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).




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