Diminishing And Negative Returns

Turns out you can push a salesperson too far in a negotiation. You can negotiate to a point where the business becomes unsustainable and there are even cases where companies have gone bankrupt because of a negotiation going too far. And, the unfortunate truth is that many sales people don’t know how or when to say “no”. This is a HUGE issue! It’s so big that a big portion of the training I provide is to sales teams and teaching them how to say “no” effectively.

Now, as a procurement person, you may say, “Well, it’s not my problem that the sales person kept saying ‘yes’! They agreed to the terms. They could have said no.”

Unfortunately, the reality is, it is your problem.

You can push and push and push until there’s no margin left and push further so that the selling company is losing money on the deal. The savings are AMAZING!!! And you walk around the office strutting your stuff and talking about how you ran through the salesperson. But, while you’ve saved tons of money, you likely haven’t forecasted the cost of those actions. And those actions have a cost, and it can be substantial.

This type of a negotiation forces the selling business to service an account at thin or no margin. And then three things usually happen:

1. Reduction in Account Servicing
Because there’s no money in the business, the selling company doesn’t service the account, doesn’t visit the customer, provides little to no customer service, and basically ignores the account. This obviously frustrates the operations and procurement team and then you end up switching the provider out and go through switching costs. Switching costs are real. I hope you’re factoring these into your savings calculations.

2. Getting Money Back
Change orders suck. No one like them. But many companies will change order as much as they can to try regain some margin from losing out on a deal. In my estimation, the cost for this can sometimes (often) exceed the cost of just providing a fair margin in the contract negotiation.

3. Bankruptcy and Layoffs
If the buying company is big enough and the volumes are large enough and the buying company represents a large portion of the selling company’s revenue, there is a chance that a single negotiation could cause major financial strife for the selling company. I’ve seen negotiations like this lead to extreme layoffs for the selling company to try to reduce cost and in a few cases, it’s led to the bankruptcy of that company.

Now, hear me. I’m not saying that you shouldn’t negotiate lower prices. But at a certain point, if you keep grinding, you get to the point of diminishing and even negative returns.

Now, the natural response is, “How do I know when to stop pushing?”

Good question.

There are 3 main ways:
1. Experience – this isn’t meant to be a cop out, but it does come with a lot of time behind the wheel and screwing up a few times before you begin to recognize the signs.
2. A Great Deal Sheet – The development of a good deal sheet/negotiation framework/deal matrix (whatever you want to call it) is essential to knowing when to stop.
3. Understanding the Pricing – Your math game needs to be strong and you really need to do your home work to determine the market prices/cost build up/selling company financial health/commodity pricing/indexing. Without this data, you’re bound to either leave money on the table or push too far.

This is a cautionary post. You can push a salesperson too far in a negotiation. Knowing when to stop is essential.