One of my favorite shows on television features the exploits of a pawn shop in Las Vegas. Called Pawn Stars, the show presents a never ending stream of people bringing odd things into the shop to sell. One thing that amazes me is that most of the people who come into the shop seldom get close to what they are hoping to receive to sell their item. Yet, they usually sell it anyway because they want the quick buck. Hundred dollar bills have a way of cutting through all the hard feelings because you think somebody some day might offer you more money.
For starters, you don’t go to a pawn shop if you want top dollar. But pallet and lumber companies do the same type of thing all the time. They may sell pallets at a significantly reduced rate because they are working through a broker. Or maybe a pallet recycler agrees to terms with a core supplier that end up being less than ideal. Lumber companies make bad deals too because they have inventory sitting around and need to move it.
Knowing how to make a good deal is a very important skill for almost any business person. But it is an often overlooked aspect of American business. And it can be easy to deceive ourselves into thinking that we are better at negotiating a deal than we really are.
Think about those areas of your business that require good negotiation skills. You can get burned by any of the following: bad terms with raw material suppliers, customer agreements that put you on the hook for defects beyond your control (i.e. mold or improper heat treatment), equipment leases and bank terms, bad broker arrangements, poor collection terms with debtors, over staffing and over paying new hires, agreeing to delivery schedules that are difficult to meet, etc.
I was reminded about the importance of negotiating the terms of your business relationship as I interviewed John Swenby and Steve Mazza of Pallet Logistics & Unit-load Solutions for the article on page 24. They represent the organization that is behind the launch of the new industry cooperative block pallet pool. Formerly known as PIMS, this new pool will be marketed using the brand name 9BLOC. It launched last month with the first production run of block pallets made to service clients supplying products to Costco Wholesale.
Initially, the 9BLOC pool is going to focus on meeting the needs of manufacturers that need to comply with Costco’s block pallet requirement but don’t want to be tied to rental systems. In order to establish the 9BLOC pool, its organizers had to negotiate some basic terms with Costco. While many of the details are still in the works, it seems that Costco has agreed to a few key terms before it starts accepting 9BLOC pallets.
Organizers behind the 9BLOC pool originally wanted to be treated like any other pool, such as CHEP, PECO or iGPS. They wanted pallets returned after use in Costco’s supply chain. But Costco has yet to agree to those terms. Costco has held out the promise of possibly doing this in the future.
The retailer first wants to see how much success 9BLOC will have before it establishes sortation lines at distribution centers to handle those pallets. This delay tactic will help Costco ensure the 9BLOC system works before designating any significant resources to service it. More importantly, it allows Costco to fill its pool with high-quality, standardized block pallets that are free to use. These pallets will accumulate and eventually reach a saturation point where Costco will have no choice but to return at least some of them. Or at least that is the hope of the 9BLOC development team.
One major concession they have been able to get from Costco is exclusivity when it comes to selling or repairing 9BLOC pallets. Costco will not sell any 9BLOC pallets to anyone outside of the 9BLOC network. Neither will
the retailer allow repair beyond member companies. This ensures that only those companies who are certified and inspected can repair pallets. These measures protect the integrity of the system and make it likely that 9BLOC will eventually recover some of its pallets even though Costco will keep a certain amount for its stores and DCs.
It will be better for the industry and the end users if 9BLOC can negotiate better terms with Costco. The reason is that better terms, especially returning 9BLOC pallets, will help solidify the sustainability of the system. In the meantime, the industry must make the best of the situation. This has led me to think about what are some good tips to consider when negotiating the next deal with a customer, supplier, employee or even a family member at home.
Some words should not be used in negotiation. The word “between” may seem like an overture to fairness but it actually is a concession. Any shrewd negotiator you encounter will focus on the lower price, the later deadline, or the most favorable term. That becomes the new floor for negotiation. You basically give up ground without gaining anything in return.
The other party will look for signs that you are experiencing deal fatigue. Comments like, “I think we’re close,” or “We expect to reach a deal soon,” may tell the other party that you value reaching a deal more than getting what you really want. This could actually lead the other party to stall to negotiate even better terms.
You need to go into the negotiation having done your homework and know what is a reasonable range for the product, property or service being discussed. Contrary to what people think, don’t be afraid to make the first offer. The first offer sets the basis for negotiations. Just make sure you are at the right end of the spectrum of the reasonable range. If you are the buyer, you want to offer toward the bottom of the range. If you are the seller, you want to ask for the top part of the range. You don’t want to make truly unreasonable requests that will make the other party feel you aren’t negotiating in good faith. Both sides need to win a little in the negotiation process to ensure a deal gets closed. You will likely need to make concessions at some point so that both sides can feel good about the process because emotions do play a role in decision making.
Yet, you also need to keep your emotions in check. Just as athletes trash talk during games, the other side may say things to gauge your emotional reaction or to tease a reaction. It pays to stay calm, avoid overreacting that can give the other party the emotional high ground. This is true even when they make a completely unfair offer or unreasonable demand. By remaining calm and in control, you are likely to fluster the other person, which may lead them to make a bad decision just to close the deal.
Look for signs to see what is really important to the other party. This will likely be off-hand remarks or information you obtain outside of the negotiation table. The highest bid many not always win if some other terms are more important, such as closing a deal faster, having more guaranteed money up front, receiving favorable service level guarantees, etc.
At some point, you will need to know if there are other parties that need to be brought into the discussion to approve the deal. This could be investors, executives, business partners, etc. It is usually best to meet them at some point to get a feel for what is important to them. This has been one of the problems with pallet companies trying to negotiate with major retailers or food manufacturers. The pallet guys are talking with people in purchasing or logistics when executives on the other side of the building will make the final call.
You can even use the “I got to get this approved by so-and-so” line to buy extra time to think through an offer. This gives you an out just in case you get cornered in the negotiation. Whatever you do, take 24 hours to think over any final offer or negotiated deal just to ensure that you have time to really consider all the parameters and don’t fall trap to the emotional rush of the negotiation table. If somebody makes an offer that requires an immediate answer, it is usually best to walk away.
Remember that you can always walk away and generally come back to negotiate another day as long as you don’t burn any bridges. You have to know your bottom line and don’t budge from it. Sometimes you have to be willing to walk away to open the door for a better deal. In the end, you have to reach terms that you can live with or else the negotiation was a failure.
