Printer Friendly

Negotiating strategies: the question of price.

Negotiating strategies: the question of price

Exporters in developing countries entering new markets, particularly small and medium-size enterprises (SMEs), often face problems in initial negotiations with importers, agents and buyers in the target markets. These difficulties generally centre around pricing questions and particularly the fact that their prices may be considered too high. Although price is only one of many issues that has to be discussed during business negotiations, too frequently it tends to influence the entire negotiation process. New exporters may be inclined to compromise on price at the beginning of the discussions, thereby bypassing other negotiating strengths that they may have, such as the product's benefits, the firm's business experience and its commitment to exporting quality products.

As pricing is often the most sensitive issue in business negotiations, the subject should usually be postponed until all of the other aspects of the transaction have been discussed and agreed upon. It is estimated that about 80% of the issues negotiated are of a nonprice nature. Decisions to place export orders involving a long-term commitment are in any case rarely made on the basis of price alone but rather on the total export package. This is particularly so in markets where consumers are highly conscious of quality, style and brand names; where marketing channels are well structured; and where the introduction of the product in the market is time consuming and expensive.

By presenting a more comprehensive negotiating package in a well planned and organized manner, exporters should be able to improve the effectiveness of their business discussions and in the long term the profitability of their export operations.

Tactics in negotiations

An importer may reject an exporter's price at the outset of the discussions simply to get the upper hand from the beginning of the negotiations, thereby hoping to obtain maximum concessions on other matters. The importer may also object to the initial price quoted to test the seriousness of the offer, find out how far the exporter is willing to lower the price, seek a specific lower price because the product brand is unknown in the market, or demonstrate a lack of interest in the transaction as the product does not meet market requirements.

If the importer does not accept the price, the exporter should react positively by initiating discussions on nonprice questions, instead of immediately offering price concessions or taking a defensive attitude. Widening the issues and exploring the real reasons behind the objections to the price quoted will put the talks on a more equal and constructive footing. Only by knowing the causes of disagreement can an exporter make a reasonable counter-offer. This counter-offer need not be based merely on pricing. It can also cover related subjects.

To meet price objections, some exporters artificially inflate their initial price quotations. This enables them to give price concessions in the opening of the negotiations without taking any financial risks. The danger of this approach is that it immediately directs the discussions into pricing issues at the expense of the other important components of the marketing mix. Generally such initial price concessions are followed by more demands from buyers that will further reduce the profitability of the export transaction. For instance, the buyer may press for concessions on:

* Quantity discounts.

* Discounts for repeat orders.

* Improved packaging and labeling (for the same price).

* Tighter delivery deadlines that may increase production and transport costs.

* Free promotional materials in the language of the import market.

* Free after-sales servicing.

* Supply of free parts to replace those damaged from normal wear and tear.

* Free training of staff in the maintenance and use of the product.

* Market exclusivity.

* A long-term agency agreement.

* Higher commission rates.

* Better credit and payment terms.

To avoid being confronted by such costly demands, an exporter should try to determine the buyer's real interest in the product from the outset. This can be ascertained through appropriate questions but must also be based on research and other preparations before the negotiations. Only then can suitable counter-proposals be presented.

Planning negotiations

To achieve a favourable outcome from the negotiations, an exporter should draw up a plan of action beforehand, which addresses a few key issues. Experienced negotiators consider that as much as 80% of their overall time devoted to negotiations should go to such preparations. The preliminary work should be aimed at obtaining relevant information on the target market and the buyers of the product. It should also include developing counter-proposals if objections are raised on any of the exporter's opening negotiating points. The preparations should thus involve formulating the negotiating strategy and tactics.

Market research: Knowing what the buyer wants or needs requires advance research. Besides customers' preferences, an exporter should assess competition from both domestic and foreign suppliers and be familiar with the prices that they quote. The distribution channels used for the product and the promotional tools and messages required should also be examined. Such information will be valuable when negotiating with buyers. The more that is known about the target market and the buyers for the products concerned, the better placed the exporter is to conduct the negotiations and match the offer to the buyer's needs.

Supply assessment: Making counter-proposals also requires detailed information on the costs of the exporter's production operations, freight insurance, packing and other related expenses. An exporter should carry out a realistic assessment of the quantities that can be supplied and the schedule for supplying them. Every effort should be made to match the export firm's size, financial situation, production capacity, technical expertise, organizational strength and export commitment with compatible buyers.

As part of the preparations for negotiations, an exporter should list the potential price objections the buyer may have towards the offer to be presented, along with possible responses. Some of the most common price objections are listed in the table on page 12, together with some suggested action. Exporters can adapt the list to their own product, the particular competitive situation and specific market requirements.

Into the negotiations

In the negotiations the exporter should first find out what the buyer really needs. If the subject of prices has been raised at the outset, the background to any price objections should be determined in order to better understand the buyer's requirements, but without making any commitments or concessions on price at this point. The talks should then proceed to substantive matters.

The firm's attributes: This is the time for promoting the strength of the export firm as a reliable commercial partner, committed to long-term business relationships. The buyer should be convinced that the exporter is capable of supplying the type of goods needed on acceptable terms.

The exporter can stress the following aspects of the firm's operations:

* Management capability.

* Production capacity and processes; quality control system.

* Technical cooperation, if any, with foreign firms.

* Export structure for handling orders.

* Export experience, including types of companies dealt with.

* Financial standing and links with banking institutions.

* Membership in leading trade and industry associations, including chambers of commerce.

The product's attributes: Once the buyer is convinced that the exporter's firm is a reliable one, negotiations can be directed towards a discussion of the product and its benefits. The attributes of a product tend to be seen differently by different customers. It is therefore essential to find out as soon as possible the buyer's needs and determine how the product can fit them.

In some cases meeting the buyer's requirements is a simple process. For example, during sales negotiations an exporter of cutlery was told by an importer in a major market that the price was too high, although the quality and finish of the items met the market requirements. In the discussions the exporter learned that the importer was interested in bulk purchases rather than pre-packed sets of 12, as consumers in that market purchased cutlery either as individual pieces or in sets of eight. The exporter then made a counter-proposal for sales in bulk at a much lower price, based on savings in packaging, transport and import duties. The offer was accepted by the importer, and both parties benefitted from the transaction. This example illustrates that knowing what product characteristics the exporter is looking for can be used to advantage by the exporter.

Exporters may not have a unique product, but by stressing the product attributes and other marketing factors in the negotiations they can offer a unique package.

Maintaining flexibility: In the negotiation process the buyer may request modifications in the product and its presentation. An exporter should show a willingness to meet such a request if possible, provided that it will result in profitable export business. For example, in one case negotiations on the export of teak coffee tables were deadlocked because of the high price of the tables. During the discussions the exporter realized that the buyer was interested primarily in the fine finish of the table top. The exporter therefore made a counter-proposal to supply the coffee table with the same teak top but with table legs and joineries made of less expensive species of wood, at a lower price. The importer accepted the offer, and the exporter was able to develop a profitable export business.

Price package: After covering all of the nonprice issues, the exporter can shift the discussions in the final phase of the talks to financial matters having a bearing on the price quotation. This is the time to come to an agreement on issues such as credit terms, payment schedules, currencies of payment, insurance, commission rates, warehousing costs, after-sales servicing responsibilities, costs of replacing damaged goods and so on. Agreement reached on these points constitutes the price package. Any change in the buyer's requirements after his agreement should be reflected in a new price package. For example if the buyer likes the product but considers the final price too high, the exporter can make a counter-proposal by, for instance, cutting the price but asking the buyer to assume the costs of transport and storage en route.

The table above gives examples of questions to test an exporter's readiness to negotiate around the pricing issue.

Exceptions

In some cases price is an all-important factor in sales negotiations. The most obvious situation is when firms are operating in highly competitive markets with homogeneous products. Bypassing the pricing issue at the outset of negotiations is difficult when buyers are interested only in the best possible price, regardless of the source of supply. In such a situation it may be advisable in the longer term to differentiate the product from those of other suppliers to allow for negotiation on other factors such as product style and quality.

Conclusion

In their international marketing negotiations small and medium-size exporters in developing countries too often limit their discussions to pricing issues. Although pricing is a key factor in any business transaction, a number of other questions need to be clarified before any realistic business proposal can be considered. Exporters should give more attention to the full range of marketing factors. They should stress the strengths of their firms and products and match them with the perceived needs of the buyers. Once these issues have been covered, they have reached the final stage of the negotiation process and can consider the question of price.

Preparations for price discussions

Importer's reaction Exporter's possible response to price offer
1. The initial price quoted is too Ask the buyer what is meant by too
 high; a substantial drop is high; ask on what basis the drop is
 required. called for; stress product quality and
 benefits before discussing price.
2. Better offers have been Ask for more details on such offers;
 received from other exporters. find out how serious such offers are;
 convince the buyer that the
 exporter's firm has a better offer.
3. A counter-offer is required; a Avoid making a better offer without
 price discount is expected. asking for something in return, but
 without jeopardizing loss of interest;
 when asking for something in return
 make a specific suggestion, such as
 "If I give you a 5% price discount,
 would you arrange for surface
 transport including storage costs?"
4. The price of $.... is my last Avoid accepting such an offer
 offer (the importer specifies a immediately; find out the quantities
 lower price). involved; determine if there will be
 repeat orders; ascertain who will
 pay for storage, publicity, after-sales
 service and so on.
5. The product is acceptable but Agree to discuss details of the
 the price is too high. costing; promote product benefits,
 reliability as a regular supplier,
 timely delivery, unique designs and
 so on.
6. The initial price quoted is Find out why the importer is so
 acceptable. interested in the offer; recalculate
 the costing; check competition;
 contact other potential buyers to get
 more details on market conditions;
 review the pricing strategy; accept a
 trial order only.


Checklist for negotiations
Question Action required
- Am I well prepared? Undertake thorough research on
 target markets and buyers.
- Do I know the nonprice benefits Develop a list of product benefits
 of my products? that could be used to counter price
 objections.
- Do I know my best markets and Obtain detailed information of
 buyers? market and buyer requirements; be
 ready with options.
- Will the buyer listen to me and Practice projecting confidence and
 take me seriously? maintaining two-way communication.
- Am I ready to make Decide on the maximum
 concessions? concessions that can be made;
 prepare several negotiating options.
- Will I be in a position to accept Determine what can be considered
 the negotiated deal? to be a sustainable sales
 agreement; decide ahead of time to
 not enter into a transaction simply
 for the sake of exporting; remember
 that no deal is better than a bad
 deal.


PHOTO : An importer may reject an exporter's price for a variety of reasons.

PHOTO : To achieve positive results, an exporter should have a plan of action.

Claude Cellich is chief of ITC's Training Section.
COPYRIGHT 1991 International Trade Centre UNCTAD/GATT
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Cellich, Claude
Publication:International Trade Forum
Date:Apr 1, 1991
Words:2308
Previous Article:Insuring coffee shipments for export.
Next Article:Copper semimanufactures: untapped market opportunities.
Topics:

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters