How to avoid negotiating yourself into becoming a low margin enterprise.
Stores that operate with low margins typically have one other thing in common. They allow their sales people to negotiate on the floor. Price negotiation is a margin eroding practice that is simply not necessary in this day and age. There are a number of reasons why stores allow the practice to persist. The costs, however, far outweigh the benefits. This article will show you examples of why negotiating is not in your interest as well as present a more attractive alternative solution.USED CARS:
The most striking example of a company that forgoes negotiating with customers in favor of sticking to a single fair price is the used car superstore Car Max. By implementing this practice the company has revolutionized used car sales. Shoppers can choose a car on the lot, get a price and description from a computer in the showroom, and know that the price is the same for everyone.
I was recently in a Car Max showroom near my home looking at a late model pickup truck. I asked the salesperson if the store would take less than the $15,000 list price for the vehicle. His reply was, "No, the price is $15,000." When I asked him what would his Sales Manager say if I offered him $14,500 in cash, on the spot his reply was, "My manager would say you owe us $500." At that point, the sales person took me aside and told me that the company has never negotiated a deal, yet it is still very successful and the customers are always happy. He went on to say that Car Max is not owned by car people, but by Circuit City, the huge home electronics chain.
Because Circuit city operates in a completely different industry, its managers have a different paradigm as to how big ticket items should be sold. Although used car prices are extremely subjective, Circuit City has successfully taken negotiations out of the used car sales process merely by approaching the issue from a different point of view. My experience with retail home furnishing stores is identical.
If we believe our sales people must negotiate with customers to make a sale, then that is true; if we believe that we do not have to negotiate, then that is also true. In our industry, we often become so desperate for the sale that we end up negotiating with the customers who, for the most part, would have paid the full retail price.
This margin eroding behavior is not necessary, even for retailers who believe that they will never be able to get the negotiation monkey off their back. If we are open minded and tenacious we can effectively end the practice.
Some stores do not allow their sales people to negotiate, but do let them consult with the sales manager on each and every individual deal. This is exactly the same as negotiating. Don't kid yourself. If you are serious about ending negotiations, then this practice has to end as well.
There are volumes of evidence indicating why negotiations are bad for business, not the least of which is the fact that it is one of the biggest contributors to margin erosion. Negotiating also negatively impacts sales skills, ethics, customer service costs, and customer satisfaction.SALES SKILLS:
The most successful sales person in any given store typically has the highest margins. This fact clearly indicates that negotiations have more to do with selling skill than the customers' need for a lower price. This means that sales people who negotiate sell at lower margins and also sell less furniture. If all of our sales people were equally skilled, they would not need to rely on the crutch of negotiations, and our margins would be higher.
Why should some customers pay less than others for the exact same merchandise? This question alone is difficult to answer, but when we consider how allowing negotiation affects our customers unevenly, it becomes clear why some customers get better deals. In order to get the best deal in a store that allows price negotiations, customers need three things:
- The need for furniture.
- The resources to purchase that furniture.
- Negotiation skills.
Some customers will have better negotiating skills than others and will therefore walk away with better deals. This is certainly not fair to the customers who end up paying more. Our industry is one of a small handful of industries that require consumers to have a special skill to obtain a value in our stores. Needless to say, this is not good for business and it does not encourage repeat buying.CUSTOMER SERVICE:
Most retailers will agree that the customers who get the lowest price are typically the ones who cause the most trouble after the sale. Not only do they get the lowest price but they also end up costing us the most in post-purchase customer service. If you eliminate negotiations, these customers will pay full price and, consequently, cover a larger portion of the customer service expense that it costs you to service them.
CUSTOMER SATISFACTION: Customers who negotiate price always believe that they overpaid. For example, if you ask a customer who had just bought a $2,000 sofa for $1,500 whether she believed she got a good deal, the answer would likely be yes. However, if you asked whether she could have gotten a better deal if she was a better negotiator, the answer would also always be yes. Negotiation often has nothing to do with the value of the merchandise. Even though customers may be successful at negotiating prices down, they always believe that the store is better at negotiating than they are. After all, sales people sell furniture (and practice their negotiation skills) every day, customers buy furniture infrequently. The result:
- Customers always believe that they overpaid for their merchandise, no matter how much they negotiated off the list price.
- Customers spend the following weeks looking at newspapers and watching television ads to confirm whether or not they got a good deal.
- These customers develop very little loyalty to the store.
When customers try to negotiate we often mistakenly assume that they do not believe that our furniture is worth the ticketed price. I challenge this assumption. If you were to price a sofa at $1,000, your customers would try to get if for nine hundred, and would buy it if you agreed to sell it at that price. If the very same sofa was priced at $900, the customer would feel like they needed to get it for $800 in order to believe they received a good deal. This process has nothing to do with the value of the merchandise.
Stores that have successfully converted from negotiating on the floor to firm pricing, find that customers do not need a price cut to believe that they received the best value. They just needed to know that they were not the only suckers who paid full price!HOW DO YOU STOP NEGOTIATING?
When dealers say that they can't stop the negotiating, it is often because they've attempted to stop unsuccessfully in the past. Generally, this result stems from two factors:
- The failure to implement a guaranteed pricing program.
- The failure to give sales people new skills to compensate for the elimination of negotiations (typically the strongest closing technique).
It is not productive to walk onto the floor and announce that sales people are no longer allowed to negotiate. The shift to firm pricing must be tightly married to guaranteed pricing and skills development.GUARANTEED PRICING:
If you wish to successfully make the transition to firm pricing it is critical to implement a guaranteed pricing program to its fullest extent. This means that your policy should not only be verbalized, but it should also be posted in many locations throughout the store. Typical verbiage indicates that if a customer finds the same merchandise at a similar stocking retailer at a lower price anywhere within 30 days of purchase, the store will refund the difference plus an additional percentage (to make it worthwhile).
You cannot stop negotiations on the floor without this fundamental element. Strangely enough, many stores that have guaranteed pricing, continue to allow their sales people to negotiate. This is a perfect example of faulty implementation. It is simply bad business to allow both sales tools to coexist. The use of one should automatically force the abandonment of the other.SELLING SKILLS:
Next, you must give your sales people the necessary skills to compensate for the elimination of price negotiations. This is as important as guaranteed pricing because sales people typically use negotiation as their most advantageous closing tool. They will often use phrases like, "If this is the furniture you want, what do we have to do to get it into your home TODAY?" If the vast majority of deals are closed in this way and you stop negotiation without replacing it with other sales and closing skills, your people will inevitably fail.
Without all of these elements in place, your initial attempts to eliminate negotiating may fail and your staff, your managers, even you may become falsely convinced that the negotiating process is critical for success.
Nothing could be further from the truth. The proper strategy, when implemented with a guaranteed pricing program and the proper skills development, can easily overcome the psychological barriers to firm pricing.
One final note. A lot of retailers say that they can't stop negotiating because it is a common practice in their particular market or geographic location (e.g. places that have a history of clientele negotiating). Two examples would be retirement communities like Florida and Arizona (where they believe that retired people have nothing better to do with their time than to compare prices from store to store), and New York (where the reputation is that nobody pays retail).
While negotiations may be an acceptable business practice for these stores, it is not the best business practice if you are interested in building your customer base. Even in these markets it is possible to successfully switch to firm pricing. Many retailers in these markets have been successful by using the strategy outlined above.WHAT HAPPENS WHEN NEGOTIATING STOPS?
Two things happen when you stop negotiating: margins and profits go up, and your store becomes a better place to work and a better place to shop.
For as much as your customers may ask about price flexibility, deep down inside they dislike it. When customers negotiate they will never be loyal because they will always be attempting to find the lowest price. Price alone does not create loyalty.
To gain loyal customers and to grow your businesses, you must treat them fairly, charge them a fair and honest price, and stick to your price so they know that they will never overpay.
Ted Shepherd is the founder and CEO of Shepherd Management Group. The company specializes in changing the selling culture of furniture stores from merchandise-driven to customer-driven using an intensive hands-on process of consulting, training, and mentoring. For more information on the topics in this article contact firstname.lastname@example.org.