How to prepare offers and negotiate prices

If it comes to the psy­cho­lo­gy of pri­cing and ques­ti­ons about how to pre­pa­re offers, the first sen­tence (unfor­tu­n­a­te­ly) must be: The pri­ce can­not trig­ger anything. It will only then beco­me effec­ti­ve if the purcha­se inten­ti­on alrea­dy exists. Or, put in a nuts­hell: If it were so simp­le, ever­y­bo­dy could do it.

Regar­ding pri­ce tole­ran­ce, dif­fe­ren­ces in pri­ces have near­ly no effect on the purcha­se decisi­on. For pri­cing, first of all, the ques­ti­on is important, whe­ther it is about a pro­duct or a ser­vice that is bought fre­quent­ly or not. For pro­ducts that are bought more fre­quent­ly, cus­to­mers have kind of a »refe­rence pri­ce« in their mind (learnt, but not necessa­ri­ly con­scious basis for ori­en­ta­ti­on for the esti­ma­ti­on of pri­ces). This refe­rence pri­ce lies wit­hin a cer­tain tole­ran­ce ran­ge, wit­hin which a pri­ce can be without being esti­ma­ted as too high or too low. Wit­hin the pri­ce tole­ran­ce, dif­fe­ren­ces in pri­ces have near­ly no effect on the purcha­se decision.

If a pri­ce is signi­fi­cant­ly out­side of the tole­ran­ce ran­ge, cus­to­mers lose inte­rest: If a pro­duct, for which a refe­rence pri­ce exists, is esti­ma­ted as being too expen­si­ve, the heu­ris­tics »expen­si­ve = good« remain effect­less, so the pri­ce »tilts« out of the pri­ce tole­ran­ce as well. “The pri­ce is not an issue.” does actual­ly mean: “It’s per­fect­ly fine if the pro­duct is a bit more expen­si­ve.” By impli­ca­ti­on that means that part­ners and cus­to­mers will beco­me sus­pi­cious, if the pri­ce is remar­kab­ly low. A low pri­ce might be per­cei­ved as a sign of low qua­li­ty and may­be also of the low trust­wort­hi­ness of the vendor.

The more expen­si­ve a per­for­mance or pro­duct is, the less is saved: In gene­ral, peop­le tend to save money. Para­do­xi­cal­ly, this wil­ling­ness decre­a­ses with a rising pri­ce. Whe­re­as the pri­ces of tooth­pas­tes are com­pa­red and money is saved on that basis, peop­le tole­ra­te hig­her pri­ces for fur­ni­tu­re, for examp­le. Only a very low ten­den­cy to save money by pri­ce com­pa­ri­son can be deter­mi­ned for the purcha­se of cars. Princi­pal­ly, the fol­lowing app­lies: The more expen­si­ve a pro­duct the lower the effect of bar­gains. Thus, it can be assu­med that the com­pa­ri­son of pri­ces has in par­ti­cu­lar an influ­ence on the purcha­se pro­ba­bi­li­ty for stan­dard pro­ducts, not or near­ly not for spe­cial products.

The invol­ve­ment of the cus­to­mer and the know­ledge of the same are cru­cial: If the degree of invol­ve­ment (= intrinsic com­mit­ment for a purcha­se decisi­on) is loo­ked at in rela­ti­on with the know­ledge about the pro­duct, an inte­res­ting sys­tem emerges:

involvement_knowledge_price

If the purcha­se means litt­le to the cus­to­mer and he or she has only litt­le know­ledge, then often the rule  »expen­si­ve = good« will be app­lied. So, the pri­ce beco­mes a direct sign for qua­li­ty. That dif­fers if the purcha­se means a lot to the cus­to­mer (high invol­ve­ment) and he or she has tho­rough­ly gathe­red infor­ma­ti­on about the pro­duct and the pro­duct cate­go­ry. Then the pri­ce loses its sym­bo­lic cha­rac­ter and beco­mes one fea­ture among many others. The impor­t­ance of the pri­ce is rela­ti­vi­zed in com­pa­ri­son with other fea­tures and the pri­ce beco­mes to one fac­tor of the total utility.

The­re­fo­re, for the pre­pa­ra­ti­on of offers and pos­si­ble later nego­tia­ti­ons, it is important, whe­ther the cus­to­mer or busi­ness part­ner has inqui­red the pro­duct or the ser­vice several times and has a refe­rence pri­ce due to this. If it is not about stan­dard pro­ducts, but about more or less spe­cial ser­vices, it can be assu­med that the cus­to­mer does not have a refe­rence pri­ce. In such cases, the pri­ce tole­ran­ce remains unde­ter­mi­ned or at least very lar­ge. Fur­ther­mo­re, the »intrinsic invol­ve­ment« of the cus­to­mer is cru­cial.  If it is high, it can be assu­med that the pri­ce does not play a major role, but only one among many.

In a nuts­hell, the pri­ce does by far not play the role often assi­gned to it in dis­cus­sions. Other fac­tors play – at least for non-stan­dar­di­zed pro­ducts and ser­vices, which repre­sent by far the big­ger part – a signi­fi­cant­ly big­ger role, for examp­le the rela­ti­ons­hip bet­ween the poten­ti­al busi­ness part­ner (or the abi­li­ty to estab­lish a rela­ti­ons­hip) and the pre­sence of posi­tively definab­le USPs. The ans­wer to the ques­ti­on, why a cer­tain pro­duct can be rea­li­zed espe­cial­ly with me is thus much more important for the most com­pa­nies or offers than the pri­ce. (As alrea­dy men­tio­ned: That all can only be app­lied in excep­tio­nal cases for stan­dar­di­zed pro­ducts or services.)

Is it true that tho­se things are good which are expen­si­ve? The con­nec­tion »expen­si­ve = good« espe­cial­ly exists in the heads of cus­to­mers, but it does not necessa­ri­ly exist in the real world of pro­ducts.  Pri­ce and qua­li­ty do inde­ed only cor­re­la­te in some cases; in many other cases the cor­re­la­ti­on is zero or even nega­ti­ve (pro­ducts of poor qua­li­ty with high prices).

It’s about sta­tus – if I can’t afford some­thing, it will beco­me more attrac­ti­ve: The wil­ling­ness to purcha­se expen­si­ve pro­ducts depends on the social sta­tus of the buy­er (expen­si­ve pro­ducts as sta­tus sym­bols). Peop­le with a hig­her inco­me per­cei­ve pri­ces in a dif­fe­rent way than peop­le with a low inco­me. For the lat­ter, a pro­duct may seem the more valu­able and pres­ti­gious the less »achiev­a­ble« it is. Abo­ve that, the wil­ling­ness to pay hig­her pri­ces or to pre­fer lower ones depends on the atti­tu­de of the con­su­mer. If the purcha­se of a cer­tain pro­duct seems to be »flam­boyant« or »inap­pro­pria­te« regar­ding the value sys­tem of a cer­tain tar­get group, this will lead to the rejec­tion of the product.

 

Whe­re the jour­ney takes us

The topic dis­cus­sed here gets even more inte­res­ting when it is loo­ked at in the back­ground of the cur­rent »gre­at developments«:

Accord­ing to Peter Dru­cker, indus­try is expe­ri­en­cing the same what hap­pen­ed to agri­cul­tu­re alrea­dy a long time ago – an incre­a­se of pro­duc­ti­vi­ty with a hea­vi­ly fal­ling num­ber of employees at the same time.  The pre­sent is alrea­dy main­ly cha­rac­te­ri­zed by ser­vices, the pro­blem, howe­ver, is, Dru­cker said, that our cen­tral instru­ments such as plan­ning and accoun­ting were based on models of indus­tri­al logic. We have trans­fer­red tho­se models to ser­vices, even public admi­nis­tra­ti­on, without being able to assign cash flows to the per­for­man­ces. The input and the out­put are known and the rea­son for spen­ding money, but money and per­for­mance can­not rea­son­ab­ly be matched.

Inte­res­ting con­clu­si­ons can be drawn, if Drucker’s con­si­de­ra­ti­ons are com­bi­ned with a model of the orga­niz­a­tio­nal psy­cho­lo­gist Edgar Schein and if that is trans­fer­red to the rela­ti­ons­hip bet­ween ser­vice pro­vi­ders and their cus­to­mers. Just like manage­ment con­sul­tants used to help their cus­to­mers sol­ving cur­rent, most­ly com­plex tasks, today the most ser­vice pro­vi­ders (and many manu­fac­tu­rers as well) are busy hel­ping their clients.

Accord­ing to Schein, the­re are three kinds of such help:

Mode 1 – Specialist’s help: The cus­to­mer does not only know that he has a pro­blem, but he exact­ly knows which kind of pro­blem he has. He can descri­be it in detail and knows the appro­pria­te solu­ti­on. The cus­to­mer con­ta­cts an appro­pria­te spe­cia­list and buys the solu­ti­on the­re. So, if a stan­dard soft­ware with some spe­ci­fic cus­to­miz­a­ti­ons for seven work­sta­tions is nee­ded for the accom­plish­ment of stan­dard tasks, then this is a typi­cal case of specialist’s help.

Mode 2 – The doc­tor-pati­ent rela­ti­ons­hip: In this case the cus­to­mer knows that the­re is a pro­blem, but may­be he’s not qui­te sure what to do about it. Here too, the cus­to­mer con­ta­cts spe­cia­lists, who, howe­ver, not immedia­te­ly offer the solu­ti­on, but who will make a »dia­gno­sis« which repres­ents the basis for the later solution.

Mode 3 – Con­sul­ting and the search for solu­ti­ons as pro­cess: In this third ver­si­on, neit­her the cus­to­mer nor the sup­plier knows the exact natu­re of the pro­blem, not to men­ti­on the solu­ti­on. The star­ting situa­ti­on is so com­plex that only a col­la­bo­ra­ti­ve pro­cess of search, ana­ly­sis and deve­lo­p­ment will lead to the solu­ti­on. The basis of this pro­cess is the (hel­pful) rela­ti­ons­hip bet­ween the peop­le involved.

Our cur­rent com­pa­ny-rela­ted thin­king models come, for the most part, from indus­try, and the fami­li­ar mode of coope­ra­ti­on bet­ween busi­ness part­ners is that of specialist’s help, some­ti­mes may­be also the doc­tor-pati­ent rela­ti­ons­hip. Star­ting situa­tions, howe­ver, are so com­plex at the moment that cus­to­mers often don’t know what their pro­blem actual­ly is. Soft­ware deve­lo­pers know about that and adver­ti­sing agen­ci­es, too. One solu­ti­on sce­n­a­rio in the field of IT is not to pre­pa­re com­pre­hen­si­ve requi­re­ments cata­lo­gues any more, but to deve­lop the soft­ware step by step in a con­ti­nuous dia­log with the cus­to­mer (Scrum). Lar­ger ad agen­ci­es often open small offices wit­hin the pre­mi­ses of their cus­to­mers. Nowa­days, the cus­to­mers even have to be invol­ved in pre­pa­ring offers as the demand ana­ly­sis has beco­me a pro­cess that can near­ly not be divi­ded into stan­dar­di­zab­le sta­ges any more.

In sum­ma­ry, explana­ti­ons on the cur­rent deve­lo­p­ments indi­ca­te a more inten­si­fied pro­cess cha­rac­ter of busi­ness pro­ces­ses and set (among others, espe­cial­ly ser­vice pro­vi­ders) com­pa­nies the task to work in even smal­ler steps and more pro­cess-ori­en­ted, lea­ding to high deman­ds regar­ding the abi­li­ty for dia­lo­gues and con­sul­ting, and requi­ring, in par­ti­cu­lar at the begin­ning of pro­jects, to ask the right ques­ti­ons and to take the time for necessa­ry clarifications.

 

Final­ly, some infor­ma­ti­on on numbers:

First, one ques­ti­on of pri­cing con­cerns visu­al effects – so cal­led »bro­ken pri­ces«, that means amounts direct­ly below a round pri­ce (EUR 199 ins­tead of EUR 200) are per­cei­ved as lower and thus more favor­able. The same goes for the nume­ri­cal sequence of the pri­ce – decre­a­sing nume­ri­cal sequen­ces are per­cei­ved as more favor­able than incre­a­sing sequen­ces (EUR 531 vs. EUR 479). Abo­ve this, the size of the repre­sen­ta­ti­on of the num­bers influ­en­ces the assess­ment of the pri­ce (the lar­ger the num­bers are dis­play­ed the more favor­able the pri­ce is per­cie­ved). In addi­ti­on, a remark on the role of colours: Many super­mar­kets use several colours for labe­ling. The fact of a pri­ce prin­ted on paper which is con­nec­ted with »favor­able« leads to signi­fi­cant sales incre­a­ses, no mat­ter if the pri­ce is inde­ed lower than normal.

Second, the so cal­led »ancho­ring effect« is to be taken into con­si­de­ra­ti­on, which means that people’s abi­li­ty to assess rela­ti­ons cor­rect­ly is limi­ted after a first »anchor of per­cep­ti­on« has been set. This holds true for many kinds of assess­ments or value judgments. The effect of num­bers, howe­ver, is espe­cial­ly strong. In prac­ti­ce, that means: If the district attor­ney urges a high sen­tence, the defen­ding lawyer’s claim and the sen­tence will be hig­her, too, than it would be in case of lower claims. Thus, the first-men­tio­ned num­ber »drags« all num­bers thought of and sta­ted after­wards in its direc­tion, that’s an effect which is in par­ti­cu­lar use­ful for fee nego­tia­ti­ons. Third, a cer­tain »ten­den­cy to the midd­le« shall be assu­med. If the­re are three equip­ment ver­si­ons (e.g. pre­mi­um, com­fort and basic), the decisi­on is espe­cial­ly often made in favor of the inter­me­dia­te version.

Jörg Hei­dig

This arti­cle is also avail­ab­le in Ger­man.

Lite­ra­tu­re:

Bau­er, F. (2000): Die Psy­cho­lo­gie der Preis­struk­tur. Ent­wick­lung der “Ent­schei­dungs­psy­cho­lo­gi­schen Preis­struk­tur­ge­stal­tung” zur Erklä­rung und Vor­her­sa­ge nicht-nor­ma­ti­ver Ein­flüs­se der Preis­struk­tur auf die Kauf­ent­schei­dung. Mün­chen: CS Press.

Dru­cker, Peter F. (2007): Mana­ging in the next socie­ty. Clas­sic Dru­cker Collec­tion. Oxford: Else­vier/­But­ter­worth-Hei­ne­mann.

Fel­ser, Georg (2007): Wer­be- und Kon­su­men­ten­psy­cho­lo­gie. 3. Aufl. Ber­lin, Hei­del­berg: Spektrum.

Hei­dig, Jörg; Klei­nert, Kim Oli­ver; Dral­le, Thors­ten; Vogt, Mari­an­ne (2012): Pro­zess­psy­cho­lo­gie. Wie Pro­zes­se, mensch­li­che Fak­to­ren und Wis­sen im Unter­neh­mens­ge­sche­hen zusam­men­wir­ken. Ber­gisch Glad­bach: EHP Edi­ti­on Huma­nis­ti­sche Psychologie.

Schein, Edgar H. (2009): Füh­rung und Ver­än­de­rungs­ma­nage­ment. Ber­gisch Glad­bach: EHP (EHP-Orga­ni­sa­ti­on).

Schein, Edgar H. (2010): Pro­zess­be­ra­tung für die Orga­ni­sa­ti­on der Zukunft. Der Auf­bau einer hel­fen­den Bezie­hung. 3. Aufl. Ber­gisch Glad­bach: EHP (EHP Organisation).

Von Jörg Heidig

Jörg Heidig, Jahrgang 1974, nach Abitur und Berufsausbildung in der Arbeit mit Flüchtlingen zunächst in Deutschland und anschließend für mehrere Jahre in Bosnien-Herzegowina tätig, danach Studium der Kommunikationspsychologie, anschließend Projektleiter bei der Internationalen Bauausstellung in Großräschen, seither als beratender Organisationspsychologe, Coach und Supervisor für pädagogische Einrichtungen, soziale Organisationen, Behörden und mittelständische Unternehmen tätig. 2010 Gründung des Beraternetzwerkes Prozesspsychologen; seit 2016 Leitung des Görlitzer KIB-Instituts. Lehraufträge an der Hochschule der Sächsischen Polizei, der Dresden International University, der TU Dresden sowie der Hochschule Zittau/Görlitz.