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  • BUSINESS NEGOTIATIONS: MAKING THE FIRST OFFER

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    Business Negotiations: Making the First Offer

     

     
     
    © International Trade Centre, International Trade Forum - Issue 2/2000

    First impressions make a difference. Getting off to a good start in business negotiations is likely to influence the final agreement. Your first offer should reflect your best-case scenario, supported by first-class justification. To steer negotiations toward your goals, find out the other side's needs; think through your opening positions; and master the technique of repeated questioning.

    The way you open business negotiations influences the entire process, from the initial offer to the final agreement. For first-time negotiations, especially between different cultures, these opening moments are even more critical.

    Business executives should ask themselves three questions when preparing their opening offer:

    • Who should make the first offer?

    • Should it be high (if you are exporting) or low (if you are importing)?

    • What should you do if your opening offer is rejected?

    While some negotiators recommend letting the other side open the discussions, others suggest that making the first offer gives you a tactical advantage. These suggestions are simplistic and generally apply to one-time business deals. Doing business in the global arena is a long-term prospect, where personal relationships are essential. Skilled negotiators create a favourable atmosphere that has a positive impact on the tone, style and progress of negotiations, as well as the final agreement.

    Once made, first impressions are difficult to change, particularly if they are negative. We tend to have quicker, stronger and longer-lasting reactions to bad impressions than to positive ones. So, take extra care in formulating opening statements.

    For fruitful negotiations, the opening offer should:

    • stress mutual benefits;

    • be clear and positive;

    • imply flexibility;

    • create interest;

    • demonstrate confidence; and

    • promote goodwill.

    Understand what the other side needs

    The opening phase is the time to find out what the other side is really looking for. Identify their underlying needs and your common interests, and emphasize the mutual benefits to be derived from reaching agreement. At least in the initial stage of the discussions, be prepared to set aside differences of interests and potential obstacles that could derail the negotiations. Your first offer should be viewed as fair and reasonable. The other party may require justification to support your proposal; you should be in a position to provide it. Overall, the initial offer should be on the higher side to give you room to manoeuvre while protecting your margins. Research has proven that negotiators starting with high aspirations generally obtain higher outcomes than those with lower or more modest goals. As a rule, buyers do better starting with low offers, while sellers improve their results with high openings.

    In view of these findings, exporters may be tempted to start high and importers to begin low to maximize their outcomes. However, as every deal is different, both parties should consider each new negotiation as unique, calling for extreme care in the preparation of opening strategies. Experienced negotiators in international business bear a number of factors in mind when planning their opening stance: cultural norms prevailing in the target market; competition in their line of business; and whether they are seeking repeat orders over the long term. Equally important is how badly they need the deal and whether they have other business alternatives.

    Should I make the first offer?

    Yes, if you wish to take the initiative and set the tone of the discussions. You gain a tactical advantage by submitting your position first, because you establish a reference or anchor point.

    Your anchor point will probably influence the other side's responses. The other party now knows your position, and will either reject it or request a counter-offer. The other side may also revise its acceptance limits in light of your opening offer.

    At this point, don't make unnecessary concessions; seek clarifications instead. This approach assumes that your initial offer is based on recent market information, is credible and is presented with conviction.

    In most international business deals, sellers are expected to make the first offer since buyers consider themselves in a position of power. In some markets, buyers dictate the discussions and control the negotiations from the beginning to the final agreement.

    No, if you are not familiar with the market in which you are trying to do business. Making an offer without adequate information or a clear understanding of what the other side wants places you in a risky position. For example, having your first offer accepted means that you have underestimated the market.

    Another reason for not making the first offer, even if you know the market price, is to test the seriousness of the other side, particularly if it is new a business deal. In this case, prepare in advance. Find out about quality standards, delivery terms, size of order, payment conditions and other relevant information. This will enable you to present a credible offer or counter-offer.

    Should I open high?

    Yes, if you can justify the level of your offer. At this early phase of the discussions, any objections to your high offer should be dealt with through questions, not by making concessions. Your best approach to objections is to find out which part of your proposal is acceptable and which elements are considered objectionable. Only by acquiring this additional knowledge will you be in a position to justify your initial offer or eventually make a counterproposal. Proposals and counter-offers should be handled step by step, using the technique of repeated questioning (see box). This allows you to gather and exchange information without making early concessions. Equally important, the technique allows discussions to continue, despite rejection of a high initial offer.

    Starting high is common in markets where business executives rate their superior negotiating skills by how many concessions they obtain. For example, a high initial offer is expected in many countries in Latin America and the Middle East. In highly competitive markets, frequently found in south-east Asia, North America and western Europe, opening offers are slightly above the bottom line. In most of Asia, Africa and European economies in transition, a moderate to high offer is taken for granted. A moderate opening offer is an acceptable strategy to initiate discussions in most foreign markets.

    The main mistake to avoid is to present an offer considered so high by the other side that it results in a deadlock. Another common pitfall is to start with a high offer and not be prepared to justify it. To overcome lack of justification or preparation, negotiators wrongly begin immediately to make concessions, without asking for reciprocity.

    Should I make a low offer?

    Yes, in special situations. Skilled negotiators may make a low initial offer, near the bottom line - not so much to get the business, but to be invited to the negotiations. In some industries and markets, your product is sold at a going price and at predetermined conditions, leaving you with little choice in setting your opening offer. When facing strong competition, your offer should be more or less in line with theirs.

    An advantage of having an opening offer close to the competition's is that it allows you to remain in contention for the business. To increase your chances of having your offer retained, your proposal must address the specific needs of the other side and demonstrate how your offer can best meet their requirements to their full satisfaction. While doing this, it is important not to criticize your competitors openly.

    When they hope to enter into new markets or to get a foot in the door with a new customer, business executives often open with a proposal that is close to, or at times below, their bottom line. In such cases, it is vital to explain that the offer is valid for a limited time only. For example, an exporter may be faced with extra production capacity during the last quarter of the year. In this situation, the exporter could propose a limited business deal at a one-time price preferential, in order to utilize the extra capacity and thus recover the fixed and part of the variable costs.

    At times, you may wish to make a low offer in order to secure business with well-known global enterprises. This strategy is common among small and medium-sized firms seeking business deals with world-class companies. Advantages of being associated with large international firms often override the need for immediate profits. This business strategy places the negotiator in a weak position from the beginning, however, and often results in unprofitable agreements. To avoid being caught in this situation, shift the discussions away from the initial offer to the needs of the other side.

    Your main concern at this stage is to take charge of the discussions through questions, in order to make sure you have a clear understanding of the real needs of the other side. Once you know exactly what the other party's requirements are, you can propose additional features such as better quality, faster delivery, individual versus bulk packaging, short and flexible production runs and other intangibles in order to improve your margins. By managing successfully this type of low-offer strategy, you could obtain a profitable agreement despite having started near your bottom line. Remember, professional buyers are known to seek the highest-quality products or services from the most reputable firms at the lowest possible price. In the end, these same buyers often end up paying a premium to avoid the risk of getting inconsistent quality or receiving late deliveries.

    There are times when entrepreneurs from small or mid-sized firms propose very low offers in the hope of receiving large orders at higher prices in the future. Too often, promises for future business opportunities remain just that - promises. Negotiating deals at low prices in the hope of recovering lost profits from future orders is a dangerous strategy. Wise negotiators avoid this strategy because of the high risks involved. Don't forget that if the main reason you obtained the deal was your low offer, the moment you raise the price (with or without ample justification), the buyer is most likely to shift the business away from you to your competitors.

    What should I do if my first offer is rejected?

    React positively. A rejection should be regarded as the beginning of the negotiations, not the time to make concessions or take a defensive attitude.

    Experienced negotiators expect objections. They turn objections into opportunities, without getting into concessions. They consider such reactions as an ideal opportunity to start an information exchange through questioning.

    Before justifying your initial proposal, ask the other side what part of your offer they are willing to accept. This information allows you to initiate discussions in a positive manner and to reintroduce your proposal, stressing the features considered best by the other side. By not ceding to pressure, you gain a substantial psychological advantage in the early round of discussions. This exchange of information between both parties is necessary to identify common grounds and explore new interests to reach a better agreement.

    A summary of the most common objections encountered in the opening phase of the face-to-face discussions and appropriate responses is given in the box on page 16. These objections are generally meant to put you on the defensive. By taking charge of discussions through repeated questioning until you have a clear understanding of what the other side really wants, you can successfully overcome these early objections and be in a favourable position to steer the negotiations toward your goals.

    Getting your first offer ready

    For every negotiation you plan to enter, your initial offer should stand on its own merit within the prevailing context surrounding the discussions. Entering the negotiations under false pretences or unfounded premises can prove costly or result in deadlocks. Make your first offer competitive in the eyes of the other party and be ready to defend it with valid arguments.

    The worst scenario is to make concessions immediately following objections to your initial offer. Unskilled or unprepared negotiators frequently face this dilemma in their business dealings. Asking questions, active listening and patience go a long way to conquering this tendency. Anticipate the typical objections you are likely o face; prepare appropriate replies in advance; and formulate information-seeking questions before you meet the other side.

    Your knowledge of the market, a clear assessment of your competitors, and an understanding of the other side's real needs should help you overcome this crucial initial phase.

    As the opening offer will shape the outcome of the negotiations, your ability to make a good impression from the outset is critical. Remember, you may not be given a second chance to make a good first impression.

    Although it is better to place your initial offer slightly higher to reach a better outcome, you may have to lower it if you are doing business in highly competitive markets. In more traditional and less competitive markets, your offers should be on the higher side with plenty of built-in concessions. In these markets, negotiators judge their results by the number of concessions obtained due to their persuasive bargaining skills rather than the full value of the concessions.

    In whichever market you plan to negotiate, your initial offer should be presented with confidence and conviction yet implying flexibility. The issue is not to have your offer accepted or rejected or to be the first to make an offer, but to be in a position to start strong and maintain control of the discussions. It is only through a series of high-yield questions that you will learn what the other side really requires, enabling you to reformulate your offer to meet their specific needs.

    This phase of the negotiations should be regarded as an opportunity to create an atmosphere of trust, leading to an exchange of strategic information. It is not the time to start making concessions. Executives from certain corporate or local cultures consider this initial phase a waste of time and enter immediately into trading away concessions. Successful negotiators know better. They invest their time by finding out the real needs of the other side and by determining how best they can satisfy those needs in an acceptable package. In other words, your first offer should reflect your best-case scenario, supported by first-class justification.

    What if they say... Handling common rejections to first offers

    Your offer is too expensive.

    • Ask what is meant by too expensive.

    • Find out what is considered acceptable and on what basis.

    • Respond by providing justification.

    • Avoid lowering your price until you learn more about what the other party is looking for.

    • Find out if the objection is due to your price offer or if it reflects other factors.

    • Ask yourself: if I'm too expensive, why is the other side negotiating with me?

    We don't have that kind of budget.

    • Find out how large the budget is, and for what time frame.

    • Explore whether your offer can fit within the overall budget by checking whether the other side can combine several budget lines.

    • Propose deferred payment schedules.

    • Confirm the order and postpone deliveries until a new budget allocation is confirmed.

    • Split the order into smaller units or mini-orders to meet current budget limitations.

    That's not what we are looking for.

    • Ask what they are looking for, and insist on specifics.

    • Find out which aspects of your offer they like best.

    • Keep asking questions until you have a clear understanding of the other side's real needs, then...

    • Repackage your offer in light of the new information received.

    Your offer is not competitive.

    • Ask what is meant by the phrase 'not being competitive'.

    • Find out if your competitors' offers are comparable to yours.

    • Look for weaknesses in the other offers and stress your strengths.

    • Reformulate your offer by avoiding direct comparison with competition. Stress the unique features of your products/services.

    Claude Cellich, Vice-President of the International University in Geneva, formerly served as ITC's Chief of Human Resource Development.