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Negotiating to yes in a mutually beneficial way

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Negotiating to yes means negotiating to obtain at least the basic result you seek from the discussions. Negotiation is part of our daily life. We negotiate with our family, our friends, our co-workers, our superiors, suppliers and others. When approaching negotiation, “negotiating to yes” is the objective. However, negotiation can be seen as a lose-win game or a win-win game. When you approach another party with an intent to negotiate in a lose-win game, you may be damaging the long-term relationship with the other party.

Do not confuse negotiating to yes with trying to take everything away from the other party. Greed and short-term victories can be painful in the long-term.

Short-Term Success vs. Long-Term Failure

No one wants to come out of negotiations as a losing party and, should this happen, the losing party may not have warm feelings toward any further negotiations or will plan to “get even” in further negotiations.

If you find a counter-party who can be negotiated-to-a-yes and you make him look absolutely bad, it is almost guaranteed he or she will be replaced by a better negotiator. That only makes your life all the more difficult. Therefore it is in your best interest to not ask for more then you need. Giving something back or taking just a little may be a better strategy for you.

It is important to have the intent to find a solution which will be workable for all parties involved. The objective should be to find a win-win solution where at least the basic needs of both parties will be met.

As a negotiator, the first step you need to take is to understand the needs and interests of both parties. Then, taking this knowledge into account, you can consider which alternative meets the needs of both parties. The focus should be on finding a workable solution that will meet the needs of both parties.

Of course, there could be situations when a win-win solution is not possible. However, in approaching the negotiations, the focus should be on finding a workable solution whenever possible. The “losing” party must also understand why they could not come out as a winner and must be willing to accept the outcome. The “yes” in “negotiating to yes” can be adjusted in the losing party’s mind to a more workable outcome.

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You need to make sure that the objective of “negotiating to yes” is achieved by both parties. Even when you can take everything, think for the long-term and try to build an ally rather than an enemy.

Furthermore, think of your personal style when you conduct negotiations. Always ensure it is respectful and considerate in dealing with the other party. Generally, people respect and appreciate authenticity, honesty and fairness. If you have their best interests in mind – they will be more likely to be considerate of yours. However, do not confuse fairness with being a push-over. You need to be tough when required, but remember that negotiating to yes is not a winner takes all approach.

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The 4 Ps of Marketing Mix

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The term marketing mix was first used in 1953 by Neil H. Borden in his presidential address of the American Marketing Association and later in his article entitled “The concept of the marketing mix”.

In 1960, a well-known marketer E.J. McCarthy categorized elements of the marketing mix proposed by Neil H. Borden into four main categories. According to E.J. McCarthy, marketing mix consists of four main elements:

  1. product
  2. place (distribution)
  3. promotion
  4. price

These elements commonly called 4Ps of marketing mix.

Maximizing performance of the marketing mix is what marketing as a function of organization focuses on. Of course, the ultimate objective of managing the 4 Ps marketing mix is the same as of any other action of the organization, to increase the wealth of the shareholders of the enterprise.

The 4Ps of the marketing mix

Product – Product, as an element of marketing mix, refers to products and services produced by companies for consumption by the population. Various marketing decisions have to be made concerning the product element of the marketing mix. Such decisions include decisions on packaging of the product, branding of the product or service, and on the product warranty.

Place (distribution) – Place (distribution), as an element of marketing mix, refers making products and services available for the customer. It also refers to the site where the product or service is made available to customers. Management of place as an element of the marketing mix includes various vital decisions such as decisions regarding the distribution channel and inventory management.

Promotion – Promotion, as an element of marketing mix, incorporates everything that companies do to attract customers to its products and services. Management of promotion, as an element of marketing mix, includes management of the “promotional mix” which consists of sales promotion, advertising, sponsorships, direct marketing, personal selling and public relations (publicity).

Price – Price, the last of the 4 Ps, refers to the amount, in monetary terms, that the producer requires from consumer in order to part with the ownership of or ability to use the product or service which is offered for sale. One of the key elements of the marketing mix is pricing strategy.

 

Growth of a Small Business

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Entrepreneurs have different preferences towards the growth of their businesses. Some desire rapid growth, others pursue manageable and reasonable growth while others prefer not to grow their businesses at all but only to maintain the current size of the business.

Growth of a small business can be incredibly challenging if it is not planned for. One of the reasons for this is due to the fact that growth usually requires additional financing which has to be obtained before the additional profits appear as cash inflows.

This growth problem is further exacerbated due to the difficulty of obtaining external financing. Business may need additional financing to hire more personnel to handle increased sales and to buy extra inventory and raw materials. Therefore, the situation may occur where a rapidly growing business is profitable but has cash-flow problems. This is referred to as a “growth trap”.

 

Distribution, distribution channels and distributors

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One of the important sub-concepts in supply chain management (SCM) is distribution. Distribution is also one of the four Ps of the marketing mix. The four Ps of the marketing mix are product, price, place (distribution) and promotion. After the product is manufactured or service produced is ready for consumption – it has to be distributed.

Distribution describes the activity of distributing products or services from producer to the final consumer.

Distributors, which are also called intermediaries, assist in the distribution of products or services to the final consumer. Examples of distributors of products could be an agent, wholesaler or retailer. An example of distributors of services could be an employment agency which distributes the labour of job seekers to employers.

Some distributors take a title and are called merchant middlemen. Examples of merchant middlemen include wholesalers and retailers. Those distributors who do not take a title are called middlemen (as well as brokers and agents). An, example of a middleman is an insurance broker.

Distribution channels

There can be direct or indirect distribution channels:

A Direct distribution channel does not involve the help of an intermediary (distributor). In the case of a direct distribution channel, the product or service is distributed directly from the producer to the final consumer. An example of direct distribution channels is the case when an organization distributes its products directly from its website.

Indirect distribution channels involve the help of an intermediary (distributor) which acts as a middleman between the producer and final consumer. There can be one or more levels of distributors between the producer and final consumer. For example, the product can be distributed to an agent who in turn distributes it to the wholesaler who in turn distributes it to a retailer. The final customer buys product from the retailer. In this case there are three levels of distributors between the producer and final consumer.

If the company uses a combination of distribution channels it is called dual distribution. An example of dual distribution occurs when the company offers its products directly from its website (direct distribution channel) as well as via local retailers (indirect distribution channel). Dual distribution may allow the company to achieve higher profitability.

There are various factors that must be considered in selecting a distribution channel. Those factors include: nature of the product, strategies followed by competitors, availability and reliability of intermediaries, customer preferences and characteristics, cost of involving intermediaries, size of the business (capacity to deal with a large intermediary such as a national retailer) and warranties (capacity to offer warranties that may be demanded by the intermediary).

Disadvantages of using intermediaries include a generally higher price to consumers, lower degree of control over level of customer service provided to the final consumer, reliance of eagerness of intermediary to promote the product and lower degree of communication between producer and consumer.

Advantages of using intermediaries include the fact that, especially for small businesses, it may be much cheaper to use an established distribution infrastructure than to create its own (intermediaries specialize in distribution activities and can usually execute such activities more cheaply than the producer of the product). Some of the costs and activities such as storage and promotion are undertaken by the intermediary so the business can focus on its core competency – producing the product, and some of the business risk may be overtaken by merchant middlemen.

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Supply Chain Management

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Supply chain refers to the network of organizations linked by movement of goods through various stages of production, storage and delivery until it becomes available to the final consumer.

Supply chain management (SCM) is a step by step integrated and coordinated process of movement of goods from raw materials stage all the way to the final product which is distributed to the final customer.

Supply chain management consists of three main flows which are product flows, financial flows and information flows. Product flow refers to the flow of products through the supply chain process. For example, products can move from raw material form to manufacturer to wholesaler to retailer and eventually to the final consumer. Financial flow refers to financial matters concerning purchasing and sale of products such as credit terms and payment schedules. Information flow refers to flow of information with regards to purchase and sale of products which move throughout the supply chain management process.

Within the strategic management process (SCM), management decision making and activities are usually grouped into strategic, tactical, and operational levels.

Strategic level – At the strategic level, a “big picture,” high level and long-term decisions with regards to supply chain management (SCM) are made in relation to the organization as a whole. Such decisions may include allocation of resources, consideration of partnerships and consideration of product life cycle (PLS) management.

Tactical level – At the tactical level, medium-term decisions are made on the subject of supply chain management (SCM) of the business. Such decisions may be on matters with regards to inventory, production and transportation.

Operational level – At the operational level, day-to-day short-term decisions are made with regards to supply chain management (SCM) of the enterprise. Operational level decisions may concern matters such as daily delivery and production.

The distinction between tactical and operational level decisions is often vague within organizations. This occurs because to meet daily orders (which occur at an operational level) organizations need to allocate resources (which occurs at the tactical level). Therefore, as with any other framework, various levels of decision making provide guidance for effective supply chain management (SMC) which should be supplemented with common sense and intuitive guidance.

There are numerous supply chain management software available, which significantly simplify supply chain management within organizations. Furthermore, the Internet has made communication within supply chain much more easier and faster compared to pre-Internet times.

Effective supply chain management (SCM) can decrease costs associated with supply management activities such as transportation, storage and packaging costs. This can contribute to obtaining  a competitive advantage over peers.

 

Product Life Cycle (PLC)

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The only way an organization can continue its existence and growth is by rejuvenating its product mix. This is important because products go through the product life cycle.

Product Life Cycle (PLC)

The idea of a product life cycle (PLC) was introduced by Theodore Levitt in his Harvard Business Review article entitled “Exploit the Product Life Cycle” which was published in November of 1965. Product life cycle is based on the biological life cycle and starts with introduction of the product (introductory stage) which is followed by growth and maturity stages and eventually decline stage.

The duration of the product life cycle depends on the product and can range from few months to few decades and beyond. Understanding of the product life cycle (PLC) assists management in enhanced understanding of what they can expect with regards to product performance based on where it is in the product life cycle and in developing appropriate strategies. Organizations need to ideally introduce new products before the old product reaches its peak stage.

In terms of profits and losses from new products, at the beginning of the introductory phase a loss is usually made. Then, at some point during introductory stage break even occurs. After break even profits generally rise up until its peak which occurs approximately close to the end of the growth stage which is followed by decline in profits.

Organization’s marketing, financial, human resource, purchasing and manufacturing strategies for the product should reflect the stage of the product in the product life cycle.

Stages of Product life cycle

Introductory stage – During this stage a product is developed and introduced to potential customers. Awareness about the product should be created and the market needs to be established. Marketing communication usually focuses on educating potential customers about the new product. If relevant, intellectual property protection should be obtained.

During beginning of the introductory stages losses are usually incurred. This occurs for a number of reasons such as the high costs of advertising involved in introducing a product to the market as well as the high costs of actual development of the product. Then, at some point during the introductory stage, break even occurs. After that point the firm starts making small but increasing profits. E-conferencing is an example of a product in the introductory stage.

Growth stage – Growth stages are characterised by rapid growth in sales and profits. If economies of scale are possible then profits are further accelerated. This is the stage when a company usually invests substantial economic resources to promote the new product and build the brand. Competition in the growth stage is drawn to the market. Market shares of market players tend to stabilize at this stage. Profits continue to rise up until its peak which generally occurs close to the end of the growth stage. This is usually followed by declining profits. Email is an example of a product in the growth stage.

Maturity stage – Maturity stage characterised by acutely increased competition. Intense competition may lead to price wars and concentrated attempts of rivals to differentiate its products. Companies experience decreased margins and some leave the market. Profits of a company generally continue its decline in the maturity stage. However, overall profits of the market for this particular product tend to be the highest at this stage of the product life cycle; although it is heavily splintered amongst many medium size to small players. There are usually 1 or 2 market dominant companies. Credit cards are an example of a product in the maturity stage.

Decline (saturation) stage – At the saturation stage consumers’ interest in the product dramatically declines. This can happen due to the introduction of more superior products to the market or changed consumer tastes.

Profits continue its decline in the saturation stage until profits reach zero (break-even point). The company may try to prolong this stage by finding ways to cut costs. Companies may also try to rejuvenate products by adding new features and looking for other ways in which product can meet customers’ needs. Markets itself tend to shrink at this stage. Eventually the product is withdrawn from the market. Typewriters are an example of a product in the saturation stage.

In conclusion, it is important to note that not all products will go through each stage of the product life cycle. Some products, for example, may experience the decline stage right after the introduction stage. Therefore, product life cycle (PLC) is a useful formal framework which can be used. However, common sense and intuition should also be applied in making product life cycle decisions.

 

Pricing Strategies

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The main objective of any enterprise is to maximize wealth of its shareholders. All decisions that are made for the organization should be based taking this objective into account.

Pricing strategy should also be aligned with the main objective of the enterprise. Further, in determining the pricing strategy, the goal should be to select prices which will allow achieving the highest profitability, which is determined by sales level and profit margin. Therefore, organizations should target attainment of the highest feasible profit margin at the highest sales level. A trade-off needs to be made between highest margins at lower sales against lower margin against highest sales.

There are various pricing strategies that can be considered in determining the most appropriate price for the product or service. Some strategies are presented below.

Skimming (skim, creaming) pricing strategy

A skimming (skim, creaming) pricing strategy refers to setting a very high price (with a high profit margin) for a limited period. It refers to “skimming the cream” from the market. Skimming pricing strategy may be possible when businesses have no or very few competitors. When competition will become more intense, business can lower its prices to more competitive levels. The skimming pricing strategy is often selected if investment costs must be quickly recovered and if there is no or very limited competition.

Remember the early days of the internet. People paid to have email accounts. Prices then tumbled as competition increased until email is now free.

Prestige (premium) pricing strategy

Prestige pricing strategy, which is also referred to as premium pricing consists of charging a very high price on a permanent basis throughout the entire product life cycle. Such a strategy is only possible for unique and high quality products or services in situations whereby an entrepreneur has a very strong competitive advantage. It is relevant when targeting an elite target market. This is because customers with high income levels have more inelastic demand (lower sensitivity to price and greater sensitivity to value provided by product or service). Moreover, taking psychological effects into account, very high price of a product may be part of the reason elite customers buy the product as high prices may evoke perceptions of additional “status”, “prestige” and “quality” value added to the product.

Variable pricing strategy

Majority of businesses charge a fixed price, which refers to situation whereby standardized price is charged for the product or service. However, sometimes business can use variable pricing strategy, a form of price discrimination. Under variable pricing strategy, business offers different prices to different customers based on factors such as customers’ bargaining power and quantities purchased.

In the case of a variable pricing strategy, a consistent price generally should not be promoted to allow for the price to vary. In other cases, standardized prices may be promoted and concessions may be granted to specific customers based on the factors such as customer knowledge, quantity purchased and bargaining power. However, it should be noted that some experts strongly advise against variable pricing strategy as they believe it diminishes the value of the brand.

Certainly, in some situations, variable pricing is more adequate than in others. For example, variable pricing may work for consulting work when different clients are charged different price for similar service based on number of factors. However, variable pricing may be damaging for the soft drinks’ brand.

Sometimes a dynamic pricing strategy is followed, which is a variation of the variable pricing strategy. Under a dynamic pricing strategy, price is determined for each customer separately based on such factors as customer’s financial position, past purchases history, where the customer lives and extent of eagerness to buy a product or service. Dynamic pricing strategy is possible due to advances in information technology and mainly used by internet based companies. Dynamic pricing strategy is also widely used by the airline industry.

Psychological pricing strategy

Psychological pricing strategy refers to situations where businesses take psychological effects into account when setting the price. For example, price set at $7.99 or $9.95 will have a psychological effect of being perceived as smaller than $8 and $10.

Penetration pricing

Penetration pricing strategy refers to setting prices below long-term market prices. This is especially relevant if the business has lower costs than competitors and therefore can afford to offer lower prices while maintaining adequate profit margins. This pricing strategy is also more appropriate for types of products and services which are demand elastic.

When price is set below the long-term market price to discourage new competitors from entering the market, this is called a pre-emptive pricing strategy. Further, when the lowest possible price is set, often one that does not cover the costs of production, to drive away competitors and to discourage new competitors, such pricing strategy is referred to as an extinction pricing strategy. Under pre-emptive and extinction pricing strategies, business often try to create an impression that penetration pricing is actually a long-term market pricing. In reality, when competitors leave the market, the business will increase prices back to profitable levels.

Product Line (price lining) pricing strategy

Product line (price lining) pricing strategy refers to businesses which offer lines of similar product at different prices. An example can be a line of shampoos by the same producer at $10, $15 and $25. Each subsequent product claimed to be more advanced. Such assortments make it easier for customers to select an appropriate product which most adequately meets needs of the customers.

Leader pricing strategy

Leader pricing strategy, which is also called follow-the-leader pricing strategy, refers to situation whereby business follows the price level of the dominant competitor. Leader pricing strategy is relevant for markets where intense competition is predominant. The leading competitor is usually a large firm with lower costs due to economies of scale. Therefore, following this strategy may significantly decrease profit margin of a small business. In such case, it is more advantageous for small business to differentiate its product from the dominant competitor and offer it at a price which is sustainable for a small business.

Mark-up pricing strategy

Mark-up pricing strategy consists of adding a certain percentage, possibly based on industry average, to the cost of the product. Percentage of cost is determined as follows:

Mark-up as a percentage of cost = Mark-up/Cost * 100

It is important to ensure that the mark-up incorporates profit margin and all anticipated relevant costs such as operating costs, future price reductions and discounts. Different mark-ups can be used for different products and services.

Pricing-at-what-the-market-will-bear pricing strategy

Pricing at what the market will bear refers to the setting of the maximum prices at which customers still will buy the product or service. This is only feasible if the business has no or limited competition and if the product is really unique.

For example, if the business has no competitors and products have no substitutes than customers may continue to purchase the product or service at a very high price since no other alternatives to obtain this product or service exist, or a substitute for this product or service is unavailable.

Manufacturer suggested retail price (MSRP)

According to this pricing strategy, retailer charges a price suggested by manufacturer. This can be advantageous in avoiding price wars with other retailers.

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Competitive Advantage

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Competitive advantage refers to quality that makes product or service more valuable and unique in some way compared to similar products and services offered by competitors. Sustainable competitive advantage is competitive advantage which competitors cannot easily copy.

Competitive advantage may be increased by improving value that product or service adds to customers. Increased value can be achieved by improving the total product offering such as improving delivery time, customer service levels, how fast quotations are provided and how customer is treated if the need for return or exchange arises. Below are some examples of a competitive advantage:

Google:

  • It is a dedicated search site.
  • A clean and simple interface which can load very quickly.
  • The ability to manage searches in multiple languages.

Apple:

  • All Apple products are tightly integrated and work very well together.
  • The brand is known for exceptional design and usability.
  • Easy to use, simple, light, compact and accessible.

 

 

Determining Pricing for Products or Services

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When products or services are developed and ready to be provided to customers, an entrepreneur still needs to make a pricing decision. Entrepreneurs need to be careful to ensure that the appropriate price is determined since customers generally do not like increases in prices.

Price is one of the four Ps of the marketing mix, which are product, place (distribution), promotion and price. Price, further, is interrelated with other Ps of the marketing mix.

Price of the product or service directly affects the revenue of the business. It also indirectly affects demand for the product or service (level of sales). This refers to the fact that generally as price of the product or service decreases demand tend to increase and as price increases demand tend to decrease. Both of this influences of price needed to be taken into account when an entrepreneur decides on appropriate price for the product or service.

Sales revenue

Total sales revenue of the business depends on quantity sold and price. If we ignore the affect of changes in price on demand than we can assume that as price increases revenue will also increase and vice versa.

For example, if a small business owner increases its price from $6.5 to $7 and the demand stays the same at 150,000 units per year than the following changes in revenue will take place:

Sales revenue at $6.5 per unit: $6.5 * 150,000 = $975,000

Sales revenue at $7 per unit: $7 * 150,000 = $1,050,000

As we can see from the above, an entrepreneur can lose a $75,000 annually in sales revenue by charging just $0.5 less.

A price of the unit of product or service is the cost per unit sold plus profit per unit. To determine pricing, entrepreneurs firstly need to understand the total cost of providing product and service. This includes all costs involved in getting the product or service to customers and after sales service, and includes manufacturing, advertising, storage, delivery, taxes, salaries, et cetera. When considering costs, it is important to divide total costs into fixed costs and variable costs.

Fixed costs refer to costs which do not change as volume of sales changes. For example, assume that enterprise is renting a building. The rent paid is a fixed cost since it does not fluctuate with changes in sales volume. Even if company will not sell any products over a certain period, the rent must still be paid.

Variable costs, on the other hand, refer to costs which fluctuate with changes in sales volume. An example of variable cost is commission paid to sales personnel. For example, assume that the business sells product at $100 per unit and pays sales commission of $5 to its sales personnel. The sales commission is a variable cost since it will fluctuate with changes in sales volume.

Many entrepreneurs treat fixed and variable costs the same. An average pricing approach which is often used by entrepreneurs is a manifestation of this. To find average price, entrepreneurs take total cost from the last period and divide it by total number of units sold from the last period. This gives them an average cost per unit.

This approach is very risky. The problem with this approach is that it does not account for the difference in fixed and variable costs. For example, if sales of the business will be lower than last year than fixed cost will increase the average cost per unit. This can decrease or eliminate the profit margin of the business. What is even worse is that this can even lead to business making a loss.

For example, imagine that ABC Company in the last financial period had fixed costs of $750,000 and variable costs of $250,000. Over last period 150,000 units were sold. To determine the average cost per unit, ABC will divide $1,000,000 ($750,000 + $250,000) by 150,000 units. This results in average cost per unit of $6.7. Assume that on the basis of this ABC decided to charge $9 per unit.

However, the slowdown of the economy led to decrease in number of units that ABC could sell to 90,000 units. This decreased the variable cost to $150,000. However, the fixed cost of ABC was left unchanged at $750,000. The new average cost per unit of ABC is ($750,000+$150,000)/90,000=$10 per unit. Since company charges customers $9 per unit, which is less than its average cost per unit of $10, it is making a loss.

The above example illustrates very clearly how risky an average pricing is, especially for the small business.

Pricing changes and demand

When entrepreneurs determine pricing, it is important to consider how demand is affected by pricing. The response of demand to price changes depends on whether the goods or services is demand elastic or demand inelastic.

Elastic demand refers to demand for products and services when increase in price will result in decrease in quantity purchased and decrease in price will result in increase in quantity purchased. For example, a decrease in price of certain brand of chocolate may result in increase in quantity of this brand of chocolate that is purchased.

Inelastic demand refers to demand for products and services which do not respond much to changes in price. For example, if the price of sugar will increase, the quantity of sugar purchased will likely remain unchanged. This is because sugar is seen as necessity and the amount of sugar that is used is usually more or less fixed in quantity.

To determine whether demand is elastic or inelastic it is helpful to start from a desktop research. Desktop research refers to research that can be done at one’s desk, such as with the use of the internet. The product or service that the entrepreneur makes available is provided by other companies as well and information on their prices and volumes will be available. After some research you should be able to see if demand for the product or service that you want to provide is elastic or not.

The degree of elasticity will determine barriers that entrepreneur has to consider when increasing the price of the product or service. To decrease elasticity of demand for product or service, an entrepreneur can take steps towards making product or service more unique and more value adding compared to that offered by competitors. In other words, an entrepreneur needs to establish a sustainable competitive advantage.