“What price is a loaf of bread?” And what does it have to do with negotiation?
We have seen journalists perfect this “gotcha” question to embarrass politicians and demonstrate they are out of touch with the everyday concerns of voters. It is, however, a ridiculous question as the correct answer is between $2.00 and $10.00; the lower being the price of a generic sandwich loaf at the supermarket and the higher, an artisan, woodfired loaf of sourdough at a hipster café. The same range applies to a litre of milk - the other family staple.
This range of prices illustrates two features of a modern market economy. The first is that consumers have an almost bewildering range of choices in the market. The second is the confusion between price and value. In the bread example the $2.00 loaf represents excellent value when you are trying to feed a crowd of teenagers after a morning surf. The same loaf would not represent value if you used it as the centrepiece of a gourmet breakfast featuring three types of mushrooms and miso eggs, topped with micro herbs.
As consultants in negotiating, we often have clients who see lower prices as the only route to gaining value in a negotiation. Their gain in the negotiation is at the expense of their supplier’s margin. This is a classic win-lose ploy which is achievable only when buyers have real or perceived market power. Common examples have been the supermarket price wars and in some professional services where the threat to go to market by clients is rewarded by substantial fee reductions.
One option when faced with a request for price reductions is to just say “No” and refuse to negotiate. In a market faced with shortages of talent, supply chain disruptions and increasing inflation, this would seem an entirely appropriate response. It recognises the power of incumbency (being the existing supplier) and the associated switching costs and risk.
If there is a need to negotiate, then introducing additional variables into the negotiation allows for creation of value by the parties before they divide the value. This is the essence of mutual gain negotiation. The number of additional variables is limited by the creativity of the negotiators. Common drivers of value include quality, timing, allocation of risk, deployment of the “A team” and provision of additional services such as consulting days and warranties.
As a famous consultant responded after being asked about their pricing: “We are reassuringly expensive.”