Do you get better prices if you negotiate?
Let’s look at four ways you could set and communicate your price…
1 – you set a fixed price at the optimum level – which is where half of your potential customers can’t afford you but you get a really good price from the other half.  Cheaper than that and you don’t get a good enough price from the ones who want you, and more expensive than that you lose too much business.
The profit is shown by the green strips in this diagram, the difference between the price and the cost. The people on the left can’t afford you, and the people on the right would have paid more. There are 11 of them, and if we call the difference 10, then your total profit is 110.
(In my example I have called the cost “zero” and the 50% price “10”, just for the sake of comparing the following diagrams and the profits they give).
2 – suppose you negotiate with each customer over price – and conventional wisdom is that you open above the most that you might get, so you don’t ever offer less than they would have paid, and then you negotiate down from there.  Ideally you come down in price (ideally getting things in return like larger orders or longer lead times) until you reach their maximum, at which point they say “OK, I can afford that” and you get the best price you could have got from that customer.
Of course, negotiating has its problems – the time it takes, customers don’t like it, you can’t put a price on your website, you have to make sure that one customer doesn’t know what another has paid, and the risk that you do it badly and either lose the deal because the customer got fed up, or you get dragged down low.  But assuming it goes perfectly, in theory your profit could be as shown – and all those green lines add up to a profit of about 220 units, twice as much as the first option.
3 – suppose you negotiate, and reality happens.  Some customers do indeed pay their maximum, taking the deal as soon as it becomes affordable and your price drops low enough to reach their maximum. Â
But others drag you down a bit below their maximum, some drag you way down, to lower than the price you would have set if you were setting a fixed price, and some walk away from the whole thing because the negotiating process annoyed them – maybe they found your opening offer too ridiculously high, or felt that your opening offer was dishonest in the light of how low you later came down, or just didn’t like negotiating, maybe wouldn’t negotiate, so they walked away and the deal was lost.
Maybe this assortment of outcomes would look like THIS diagram, with a total profit to you of 147.
4 – finally, how about negotiating but with a high walk away point.  This is where we try for the high numbers from the people who will pay a lot (remember we don’t know which ones they are!) and we ensure we don’t get dragged down lower that we would have been if we had had our optimum fixed price.  So we have the optimum fixed price, the price that 50% of people won’t pay, as our floor.  What will happen?
Half of the customers can’t afford us and will drop out of the negotiation – they’ll still be saying no when we get to the point that they can’t afford, so at that point they will say no and we don’t’ get that work. Which is fine if we get the other half at a better price. In the other half some will pay their maximum, most will pay a bit less than their maximum, (bluffing and dragging us down a bit below the most they would pay), and some will continue negotiating, dragging us right down to our lowest point, our 50% price, which we used in method 1 above). And some of the customers who we COULD have got, who WOULD have paid more than our 50% price, will be lost because, as above, they didn’t like the negotiating process – maybe they felt that your opening offer was dishonest in the light of how low you later conceded, or just didn’t like negotiating, maybe just wouldn’t negotiate at all, it wasn’t in their culture, so they walked away and the deal was lost.
This leads to a score of 115
Conclusion:
Based on my example graphs (and of course the negotiations might go better or worse than I have guessed) the best strategy for maximising your profit is to negotiate, with no floor (apart from costs) because not having the floor opens up the lower paying customers, while still getting a potentially great price from the higher paying customers.  We make approximately twice as much profit – and remember that’s not just turnover, it’s profit! – but we do have to deliver twice as much work in order to get that, and half of it is low margin work.Â
(Having a fixed price but letting in the lower paying customers by just having a lower price would certainly be a bad idea because although you’d sell more you’d lose all the profit from the potentially higher-paying customers).
The advantage of negotiating but WITH a high floor is that in real life, rather than negotiating and taking any job that gives you some profit however small, you might prefer to make less profit but from half as many customers, particularly as the low-margin customers will perhaps be difficult people, since they are obsessed with price and don’t value you particularly highly.  You might end up as a busy fool with lots of pain-in-the-b customers!  See how the profit per customer rises from 7 to 11.5 in my example.
The advantage of a fixed price is that it’s quick and easy (for both the customers and for you), you can put it on your website, (or every sales person can just quote it), and it weeds out the customers who don’t value quality (or you).  In my example the profit per customer from the fixed price is 10, only slightly less than the 11.5 that you get from negotiating, with all the pain that comes with that.  So even though it’s the lowest total profit, and not quite the highest profit per customer, in real life there is a good argument for just having a fixed price.
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