Our deal is going through; so now we’re ready to talk “terms.” Trading gives us a powerful way to determine what both buyer and seller really want so we can use trade data to make each deal more productive and profitable.
In a nutshell, each side creates a prioritized list of the top three or four items they need, want or value from the other side. Items that one side values more or less than the other side can be traded and measurable business value is created. Just to get you warmed up, here is a simple example of trading in action.
First, prepare because you know it’s coming: The client says, “You need to lower your price by 10%.”
Then you say, “Sure, there might be a path to that. How about we increase volume or length of contract?”
Most deals have the following three levels of trades:
Level 1 Trades: Basic prices for products and services included in the deal. These are the usual suspects at the heart of most deals, such as:
Level 2 Trades: Terms and conditions of the deal. These include such high-level items as:
raw materials clauses
length of contract
Level 3 Trades: Creative trades. These are outside-the-box elements that one side values greatly and that don’t cost the other side too much. Level 3 trades can really change a business relationship, turning a deal from buy/sell to alliance/partnership. They are the mark of world-class negotiators.
Trade data also affects the balance of power in a business negotiation. Once you make a Level 3 trade in a deal, it changes the consequences of not reaching agreement for you as well as for the customer. Specifically, it makes the many moving parts of the deal more interdependent, making it harder to replace either party if an agreement is not reached. Getting to Level 3 also promotes face time with the professional buyer’s internal customers, an extremely important benefit.
Most buyers are looking for solutions to problems or enhancements to their value chain, and Level 3 Trades enable sellers to assist buyers in solving problems or improving processes. Take steel, for example. A buyer could easily say that concrete is cheaper than steel, but when one looks at the Consequences of No Agreement (CNA), at the cost of maintaining the two over time and at the expected life of each, it is easy to see that steel is superior over a longer time period. Other economic and risk elements such as volume, length of contract, type of service and support and warranty also determine price. A seller who refuses to focus on price alone is not playing hardball; he or she is being logical.
Remember that Level 3 trades involve items that are not currently on the table and presumably not part of the negotiation. It is this type of higher-level trade that signals a more strategic negotiation. Remember, too, that you won’t find Level 3 trades for all deals. In fact, managing Level 1 and Level 2 trades effectively is what you need to do first. Most negotiators, including seasoned negotiators, do not complete thorough analysis of Level 1 and Level 2 trades for both sides. But to achieve Level 3 trades, you first need to effectively manage Level 1 and Level 2 trades, getting them all on the table at once.