price focused, value extraction, win-lose type strategy which completely goes against a trust centric negotiation. Here are some suggestions which are very often overlooked.

• Better understand our counterparts KPI.
• Increase the number of variables to negotiate as more variables equate to greater total value.
• Broaden scope of negotiation.
• Demonstrate where a win-win trade exists.
• Add value in other relevant areas.
• Information sharing.

Opening extreme

When told to decrease price, a normal reaction would typically not be to ask for a price increase, let alone asking for more than we need. Which is what the notion of opening extreme really is. However, we need to ask ourselves if we are simply a victim of our own heads due to our level of discomfort.

With this, the requirement to still open extreme exists because it would be impossible to get what we require if we do not ask for more than we need.

To better understand if a deal can be done, we need to first be able to grasp the idea of what a bargaining range is and the mechanics in which it operates. A deal simply cannot be done when a bargaining range is non-existent. That is, if the seller's breakpoint is beyond the maximum the buyer is willing to pay. Or, conversely, if the buyer's breakpoint undercuts the minimum the seller is willing to sell.

Although industry specific tool kits can be utilized at the Gap Partnership, our counterpart’s breakpoint from our perspective is only an educated guess and therefore it is up to us to be able to test this assumption to more accurately determine our counterparts costs. Should we discover however, that a bargaining rage does not exist, then we need to face the hard truth that a deal simply cannot be done.

Conclusion

In conclusion, when faced-off with competitive price displacement tactics coupled with an increasing trend of disruptive capabilities spurred by the rate of technological advancement, negotiators will inevitably face situations like what was described in the above. Hence, having a sound strategy or even a corporate negotiation playbook is necessary to address this very issue.

More reading and listening…

The power of delayed gratification in negotiation: How to say ‘no’ one more time article by R. Brian Denning, Ph.D., Senior Consultant, The Gap Partnership

Vince Brook | Tricks of my trade podcast hosted by Dürrin Ergün, Manger, The Gap Partnership featuring Vince Brook, Regional Consulting Lead, The Gap Partnership

For more, visit www.thegappartnership.com/insights

About the author 

Alexander started his career as a key accounts manager in the food industry, focusing on international fast-food chains and large-scale manufacturing. Over the course of nearly a decade, his roles took him to Moscow, Cape Town, and Auckland.

He then set up his own business, opening Singapore’s first premium mobile auto detailing company using waterless technology. The environmentally conscious concept combined with positive political and celebrity support enabled the business to break even within a matter of weeks. Two years later, Alexander sold the company at a profit.

In September 2022 Alexander joined The Gap Partnership, and he now delivers a spectrum of negotiation solutions to clients across multiple industries and markets. He has a particular interest in cross-cultural negotiation and behavioral psychology, and an in-depth knowledge of the food and beverage and FMCG industries, from both an upstream and downstream perspective.

Alexander holds an honors degree in International Business from Latrobe University in Melbourne Australia and has attained seven academic excellence awards and scholarships, making the dean’s list two years in a row. He currently lives in Singapore with his wife and two daughters.

About The Gap Partnership

The Gap Partnership is a management consultancy specializing in negotiation. We help organizations drive profitability, increase efficiency and reduce cost.

Negotiation is an integral part of everything a business does. It exerts a critical influence on the profitability and market value of the organization.

At The Gap Partnership, we provide development programs and negotiation training to our clients. We work with you to understand your challenges and performance needs. Our negotiation consultants come from your industry and will support you with a 'complete' solution that embeds learning, measures capability and delivers sustainable change.

We hold ourselves accountable for your success. 70% of our business comes from clients we have worked with for over five years

If you require further information on how we can help you and your teams make the most of every negotiation, or simply need to ask us a question - just call, email or complete the form.