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Negotiating in China: Split the Difference
By andrew | March 28, 2007
Here’s another gem that you’ll run into in your Chinese negotiations, which I like to call, ‘Split the Difference’.
Al and Bob are negotiating the price of Product X. Al, the seller, offers a sale price of 500 – knowing that he will be satisfied with a price between 450 and 470. Bob, the buyer, counteroffers at 400 – knowing that he will be willing to pay between 420 and 450. It doesn’t take our boys long to reach the 450 point, and everyone walks away happy.
If Al is in China, there’s a good chance that he’ll play “Split the Difference” – but instead of starting out with a price of 500, he’ll probably go to 2,000 or 3,000 as an initial offer. When Bob starts to walk away, Al will suddenly seem desperate and ask Bob, “Well, how much are you willing to offer?”
And that’s the point of Split the Difference. It’s to get you to state the initial REAL potential offer and start the bargaining at a higher level than you ordinarilly would. The Chinese seller doesn’t expect you to pay his price – or even anything close. He DOES expect you to validate his higher offer as the stating point of your negotiation.
Let’s look at where Bob is going to make his mistake:
Al starts by offering to sell at 2,500 (roughly 5X his expected transaction price). Bob will probably offer to buy at 400. Al will come down sharply – to 1800, which pressures Bob to move up his offer. Even if Bob only raises by 5%, he is up to 420 – which is entering his initial comfort zone. Al, meanwhile, is still in realm of fantasy. Al now knows that as long as he keeps Bob engaged in the process that Al will end up the winner. So he drops his price again – to 1100. Bob thinks he’s doing OK – Al’s price has dropped by more than half already with fairly minimal work. He wants to see how far this will go, so he raises his offer a bit – to 430. Al can’t believe what he’s hearing, and is quite sure that Bob thinks he is a fool or a crazy man. But just to be fair, Al will go to 900 and Bob returns with 450. Movement will stop there for a while, until all offers to split the difference and let Bob rob him with a price of only 700. Bob inches up again – first to 460 and then to 475. Suddenly Al agrees, and is all smiles. Bob feels like he just beat the crap out of Al, having brought his initial price down from 2,500 all the way down to 475. Al feels that he has pocketed an extra 25 for a few minutes of work.
Ok, now YOU are Bob. What can you do to avoid overpaying when confronting a “Split the Difference” negotiatior?
3 things.
- 1) Know your market. You’ll notice that by the end of the transaction, Bob had some very valuable information about Al’s true costs and price limits. Unfortunately for Bob, he felt that he had vested so much energy and time into this process that he had to walk away with a deal. Up until the moment that money changes hands, Bob was actually doing great. If he had only taken the PRICE of 475 and used it as a starting point with his next negotiating counter-party, he would have been much more successful. WHEN NEGOTIATING IN CHINA, YOUR FIRST GOAL IS TO GET GOOD DATA ABOUT PRICES, AVAILABILITY AND OPTIONS!!!
- 2) Walk away. Every successful negotiation I’ve ever had in China was on one foot. I was in the process of walking away each time. If Bob had walked away from this transaction AND the next one, his third session may have yielded him a price closer to 420 – because he would have had the knowledge he needed to do it right.
- 3) Know the priorities of the other side. If your counter-party is still smiling, then you haven’t negotiated well. He knows EXACTLY where his limits are, and if you don’t then you are at a significant disadvantage. He is used to working off razor thin margins, and you have to take him down to the limit. In most cases, you can forget about after-sale benefits, Win-Win relationships, guanxi, next deals, or anything else that doesn’t carry a specific price and fit in your hands. He wants an extra mao ( $0.12) on the deal, and doesn’t care if your business gets destroyed in the process. He’ll sell you the wrong thing, the wrong size, the wrong quality or the wrong terms – his only priority is THIS deal and THIS profit.
Topics: Business Entry, Due diligence |
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