Wednesday, February 4, 2009

The Fine Art of the Haggle.

Some prices are fixed. Some aren't. Knowing the difference helps.

Yesterday I was at the Yorkdale, a local mall in Toronto. While sifting through the meandering populace for cute girls' numbers, I came across a kiosk booth selling cosmetic skin products from the Dead Sea.

Now, I'm not one of those prissy primping douchebags; I don't gel my hair, spray-on a tan, or spend long tracts of time in front of my mirror. I'm a man. But I do care about the way I look and I do have mildly dry skin in the winter, so when the saleswoman approached me as I walked by, I let her reel me in a little for a closer look.

We bantered a little: about what products I already use (limited to a simple pre-shave scrub and my shaving cream), and about the astonishing fact that nearly all the standalone kiosks in the mall are manned - or womanned - by full bore, to-the-core, Hebrew-speaking Israeli expats. Then she worked her pitch.

After a demonstration of a face-cleansing product, she went went into her the-list-price-is-$130-but-I'll-let-you-have-it-for-$60 routine. Here's where I was suddenly faced with options:

1) I could take it for $60. The product wasn't something that needed to be used anywhere close to daily, and it seemed to be a very good one from the demonstration. It was probably worth the $60 she pitched for it.

2) I could walk away. Sure, it was a great product, but $60 can buy a lot of beer.

3) I could negotiate.

Now, knowing when price-negotiation is an option means assessing a little bit about how the sale is structured. When a wage or salaried employee makes a sale, there's little incentive for them to enter into a negotiation: they get paid whether or not you buy what they're selling. The situation changes, however, in either of two cases: if the salesperson works fully or partially on commission, or is the salesperson owns the business and sees a perfect correlation with the profit margin on a sale and the money in their pocket.

Many kiosks like that one are either corporate or franchised, and most of the sales staff work on commission. The lady working there probably made 20%-35% commission of any sale made above cost price, so she has something to gain from any sale above that price, and everything to lose if I walk away.

It seems trivial to analyze when we're talking about a face cleanser, until you realize that the biggest financial decisions you will ever make in your life fall into the same organizational category. Buying a house or a car both entail working through either a commissioned salesman or a commissioned real estate agent. The difference is only a matter of degree.

The incentives on each side of the consumer and the vendor are important to understand. The consumer has demand for a product, and if the perceived value of that product exceeds the cost, he will buy it. If it costs more than it's worth, he'll fuck right off.

On the other side of the equation is the vendor. The vendor has a derivative sort of demand in the transaction: the revenue or commission earned from the sale. If that revenue exceeds what the product costs them, they profit from the sale. If it doesn't, they'll tell you to fuck off.

The negotiating room, in our case, is the margin between the list price ($130) and the vendor's cost (probably between $15 and $30). Within that range, the game is zero-sum. The difference in those two numbers will either end up in my pocket, or be divvied up between the sales lady and the owner - assuming it's not the same person. It's in that magical margin that negotiation takes place.

She had made the first move. The $60 pitch didn't come out of nowhere. From before we'd even made eye contact, she had began analyzing me. Did I wear clothes that indicated discretionary income or did I look like a moneyless waste of time? Did I carry myself in a way that indicates confidence or do I project insecurity and the impression that I'm a bit of a pushover? Did I seem like the type of person who would be interested in her products in the first place?

All of those calculations - and a whole lot more, I'm sure - ran through her head from the time she first saw me to the time she offered me the skin cleanser for $60. If I'd given her a different impression of myself and my interest, it could just as easily have been $100, or even $50. Maybe, if I seemed interested enough and willing to pay it, she'd have neglected to pull out the price list and offered me dermatological salvation for a mere $150.

But I wouldn't have paid $100 for it; I wouldn't have paid $75. And if I buy the product, anything less than $60 is money in my pocket.

I pushed a little, and she pushed back. I ended up walking away having traded the skin cream for $40 of my hard-earned cash.

So beyond my hefty preamble, here are a few insights I've gleaned about price negotiation.

Demand Asymmetry. When either the consumer or the vendor cares more about the transaction, they end up with less money in their pocket. If the mall were more crowded, and there were tons of potential customers strolling by with less of a spine than me, she'd have been happy to hold firm at $60, take it or leave it. If there were a competing business with a similar product nearby, and she'd have held firm at $60, I'd likely have walked.

That really is the biggest sticking point in a negotiation. You have to be willing to walk away. If you're convinced that you can't live without what they're selling, and there's no better place to get it, the salesperson will pick up on that. And you can bet your ass they'll have a high asking price. What's important to understand is that there are very few things you can't live without. She's not selling the only glass of water amidst miles of desert sand.

And you have to be willing to actually make a counter-offer. It's astounding to me how many people never do. We, in our modern Western culture, are so used to fixed prices that we take them for granted, and seldom even think to bargain. She has been doing this for a while, and has likely calibrated her price pitch very well-tailored to her assessment of the customer. Most of them - if they'd sat through the impressive demonstration - probably took the price at whatever figure she named.

Be the exception to the norm. Know how the incentives break down, and be willing to walk away. If the seller wants more than you're ready to give up, then do so: actually walk away.

If there's one piece of advice I can offer for people making a bigger purchase such as a car, here it comes. After you do some solid research on some options you're interested in (you should always do research, and never only have only one option), go to a few of your lesser choices first. Treat them as practice runs. Unless you're offered an unbelievable deal, you'll probably end up walking away from those. When you finally walk in the doors of the dealer selling the car you're more interested in, you've already internalized that I'm-willing-to-walk-away-from-this-deal-if-you-
try-to-bend-me-over-and-fuck-me-in-my-wallet frame of mind.

The salesman will pick up on that. And you'll benefit as a result.

Negotiation isn't shameful. It's the purest distillation of the free market. It's part of the economy that makes modern society possible.

1 comment:

  1. What, you mean you were local and you didn't call me?! ;)