We indulge in hundreds of negotiations and deals on a daily basis. We make offers, we make counter-offers, and we settle. While there are many ways in which we close deals in our personal lives, the settlement process for businesses is much more refined. There are two common ways in which we come to an agreement in a business deal: Negotiation and Discounting. While both are widely practiced, the former is more preferred for making the business profitable in the long run. Therefore, it’s imperative that you know how to negotiate, and not discount.
Negotiation is essentially value exchange.
This is how it works: Your client asks you to lower the price. If the request is not outlandishly low, you will consider it, if not fully, then partially. However, in exchange for the cost you are reducing, you are likely to ask for something; something that’s equal in value to the difference in cost. What you ask in return for the price concession could be a range of things. Maybe a surety of repeated order, perhaps a larger advance, or even exclusive trading rights. That’s entirely up to you. It’s now the client’s turn to assess the demands. More often than not, they agree, thus creating a win-win situation for the two of you. In this case, both the parties involved are giving up something, but gaining something of similar or better value via an exchange. That’s why it’s also called the “value exchange” method.
Discounting is negotiation without the value exchange.
Discounting starts off as Negotiation, but its end result is a lot different. When your client asks you to reduce the price, you don’t ask for anything in return. Instead, you just give in to the demand, often, even bearing losses. You do that mostly to gain market/business. You know that if this deal goes through, it will bring you much more business. And therefore, in the long run, the losses you’re bearing right now won’t pinch you so much.
Discounting is a necessary evil of deal making.
It’s often a means of capturing market or discouraging competition. But most often, companies are unable to pull themselves out of this tendency to offer discounts. This results in heavy losses and eventual shutdown.
Striking a Balance
Remember, Discounting is for the short-run only.
Discounting will get you quick results in terms of business deals, but it’s only a short term solution. It must be used as a launch pad to boost your business into bigger production and sales cycles. It’s imperative that the firms learn how to stop discounting. More importantly, they need to learn when to stop discounting.
In the long run, it’s important to decide on a negotiation methodology that promotes sustainable growth of the business. Over the past few years, a lot of research has gone into developing automated negotiation platforms that ease the transition of companies from discounting to negotiation. It’s highly recommended, therefore, to make use of these resources.