So what are tradeables?
Let’s take an airline as an example. In years gone by you bought a ticket and that was that. Today, we have to consider how much hold luggage, hand baggage, meals, how flexible the ticket is, penalties for changes, speedy boarding, allocated seats, airmiles payment and redemption, loyalty points and the list goes on. Airlines were forced to change their pricing strategy because of market pressures introduced by the low-cost flyers. Yet many businesses I talk to today stick to inflexible pricing strategies and then moan that their customers think they are too expensive.
In the case of a one-off purchase, for example buying a car, the relationship element is less important than when we are dealing with a customer, supplier or third party over time. In this case the relationship is just as important as the negotiation outcome itself. What’s at stake is future business, reputation and of course the ease of working together after the negotiation. The key error that most of us make is not spending enough time identifying our tradeables. As a result the relationship can suffer.
What neuroscience says…
Imagine you’re selling website design services, your tradeables might be licence fee, training, maintenance, guarantees, hosting, periodic upgrades, support etc.
Being clear about exactly what you’re selling puts you in a much stronger position if the customer demands a discount. Without tradeables you will either have to agree to a discount which will directly impact your bottom line, or you will have to say no, which risks spoiling the relationship and could even blow the deal.
Tradeables allow you to provide options for the other party. And neuroscience demonstrates that options create a sense of control which triggers the brain’s reward system. Whereas being told sorry, that’s our bottom line triggers our threat system and impacts the relationship negatively. In essence what you’re trying to achieve in any negotiation is to find something that will cost you little but is of significant value to them, and vice versa. Thus win-win!
All too often people believe they have no option other than to yield to price concessions - with a certain amount of resentment or resignation. However, careful consideration of your tradeables and pricing options provides a route to better outcomes and better relationships.
Give them options
We were recently negotiating with a large corporate to roll-out a global training programme. Their procurement department was trying to squeeze us on price. We knew if we started yielding, that would be the thin end of the wedge! So instead, we offered them a series of pre-prepared tradeables – online follow-up, certification, refresher webinars. So rather than saying no to a discount (which would have triggered a threat response), tradeables enabled us to demonstrate flexibility and a willingness to work with them to arrive at a mutually beneficial agreement.
All too often people believe they have no option other than to yield to price concessions – with a certain amount of resentment or resignation. However, careful consideration of your tradeables and pricing options provides a route to better outcomes and better relationships.
Could you be losing out by creating false expectations in your negotiations?
The brain is not capable of judging a deal as good or bad in absolute terms. The brain can only evaluate good or bad in relative terms.
The lesson here for negotiators is of supreme importance. By mentioning specific figures too early in negotiations, you are in danger of creating reference points that can work against you.
Imagine that you tell a customer they can have a 20% volume discount if they purchase 300 items.
You’ve now created a reference point (or expectation) by which they will judge the deal. Any discount they manage to negotiate above 20%, they’ll see as a gain and anything less they’ll see as a loss.
Imagine they come back and say “thanks for the 20%, we’ll have 150 items”. This leaves you with a problem – you’ll need to explain that for 150 items the discount is less – only 10%.
Avoid getting too specific about what you are prepared to offer until you have a firm commitment and understanding of the other side’s needs.
Had you not previously created the 20% reference point, this would not have been an issue and they may have accepted 10% as the discount without complaint. However, with that initial expectation of a 20% discount, the risk is that they’ll fight to improve your offer of 10%. Even though they have changed the goalposts and only want 150 items, in their mind they’re losing out against your original reference point of 20%.
An experienced negotiator would certainly push for the 20% that is clearly available. So your job is to avoid getting too specific about what you are prepared to offer until you have a firm commitment and understanding of the other side’s needs.
Cognitive biases – invisible thinking traps
When we negotiate it is often under tense conditions, where there is potentially a lot at stake. We have to think quickly and make important decisions on the spot. Experience can help, but even the most seasoned negotiator can make fundamental errors if they are unaware of the invisible forces at play.
Creating emotional value
A cognitive bias is a systematic unconscious error in our thinking that has a huge influence on decision-making. For example, most of us have a bias towards short-term thinking over the long-term – this is known as temporal discounting.
During seminars I ask participants if they would rather have £75 now or £118 in 3 months time. Incredibly, 80% of the audience would prefer the immediate payout despite the smaller amount. This is backed up by research showing that £75 now has the same emotional value as £118 in 3-months time. Instinctively, the brain always favours instant rewards over long-term gain.
Temporal discounting operates as a subconscious filter and plays a huge part in business negotiations. All too often it means we focus on immediate monetary gain – very often at the cost of healthy, long-term, win-win partnerships.
An example of this is the reward and commission system for sales people. Often rewarded on a quarterly basis, sales teams become overeager for a quick win at the expense of nurturing a partnership that will pay dividends in the long term.
We also see corporate short-termism where CEOs are answerable to the board and are judged on the last quarter’s figures. They are under pressure to make the company look good in the short term but often fail to plant seeds for long-term growth. Many economists argue that corporate short-termism contributed to our most recent global recession. Interestingly, short-termism has a cultural dimension – it is more prevalent in the West. In Japan, investing for a future harvest is more culturally acceptable.
Without being aware of cognitive biases like overconfidence and temporal discounting we are likely to remain trapped within their gravitational pull.
The overconfidence effect
The overconfidence effect is a cognitive bias that is particularly common among those who negotiate on a regular basis. Social psychologist Scott Plous calls overconfidence “the most pervasive and potentially catastrophic of all the cognitive biases to which human beings fall victim.”
It is well documented that around 80% of negotiation time should be preparation – but very few of us actually put in this time. Instead we think it’ll be alright on the night. It is only when we sit down at the negotiation table we come to realise we could have been better prepared. We don’t have all the facts and figures in the correct formats. And if the other side rejects our first proposal, we don’t have satisfactory alternatives at our fingertips.
When we feel unprepared, our confidence saps away. Anxiety levels increase and stress takes over, releasing adrenaline and cortisol, which shuts down the part of the brain that governs our cognitive abilities. When this happens a negotiation can fall apart – just when we really need our thinking brain, we don’t have it. All because we didn’t prepare sufficiently!
Preparation is the key to confidence!
Without being aware of cognitive biases like overconfidence and temporal discounting we are likely to remain trapped within their gravitational pull. However, if we are conscious of their existence we can use them to our advantage and be better prepared for negotiations. For example in construction, it is common practice to have an upfront fee and a retention after completion of the work. If the client asks for a a reduced upfront fee, the contractor should ask for a lower retention figure. This will be easier for the client to accept due to the temporal discounting effect!
Think you know all there is to know about negotiation?
One of the most common questions I get asked in our Black Belt Negotiator classes is:
“How do you tell if the other side is bluffing?“
When people lie, activity in the conscious brain network increases. This contains our executive decision-making system, regulating our thoughts, actions and social behaviours— all fundamental components of deception.
Dishonesty requires the brain to work harder than honesty
To test if someone is bluffing during a negotiation, ask them some very specific questions. If for example they say, “I’ve had a better offer from your competitor”, ask them open questions about the specifics of the “better offer”, for instance what was included/excluded in the offer, etc. If they hesitate and are unable to answer fluently and coherently it is likely they are bluffing.
A lying person is more likely to cover their mouth with their hand, scratch their nose, or cough, almost as if to cover up (literally) the lies. Also watch out for fidgeting or shuffling. This is caused by nervous energy and heightened brain activity produced by a fear of being found out. Repetition of words or phrases is a sign of buying time while they gather their thoughts or try to validate the lie to themselves.
Picking up the signals
Having observed hundreds of negotiations, what interests me is how bad people are at picking up on signs of bluffing at the negotiating table. Negotiation is a high-pressure activity, where we may feel a level of nervousness or anxiety. For this reason, our focus is usually on ourself rather than the other party – and so the most blatant signals from the other side are often missed.
Our brain evolved before language existed
To enhance your chances of picking up signals from the other side, make sure you are thoroughly prepared so you can relax into the negotiation. When in a relaxed, yet alert state of mind, our performance is at its optimum and we have the capacity to pick up subtle signs that the other side may be unconsciously giving out. Our brain evolved before humans had the capacity for language, so we all have an innate ability to pick up on body language and non-verbal cues.
Maintaining a bluff will have an impact on your ability to relate to the other party in a natural way.
The down-side of bluffing
The problem with bluffing is that it detracts from this ability. If you are having to maintain a pretence, the increased work that is required from the conscious brain will mean that you’re even more likely to miss those vital signals. The conscious brain can only focus on one thing at a time.
Try this experiment
When you are next walking with a friend, ask them to count backwards from 100 in jumps of 7. You will notice, their walking slows down or even stops. This is because the processing power required for simple arithmetic means that even automatic functions like walking are impaired. So you can imagine that maintaining a bluff will have an impact on your ability to relate to the other party in a natural way.
As business negotiation is all about building long-term mutually beneficial relationships, ‘bluffing in negotiations’ can only be a detrimental policy.
Know your neuroscience!
Understand how your brain works under pressure and the impact it has on your negotiation performance and decision-making ability. Use my tips to avoid throwing away money and wrecking your business relationships!
The myth of rationality
Look at the following subscription offer for The Economist magazine:
- Digital subscription £59
- Print subscription £125
- Print and digital £125
You might be left wondering why the print and digital subscription is the same price as the print only subscription? Who in their right mind would choose the print only option?
Behavioral Economist at Duke University, Dan Ariely, tested out this hypothesis.
The results were as follows:
- The digital subscription at £59 was chosen by 16% of respondents
- The print and digital subscription at £125 was chosen by 84% of respondents
- As predicted, nobody chose the print only option!
As nobody chose the print only option, Dan Ariely then re-ran the campaign without the this option:
- Digital subscription – £59
- Print and digital – £125
This time the results were reversed. What had been the most popular option became the least popular, and the least popular option became the most popular:
- The digital subscription at £59 was chosen by 68% of respondents
- The print and digital at £125 was chosen by 32% of respondents
How strange that removing an option that nobody wanted resulted in such a reversal, with a consequential revenue loss of 43% for the Ecomomist. This certainly questions whether we make decisions logically!
What we see at play here is our brain’s inability to judge something as good or bad in absolute terms. We have no way of knowing whether £59 or £125 represents good or bad value for the products in question.
However, including the print only option, enables the brain to make a comparison:
- Print subscription – £125
- Print and digital – £125
The print only option creates a reference point against which the brain gauges that print and digital is clearly a good deal.
Creating reference points
The lesson here for negotiators is of paramount importance: by mentioning specific figures too early in the negotiating process you set their expectations high before you have a firm commitment from them.
Picture this … You tell a customer they can have a 15% discount if they purchase 300 widgets.
You’ve now created a reference point (or expectation) of 15% by which they will judge the deal. From here on in, anything they manage to get beyond 15%, they’ll see as a gain and anything less they’ll see as a loss.
Let’s imagine they come back and say “thanks for the 15%, we’ll have 200 widgets”. This leaves you with a potential problem – you’ll need to explain that for 200 widgets the discount is only 10%.
Had you not previously created the 15% reference point, this would not have been an issue and they would have accepted 10% as the discount for 200 widgets.
With the initial expectation set at 15%, the risk now is that they’ll fight to improve your 10% offer. Even though they only want 200 widgets, in their minds they’re making a 5% loss against your original reference point. An experienced negotiator would certainly exploit the fact that clearly 15% is available, and will push for it.
TIP: Wait till you have a firm commitment from the other side before you commit to specifics
Losses loom larger than gains!
This situation is further compounded by another anomaly (cognitive bias) of the brain – consider if you would accept the following gamble on the toss of a coin:
- Heads you lose £1000, tails you win £1001?
Most likely you wouldn’t accept, even though the odds are marginally in your favour.
- How about: Heads you lose £1000, Tails you win £1500?
Probably you still wouldn’t accept the gamble. For most people, it would take a win of between £2000 and £3000 to risk losing £1000.
As Nobel prize-winner, Daniel Kahneman points out, this is because LOSSES loom larger than GAINS.
In our hunter-gatherer days, human survival depended on recognising threats (typically large, carnivorous predators!). A part of our brain called the amygdala is our primary threat-detection centre – alerting us to danger via a super highway. Interestingly, there is no equivalent super-highway for ‘good news’ or opportunities.
Now let’s revisit the scene where you’ve created a reference point (or an expectation) of 15%. As negotiations proceed and they realise they are only getting 10%, not only do they regard this as a 5% loss, but as losses loom three times larger than gain, they experience 15 units of pain! No wonder they fight so ferociously to get you back to 15%.
Using round numbers
A discount of 15% gives the impression that it’s been set without much thought and opens the door for them to push you up to 20%. Much better to offer 13% – this is less likely to be challenged as it appears to have been precisely calculated – and if they do bargain you up, it’ll most likely be to 15%.
MY BEST TIP: If you’d like to know how to put these ideas into practice, contact us to find out how you can become a black belt negotiator… BEFORE your trading partners beat you to it!