Download Understanding Pricing Decisions in Business: Factors Influencing Vendor Prices and more Slides Negotiation in PDF only on Docsity!
Chapter Learning ObjeCtives
After completing this chapter, you should be able to:
- (^) explain the factors that affect
product pricing.
- (^) summarize the importance of and
the steps useful in effective
negotiation.
- (^) Describe several types of pricing
discounts and explain rebates.
insiDe this Chapter
- (^) Understanding pricing
- (^) negotiating prices
- (^) pricing Discounts
Ordering Products:
Pricing Decisions
Case stUDy
“It’s really tough to get lower prices from vendors, isn’t it?” asked Jake, the
chef and food buyer at Carmel Straits Restaurant.
“Yes,” replied Ilze, the restaurant’s manager. “I think we’ve tried lots of things
to reduce our prices. Maybe we should reduce our quality standards and then
just shop around with different vendors to get the lowest price.”
“Well,” Jake said, “you might be right. But quality is important, and I think
we need to determine the quality of products that we need and then look for
vendors that will give us the best price.”
1. Who do you think has better ideas about reducing prices: Ilze or Jake?
Why?
2. What are some things that the chef and manager can do to reduce the
cost of food products without sacrificing quality?
Key terms
cash on delivery (COD),
p. 126
cherry picker, p. 125
demand, p. 119
differential pricing, p. 123
discount, p. 138
fall-back position
(negotiation), p. 132
free market, p. 124
going-in position
(negotiation), p. 132
negotiation, p. 127
net price, p. 138
purchase unit (pU), p. 120
rebate, p. 140
value perception, p. 122
Understanding Pricing
PRiCEs REflECT ConsumER DEmAnD
In many cases, prices are influenced by consumer demand : the total amount
of a product or service that buyers want to purchase at a specific price. When
products are in limited supply and are highly desired, the prices buyers must
pay for those products will generally be high. In some cases, such as rare
wines, the prices charged will reflect the limited supply. In some other cases,
such as gasoline, it is not scarcity but simply the consumers’ willingness to
pay that most influences price.
Restaurant and foodservice buyers are just like other consumers. The price
they pay for a product will be affected by the supply of and demand for that
product. The best buyers know when they are paying for scarcity and when
they may be paying a premium price for something like organic food items
or bottled water that many people seem to want. This understanding is
important because what other consumers are willing to pay for a specific
product can vary widely based on factors beyond the buyer’s control,
including a greater perceived need for the product and lower profit
requirements.
PRiCEs REflECT sERviCE fEATuREs
This factor can be easily understood by considering two buyers. One pays
$100 for a case of fresh sirloin steaks but must drive to the vendor’s location
several miles away to pick it up. The other buyer pays $105 for a case of the
same quality steaks, but the product is delivered to the buyer’s establishment.
Which buyer received the best price? Despite the fact that the price was
higher, the second buyer received a service feature, the delivery, which would
easily justify the slightly higher price.
When present, the importance of these added features cannot be overlooked.
Timely delivery, the condition of the vendor’s facility and delivery vehicle, and
the quality of a vendor’s service are important. Accurate invoicing and
payment processing, order accuracy, payment and credit terms, and ease of
order placement are likewise crucial. These are examples of service features
that will be reflected in a vendor’s prices.
PRiCEs REflECT vEnDoR QuAliTy
Operations with a reputation for quality food and outstanding service can
charge more for their products. Likewise, vendors that have excellent
reputations can realize an important benefit: increased prices that deliver
higher profits. Buyers who place a high value on vendors with a reputation for
quality may pay more for the products they purchase from those vendors.
However, the extra costs will be justified because of the peace of mind that
comes from having confidence in the vendor.
Understanding what a
product is really worth can be
difficult because the demand for
food and beverage products is not
constant. As recently as a decade
ago, significant sales of bottled
water in restaurant and foodser-
vice operations were virtually
unheard of. The 2000s, however,
saw an explosion in the sale of still
and carbonated bottled waters,
and profits were good.
Beginning in the late 2000s,
environmental concerns caused
many consumers to ask questions
such as, “Does shipping bottles of
water from Europe make
environmental sense?”, “How
much energy is spent to bottle
and ship it?”, and “Is it really
superior to filtered water from
local water supplies?”
The consumers’ view of value and,
therefore, what they were willing
to pay for bottled water was
changing. A move away from
bottled water reflects concerns
about the “going green”
movement to reduce the
environmental costs of bottling
and transporting water, energy
spent recycling bottling material,
and keeping plastic out of landfills.
What’s the
FOOtprint?
Op
en^ F
O^ r^ b U sin ess
CHAPTER 5 Ordering Products: Pricing Decisions
If buyers focus only on a product’s selling price per purchase unit without
considering reputation, they may end up purchasing from vendors that
provide neither quality nor value. Purchase unit (PU) refers to the weight,
volume, or container size in which a food is normally purchased. For
example, ground beef may be purchased by the pound, syrup by the gallon,
and lettuce by the case. Vendors that do not operate ethically and do not
stand behind their products and services often end up costing buyers more,
sometimes much more, than what the buyers originally paid for the
products.
pricing: the buyer’s view
Some of the factors vendors consider when developing their prices have just
been discussed. Buyers must also recognize that their own views affect buying
decisions when alternative prices are evaluated.
Much has been written about how buyers react to selling prices. One way to
examine prices from the buyers’ view is to think of these views as being either
traditional or nontraditional.
TRADiTionAl viEws of PRiCing
One traditional way that buyers view pricing assumes that vendors have
carefully evaluated their own costs. Buyers assume vendors have determined a
selling price that is low enough to attract customers and high enough to cover
costs and provide a reasonable profit. When they think this way, buyers make
one or more of the following assumptions:
- (^) Increased price = Increased quality. This is often an attractive and
reasonable assumption that can help buyers make informed decisions.
For example, bar tops made from solid wood are generally perceived to
be of higher quality than similar products made from pressed board.
The quality of the better bar tops will be reflected in their higher
prices. Similarly, a 20-year-old Scotch whiskey will likely taste better,
and cost more, than a 5-year-old Scotch produced by the same
distillery.
To avoid purchasing errors, however, buyers must ensure that they are
comparing similar products. Pressed-board bar top prices from two
vendors should not be compared directly to the solid wood bar top prices
of a third vendor.
Likewise, 20-year-old Scotch prices should not be compared to those of
5-year-old products. The assumption that increased quality equals
increased price should be used only when products that are truly
identical in nature, such as two brands of solid wood bar tops, are
compared.
CHAPTER 5 Ordering Products: Pricing Decisions
lEss TRADiTionAl viEws of PRiCing
There are also less traditional views of pricing that might seem strange at
first. However, they reveal some of the most useful thoughts about pricing:
- Price and costs are unrelated. This less traditional view of pricing
recognizes that a vendor’s cost and selling price may be unrelated. This
situation occurs more often than some buyers suspect. For example,
vendors may sell specific brands of bottled water at very high prices.
They are able to charge high prices because extensive advertising
campaigns sponsored by the manufacturer have convinced some buyers
that the water is special and is worth the higher cost.
Buyers who encounter situations in which vendors sell below their true
costs can significantly offset one of the basic foundations of vendor
pricing. These situations arise when, for example, vendors change
product lines or even go out of business. Buyers should be alert to take
advantage of them when they benefit the operation.
- Cost plus value = Price. Many accounting textbooks discuss a common
and traditional view of how businesses should establish prices:
Cost ∙ Desired profit ∙ Selling price
A less commonly taught view restates how prices might be established:
Cost ∙ Value to buyer ∙ Selling price
This less traditional view shows that the buyer, not the vendor, ultimately
determines selling price. Buyer value is the idea that a product’s value
relates to the purchaser’s need for or interest in the product. Value is not
inherent in the product itself. In this view, value is in the eye of the
beholder. Value perception is the customer’s opinion of a product’s
value to him or her. In the long run only buyers—not growers,
manufacturers, distributors, or brokers—determine the prices that
buyers are willing to pay.
Purchasers should understand that value perception is more important
than vendor cost because buyers are not interested in the vendor’s cost. It
is easy to disprove the idea that cost plus desired profit equals selling
price. Just think about restaurant and foodservice operations that go out
of business. If all managers had to do was determine their costs and add
their desired profits, even the least skilled operators could remain in
business.
Rather, customers choose to visit some establishments based on whether
their experiences have provided a value to them. Again, customers do
not care about the owner’s operating costs or desired profits. They care
only about whether the operation provides value to them. If it does, they
will gladly pay the posted prices. If not, they will not pay the price even
if the owner accurately computed all costs and the desired profits.
Understanding Pricing
The important point for buyers to remember relates to the value they
place on an item to be purchased. The value they place on a less-than-
essential item should be low. Then, the price they pay should also be low
regardless of the vendor’s price or costs. Alternatively, the value placed on
some services will likely be very high. Consider, for example, the hourly
rate for a plumber hired to fix restroom toilets at an establishment on a
busy Saturday night. Excessive time should never be wasted over
relatively small differences in vendor prices in situations like this one.
- Different prices are normal. Differential pricing involves charging
different customers different prices for the same product. For example, a
buyer who purchases 100 cases of a specific product will likely pay less
per case than another buyer who purchases 10 cases of the same product
because of a quantity discount.
No business should charge higher or lower prices based on a buyer’s race
or ethnic background. However, many operations have historically
practiced differential pricing based on gender and age. Consider “ladies’
nights” at clubs, senior citizen meal discounts, and reduced menu prices
for children. Experienced buyers understand that differential pricing
decisions are often made without considering the vendor’s actual cost of
providing the product.
Purchasers who can receive preferred prices because of differential
pricing methods used by their vendors will pay lower prices, and they
should do so. Those buyers whose operations do not receive a differential
price should talk with their vendors to learn about the requirements to
receive lower prices. There are often a number of reasons for being
included in a special pricing group.
Here are three common reasons vendors sell the same products to different
buyers at different prices:
- (^) Frequency of delivery: Vendors incur a great expense
when they deliver products to an operation
(Exhibit 5.3). When they do so less frequently, their
costs are lowered. Then, some of these savings can be
passed on to their customers. In some cases,
purchasers can reduce their costs significantly if they
eliminate vendor delivery entirely and pick up their
products at the vendor’s place of business. This is not a
widespread practice. However, it may be practical if
the establishment is located close to a vendor or if
someone from the operation routinely travels near the
vendor’s location. For example, the owner or manager
might pass the vendor on the way to the bank or on
the way to work.
exhibit 5.
Understanding Pricing
numbER of vEnDoRs
Many buyers must decide whether to buy specific products from one or more
vendors. They recognize that as the number of vendors increases, more time
must be spent in ordering, receiving, and invoice payment activities. However,
they may fear that if they award all or most business to one vendor, prices will
increase due to lack of competition. As a result, many buyers routinely split
their business among several vendors on principle. That is the approach
suggested in chapter 4 when addressing vendor sourcing decisions.
Experienced buyers in high-volume operations recognize that vendors are not
likely to increase prices unless there is a real need to do so. Restaurant and
foodservice operators share the same view. They are unlikely to take
advantage of their best customers. In fact, restaurant and foodservice
managers would likely offer additional service features, such as preferred
tables to these customers. In the same way, many vendors offer preferred
pricing to operations that do most of their buying from them. It is in the
vendor’s best interest to give a better price to a high-volume customer to
retain that buyer’s business.
The impact on price when a buyer decides to use single or multiple vendors
can be complex. Professional buyers understand that the cost of delivering a
$1,000 order is not very different from the cost of delivering a $100 order.
Each delivery will require one truck and one driver. When the vendor’s cost of
delivery must be spread across fewer items, the likely result is an increase in
purchase unit price.
Purchasers who concentrate their business with one or a very few vendors will
generally pay lower purchase unit prices. This is why buyers employed by
multiunit operations are able to obtain such attractive product pricing. For a
vendor, the possibility of securing a very big order allows significantly
reduced pricing because the cost of service can be spread across all of the
products that are being sold.
Considering the prices charged by a few vendors for each order and selecting
the one with the lowest prices for the same quality tends to increase average
delivery size and reduce per-item prices. Alternately, giving one vendor all of
an operation’s business can be costly if the products vary widely in quality
and price, or if they are often difficult to obtain.
For many buyers the logic of using multiple vendors appears sound. Often it
is, but not always. For example, consider purchasers who continually compare
prices among competing vendors. When quality is equivalent, they buy from
the vendor offering the lowest price. They appear to be maximizing effort
and minimizing cost. These buyers should, however, recognize that cherry
pickers who purchase only a vendor’s lowest-priced goods will be serviced
last. Cherry pickers is a term commonly used by vendors to describe buyers
who request bids from several vendors and then buy only those items each
Multiple Vendors As you probably know, there are two major soft drink suppliers in the world. Company B had used the same soft drink supplier since its founding, 25 years earlier. The contract came up for renewal, and it was a huge multiyear contract. I was asked to negotiate, but was told “we really don’t want to change suppliers.” I noted that if we wanted the best decision, it had to be an equal playing field. If both companies submit a proposal, then both have to have a shot at the contract. The result was a long, complex negotiation. The company that had not had the contract previously made such a strong proposal, it would have been fiscally irresponsible to turn it down. We had formed a team of franchisees and company employees, and they made the recommendation to the president. Moral: It took some convincing, but he could see that the playing field had been fair and equal. And this was the best decision for the company and the shareholders.
reaL manager
CHAPTER 5 Ordering Products: Pricing Decisions
vendor has “on sale” or for the lowest price. If a buyer purchases only a
vendor’s low-priced items, that vendor will usually respond by providing
limited service. This is a natural reaction to the buyer’s failure to consider
varying service levels, long-term relationships, dependability, or any other
vendor characteristic besides lowest price.
PAymEnT HisToRy
Buyers for operations that do not pay their bills on time might be surprised to
know what their competitors are paying for similar products. In many cases,
managers of establishments that are slow to pay will find that their vendors
have added the extra cost of carrying slow-pay accounts to the price. They do
so because the slow-pay buyers are really purchasing products with the
vendors’ money, rather than their own.
Vendors are very concerned about when they are paid, and they carefully keep
track of when they receive payments. When a buyer’s payments lag behind due
dates, notices are sent, and some costs for late fees and finance charges may be
incurred. When payments are not made after the first or second notice, the
prices quoted for products typically become less competitive. At some point,
vendors will require cash on delivery, if they will make deliveries at all. Cash on
delivery (COD) refers to a requirement that a buyer pay the full amount owed
in cash or other acceptable payment form at the time products are delivered.
Lowest price is not always the best price
Buyers must be concerned about many things as purchasing decisions are
made. Not surprisingly, the challenge of determining the best price will
always be important. The importance increases along with the amount of
money involved.
The recognition that the best price is not always the lowest is one factor that
separates an experienced buyer from someone who is just learning the basics.
The best purchasers know they are buying a product, such as fresh seafood or
canned vegetables. However, they also understand that the price they are
paying covers several additional factors.
First, they must consider the quality of the product being purchased, which
will be reflected in the product cost. Larger-sized shrimp cost more than
smaller shrimp. A can of green beans containing beans of different sizes and
colors and with stems should cost less than a can of trimmed, similarly sized
green beans. When buyers say they want the lowest price, they should be
saying they want the lowest price for a product of proper quality.
Service is also an important part of price. Why would a buyer make a
purchase agreement for a lower-priced product required for the Sunday buffet
if it will not be delivered until Monday? On-time delivery is a valuable service,
and a purchaser should be willing to pay for it.
thinK abOUt it...
What should a buyer or
manager do if a payment is due
but must be delayed for a few
days? What are the advantages
and disadvantages of alerting
the vendor immediately? What
would you do?
•••••••••••••••
CHAPTER 5 Ordering Products: Pricing Decisions
If both parties believe it is unlikely there will be a future business relationship,
the issue of price is likely to be very important. As the purchase price is
negotiated, the vendor “wins” as the price goes up, or the purchaser “wins” as
the price goes down.
However, there are even instances in these examples where issues other than
cost can be negotiated. Perhaps, for example, the buyer purchasing equipment
will transport it to the establishment at no expense to the vendor. The price of
the shed construction may be influenced by payment terms.
More commonly, successful negotiation allows both parties to “win.” This is
the desired outcome when a long-term relationship is desired. For example,
a vendor offering a price concession might be interested in a long-term
relationship with the purchaser. In the previous situations, the equipment
exhibitor might be interested in selling a new item because its presence in the
community makes it convenient for other operators to see and learn about the
equipment. The contractor building the storage shed may want a hospitality-
specific reference to expand his or her business.
Purchasers representing their operation may sometimes be confronted with
persons whose views about negotiation do emphasize the “I win, you lose”
approach. Differences between the “win–win” and “I win, you lose” viewpoints
Manager’s Memo are noted in Exhibit 5.4.
Why is the negotiation process necessary? After all, chapter 4 stressed the importance of identifying approved vendors to quote prices for needed products. Why is there a need to negotiate prices when competitive bids will be obtained?
Wise buyers know that there are other factors besides price for which agreements are needed. For example, one vendor might quote a very competitive price for a product of the required quality. However, perhaps the preferred delivery time is not convenient for the operation. Or, perhaps a buyer has a good price and the quality is excellent but payment is required before the buyer’s establishment wants to pay it. These are examples of issues for which negotiation can be helpful.
win–win Approach win–lose Approach
- Participants solve problems. • Negotiators are adversaries.
- Goal is for all parties to win. • Goal is for other parties to lose.
- Remove people from the problem. • Focus on the problem and the
people.
- Both parties trust each other. • Do not trust the other party.
- (^) Focus on and explore common interests. • (^) Do not compromise a position.
- (^) Do not have a “bottom line.” • (^) Focus on the “bottom line.”
- (^) Develop options that allow both parties to win. • (^) Search for one-sided gains.
- (^) Develop multiple options; make decisions later. • (^) Insist that one position is correct.
- Use objective factors to evaluate compromises. • Win a “contest of wills.”
- Yield to principle rather than to pressure. • Apply pressure.
exhibit 5.
DiFFerenCes betWeen tWO negOtiating apprOaChes
Negotiating Prices
The notion that vendors should provide value has been emphasized
throughout this book, and it is also important in win–win negotiating.
When possible, it is important that both parties gain lasting benefits
from the negotiation process.
negotiation and value
Experienced buyers agree that the price of a product is important.
However, value, which is the relationship between price and quality,
is even more important. They also understand that the service and
information they require is part of a product’s cost. Three things—
product, service, and information—are components of what is being
purchased from the vendor. Wise purchasers realize that the vendor’s
information and service is bundled with the purchase price and, like
the price, can be negotiated.
Most buyers recognize that it is worth something to consistently receive the
correct quality of products, in the right quantities, at the agreed-upon price.
They also know there are costs if these purchasing goals are not consistently
attained. They are willing to pay for vendors’ information about products and
the possibility of price changes in terms of a slightly higher product cost. They
also recognize the value of specialized expertise to address product-related
problems (Exhibit 5.5).
It is also valuable for the purchaser to consider price negotiation issues from
the vendor’s perspective. Vendors are not likely to want to do business with a
purchaser who paid a very high price when the chances for payment were
risky and payments likely to be slow. They do not like to do business with
buyers who consistently allege product defects that may not exist, or who have
all-too-frequent stockouts with the need for additional deliveries.
While oversimplified, buyers want to purchase from good vendors, and
vendors want to do business with good buyers. Strategies used during
negotiation and the results of the process are likely impacted by the
relationship between these two parties. The better that relationship, the
greater the benefits to both will be.
successful negotiation traits
Two types of concerns must be addressed as the negotiation process evolves.
These relate to the interests of the operation and human concerns about those
involved in the negotiation session. These concerns are interrelated, and
several factors impact the success or failure of negotiation:
- (^) The personality and skill levels of the negotiators
- (^) The extent to which the personalities of the negotiators are compatible
exhibit 5.
Manager’s Memo Negotiation is only one way for non-agreeing parties to interact, and there are others:
- (^) Giving in: One party may just accept the other party’s offer. This may be the only alternative when there are few vendors or limited product availability. Conceding to a price for rare wines is an example of this “take it or leave it” situation. Conversely, multiunit organiza- tions that purchase in large volumes may be able to dictate prices. Vendors can accept the price or risk loss of business.
- (^) Eliminating the issue: A purchaser may experience difficulty obtaining an ingredient for a specialty menu item and must pay a high price. A menu change may eliminate the need for the ingredient.
- (^) Persuading: Frequent and reasonable defense of a position may be helpful. For example, information sharing and explaining the circumstances of a purchase need are strategies that may encourage a vendor to accept a lower price.
Negotiating Prices
Manager’s Memo When the purchasing process for recurring products and supplies is properly planned and well organized, there are relatively few times when significant negotia- tion efforts will be necessary. The importance of negotiation, however, is not always related to its frequency. For example, consider the need to select designers, contractors, and other service providers for remodeling. This type of purchase does not occur frequently, but significant negotiation efforts will likely be needed for such a one-time purchase. Fortunately, skills are similar regardless of the purpose of the negotiation. Successful negotia- tors are those who use these principles most effectively regardless of the frequency or the concerns that prompt the negotiation.
exhibit 5.
steps in the negOtiatiOn prOCess
Step 1 Step 2 Step 3 Preparation (Pre-negotiation)
Participation (Negotiation)
Follow-Up (Post-negotiation)
Begin Meeting (Introduction) Discussion^ Conclusion
negotiation procedures
Exhibit 5.6 provides an overview of the steps in the negotiation process.
As seen in Exhibit 5.6, the negotiation process can be divided into parts.
There are three steps: preparation, participation, and follow-up.
sTEP 1: nEgoTiATion PREPARATion
There is no rule of thumb about the amount of time or effort required for
negotiation preparation. The complexity of the negotiation and its importance
to the operation will likely impact the amount of preparation time needed.
There are several tactics that are important when preparing for a negotiation
session:
- Identify the objectives of the negotiation.
- Identify negotiation strategies.
- Establish going-in positions.
- Consider fall-back positions.
- Collect information and input from product users.
Purchasers preparing for negotiation have several primary concerns. First,
they must know exactly what they want. Often, answering the following
question can help: “If the negotiation process is ideal, what will happen?”
Related questions include “How will we know?” “What benefits will we
receive?” “What will be our relationship with this vendor?” and “How will our
customers benefit?”
Some objectives of a negotiation activity may be relatively easy to quantify.
Examples include a lower price, a different payment arrangement, and faster
or different delivery times. By contrast, other objectives may be more difficult
to quantify. Desired changes in product quality and ways to improve value in
the products, services, and information provided by the vendor are examples.
CHAPTER 5 Ordering Products: Pricing Decisions
In addition to considering the objectives of the negotiation session, buyers
should consider strategies designed to achieve those objectives. If more than
one person from the operation will be involved in the negotiation, it is
important to consider the basic responsibilities of each party. In other words,
who will say what and when?
Wise negotiators establish going-in positions that prioritize the desired
outcomes from the session. For example, desired quality changes might be
very important, and different delivery times might be less of a concern.
The purchaser must also determine possible fall-back positions. This is
where negotiation on a specific point must be concluded. For example, a
purchaser desires twice-a-week delivery of a specific product instead of the
current once-weekly delivery. That is the going-in position. However, the
purchaser knows that delivery on another day will minimize the time in
inventory for the majority of products. Therefore, a once-weekly delivery is
acceptable if it is on a specific day. This becomes the purchaser’s fall-back
position.
Careful preparation can usually identify the best going-in and fall-back
positions for a negotiator’s most important concerns. However, during the
negotiation process one party may change fall-back positions if the other
makes a sufficient concession on a different issue.
In the example above, the vendor is concerned about delivery cost and will
not likely want to provide twice-weekly delivery. The vendor also recognizes
the buyer’s concerns: two deliveries each week reduces inventory quantities as
well as quality, theft, and storage concerns. The delivery schedule can be
revised to bring products in on Friday because most of the buyer’s business is
on the weekend. There will be little or no additional cost for the vendor to do
so, and the operation will benefit. In the process, the purchaser will realize
greater value for the purchasing dollars being spent.
The vendor that has made this concession has gained an “edge” when the next
point is discussed. As this process evolves, the relationship between the two
parties will be improved. The purchaser should consider these compromises
when preparing for the negotiation.
Often, the actual negotiation process will be much more complicated than
these examples, and both parties must prepare accordingly. Remember also
that the existing relationship of the two parties will impact their interests in
moving away from their desired positions. For example, most buyers would
rather pay $2.21 per pound for a product if they believe they would receive the
right quality than pay $2.19 per pound to a vendor with a reputation for
inconsistent quality.
Manager’s Memo
Buyers who are concerned about a value-driven relationship with vendors are basically preparing for possible negotiation with vendors on an ongoing basis. The purchaser is almost continuously researching the marketplace, addressing challenges experi- enced by product users, and considering how purchase value can be enhanced.
In the fast-paced world in which most establishments operate, it is likely that the marketplace will have changed, perhaps signifi- cantly, since the time of previous negotiations. Also, the buyer’s product requirements may differ because they are driven by the wants and needs of customers, whose preferences evolve over time.
Purchasers preparing for negotia- tions must carefully analyze the situation at the time of any earlier negotiation sessions and consider what has occurred since those events. Then, to the extent possible, they must forecast the future and its implications on current purchasing decisions.
CHAPTER 5 Ordering Products: Pricing Decisions
A final concern when preparing for the negotiation is to determine details
such as the session’s location, time, and related concerns. With these issues
addressed, the buyer will be prepared to represent the establishment during
the negotiation session.
sTEP 2: nEgoTiATion PARTiCiPATion
Exhibit 5.6 indicates that there are three parts to the actual participation in
negotiations. Participants must begin the meeting, undertake discussion,
and reach a conclusion.
meeting intrODUCtiOn Being on time and ready for the negotiation session
is important (Exhibit 5.8). The purchaser should help maintain an
environment that is professional and positive. Emphasizing the benefits of
the historical relationship between the two parties is a good start. This can
be followed by noting a sincere interest in reaching a mutually successful
conclusion.
exhibit 5.
The beginning of the meeting is a good time to recall the importance of
making careful, not necessarily quick, decisions. The buyer should also
remember to use the three most important skills of negotiation: questioning,
listening, and observing.
Someone should agree to take notes about the meeting’s agreements. The
notes can then be used as a summary of the session.
Negotiating Prices
meeting DisCUssiOn As the negotiation process evolves, several strategies will
likely be useful:
- Remember that arguments are never helpful. When problems are noted,
the proposal of a constructive solution is better than assigning blame or
becoming offensive.
- Provide summaries of important points as they are agreed on. This can
help reduce later communication problems.
- Be aware that body language can help in understanding what the
other party thinks. Body language involves nonverbal actions such as
gestures, positions, movements, and expressions that a person uses to
communicate. People often “say” a lot about their thoughts and
feelings even when they do not use words. Knowledge of nonverbal
communication can be a helpful tool as the buyer interacts with
another party.
Exhibit 5.9 shows some examples of body language. The actions listed
frequently have certain significance. Experienced negotiators often can
determine whether the body language does communicate messages or
whether the actions are meaningless.
body language what Action may mean
- Tapping fingers; drifting eye contact;
moving body away from the other person
- Being untruthful or unwilling to
compromise
- Hands and arms open; good eye contact;
sitting on edge of seat
- Readiness to take action or to
compromise
- Broad gestures; chin raised; leaning forward
in seat
- Dominance
- (^) Arms close to body; head down • (^) Submissiveness or unwilling to
compromise
- (^) Rubbing back of neck; increased eye
blinking; crossing/uncrossing legs
- (^) Nervous, tired, not feeling well,
or bored
- (^) Tapping fingers or pencil; yawning; angling
body away from speaker
- (^) Information overload
- (^) Arms crossed over chest; frown or superficial
smile; positioning body toward exit
- (^) Closed mind or disagreement
- Looking away or at watch • Desire to avoid further discussion
or end negotiation session
exhibit 5.
exampLes OF bODy LangUage
