Game Theory and converting your quotes and prospects into customers September 2011

Negotiating with a customer is often a matter of price but sometimes other factors can make or break whether you close the sale.  Most small business owners are involved in negotiations with potential customers, suppliers, previous customers, sometimes complainants over the course of their business lives.  How to get what you want out of this, whilst retaining a sense of fairness, is often the name of the game.

Game Theory focuses largely on how we interact with others when a person is trying to get what they want out of a situation.  Different scenarios have been looked at in researching economics and psychology.  Many tv games shows have also used this as a basis for their format.

Judging how the other person will react

Clearly, the amount of time a job will take, labour charges and the material costs you must pay out set certain minimum constraints on the price you can charge for your work.  However, there is obviously some tolerance in the pricing you set which has to sit somewhere between competitive pricing and the amount of value you bring, and are perceived to bring, to your customer.

Pitching a price that is going to be acceptable does not happen in a vacuum.  It is often influenced by how confident you are feeling, how much profitable work you have on, cash flow and current debt chasing, for some it is only influenced by their perception of what the customer is prepared to pay and the resources at their disposal…the list goes on.  Only a rarely held, conscious and concerted effort to resist these influences would allow you to price your work without the push of external factors or preconceived ideas swaying the pitch you make.  Of course, the one overriding factor in determining how much business someone feels they can do with someone is how well they believe they are getting on with the other person, how well have they ‘clicked’.

One game and research tool that highlights the dilemma of negotiation well is the following.  Imagine you are given £80.  You are obliged to offer the person sat next to you some of the money you have been given.  If they accept the amount you offer, then they take that amount from you and you get to keep the rest.  If they refuse to accept your offer, then neither of you gets anything.  Why would they refuse any amount if they were getting it for nothing you may ask?  Well try the exercise and offer someone ten pence out of the £80 you have been given.  They will probably tell you to keep your 10p or tell you what you can do with it!  Rational thought is rarely the only factor in any negotiation.  The research suggests that in this exercise you have to offer at least around a third to stand a good chance of a successful outcome, and offering less than this tends to at least halve the chances of a successful outcome to the game.

So if someone you are playing a game with expects you to give away a third of something they would normally have none of – how much does a customer regard as being a fair amount for you to charge them for something they are interested in purchasing?  Is there more to haggling on price than a person simply feeling they got the best, or better, deal ?  For many, it is indeed about a sense of fairness, rather than a competitive streak compelling them to feel they have ‘beaten you’ in some way.   This in particular is the case when two small business owners are negotiating together. It often creates a different dynamic, compared to say, a small business owner negotiating with a large corporate.

Successful Recipes?

The most successful tradespeople I have come across are those that work with the philosophy that they genuinely and passionately work with their customers to achieve a common goal.  They also live and breathe this with their employees and those that represent their company, in an attempt to get those people to also adopt a similar approach with their customers.   The air of common purpose does not start when they have won the job, but when they are first pitching for the work.

Finding common ground to discuss with their customers brings about a sense of unity and trust which they can build on together.  This helps with winning business, leads to better harmony with their customers and also appears to generate more referral work.   What it also seems to do is remove some price barriers – as the customer is reassured that they are getting what they want and the additional benefit of knowing they are working with a person with a similar outlook, shared commitment to getting the job done right and as a result trust is increased.  This may sound easy in theory, but not so easy for everyone in business to consistently deliver in practice. How many people have come to your home or office and tried to sell you something with a seeming disinterest in what you actually want to achieve?  How many really go into depth to understand what makes you tick?  And do they all make the effort to find out the kind of person you would want to work with on something?  Some of your competitors will not be making this effort.  Doing so helps to give you an edge.

Other ways of indicating transparency and fairness is to break down for people how much per hour you will actually end up with, once all the work is done. This often helps people to understand that there is far more involved than just a perceived larger total figure.

I recall nothing making me chuckle more than being given a lottery ticket or a lottery scratch card as a reward for a small piece of good work by a boss in a corporate business.  Only then was I told that I could only have it if I agreed that if it turned out to be a winning ticket, they would get half.  Some reward, huh?  The sense of recognition, as well as the potential (chance in a million) prize money was suddenly halved.   It appeared that the fear of them missing out on something they had bought for me far outweighed their desire to reward.  It simply demotivated me – not really the desired effect for a piece of recognition.  As ever, if you misjudge the response of the person you are dealing with in any social interaction, not just a negotiation or sales pitch, then the outcome can be far from the desired one.