Picking a path through negotiations
Negotiation is a difficult skill to learn, made even more so because the times that we need to call on it are typically time constrained with some meaningful stakes on the table. Good negotiation skills are relatively important in the early-stages of starting a company, made more so because of the perceived power imbalances in early relationships. Often when founders are negotiating their first sales, they will just be so focused on getting the contract over the line that they fail to take into consideration longer-term objectives that could leave you up the river without the proverbial paddle. What follows is a number of learnings from early-stage companies when they have been engaging in negotiations with some of their first prospects. The learnings could translate to other situations but are predominantly focused on the initial B2B sales conversations.
Don’t focus on the headline numbers
There are a couple of key concepts that are often quoted for people when entering negotiations, such as “ never be the first to mention a number”, which is a reasonable starting point. But how does this apply to start-ups?
When you’re selling a B2B product, it can be difficult to price it at first when the fixed costs to work with one customer are relatively high but marginal costs to work with subsequent customers are negligible. It’s generally best to try to understand the budgetary constraints as well as expectations of the client before proposing a price. The pricing could be based on substitutes in the market, the value that’s saved/created, or some other relevant metric. If you are able to have this discussion with a number of different potential clients as you’re scoping the product initially, you should have a reasonable idea of where expectations will sit and ask questions that guide the prospect towards those levels.
Often people get caught up about the numbers that are being used. Generally, there’s a reason that sits behind those numbers e.g. market norms, requirements to hit quotas, etc. If there’s a number that you don’t agree with, then it’s worthwhile asking about what sits behind those numbers, what’s the qualitative rationale for proposing the numbers? Generally, you’ll find a more meaningful reason that could enable you to offer something else to satiate the requirement as opposed to haggle over a number that is just a manifestation of a requirement.
Find opportunities to add value
Beyond pricing, it’s far more important to ensure that there’s value being created on both sides. Zig Ziglar, one of the more well-known sales people, exclaims that you should “make the sales call for the benefit of the prospect and not for [your] personal gain.” This means that in the initial discussions with prospects, you should be focused on understanding what the problems they face with less emphasis on the products/services that you’re able to offer. If there’s a mutual benefit, the prospect will typically qualify themselves by explaining an issue that you’re able to solve.
Once you know what requirements that the prospect has, then you can start to work on the levers. As mentioned above, these are the things that aren’t related to the headline numbers. There are generally a handful of other factors that both parties will be able to give or take to adjust the consideration in a negotiation.
Adopt an internal evangelist
Making this more specific, in the B2B sales process, there will generally be one person inside the company that is your main contact. A lot of the time, this person will become the “internal evangelist.” They are the person who needs to stake their political capital to enable your product to get integrated. It’s important to give them the tools and resources that they need to successfully persuade other internal stakeholders.
Even more important than enabling them is understanding the decision chain. If the internal evangelist that you’re speaking to departs or takes on other responsibilities, you could find that your project or integration is dead in the water. For that reason, it pays to spend a reasonable amount of time with your internal evangelist to get in front of any potential changes and ensure that you’re able to have the right person representing you internally.
Bringing it together
Be upfront, there’s no need to be dishonest. You need to be willing to discuss what your BATNA (Best Alternative To a Negotiated Agreement) is — you also need to understand what your BATNA is before you go into a negotiation… When you’re looking at creating a long-term relationship, if you aren’t able to discuss the reasons that you need to push back, you either end up accepting a sub-optimal outcome or otherwise jeopardise the longevity of the relationship.
There are some investors that will encourage early-stage companies to accumulate logos at any expense. I don’t hold the same view. While it’s important that you don’t lose A LOT of early-clients when in the fragile and formative stages of the company, it’s also important that you don’t compromise on your values or direction to service non-core clients. If there are clients that are asking for things that are inconsistent with where you want to go, don’t be afraid of explaining the reasons why you might not be the most suitable partner for them.
Being mindful of the potential power dynamics at play.
Beyond pushing back on issues, you also need to have the confidence to push for terms that increase the engagement’s potential for long-term success. Consider terms that incentivise the counter-party to get the full benefit out of the product e.g. monthly minimum spend or an integration timeline to ensure that they have sufficient engineering capacity to onboard your product. Failure to do so could result in the client failing to integrate and adopt the product and eventually churn.
A lot of start-ups don’t feel comfortable negotiating for these terms because they feel grateful to have the opportunity with the client. If you’re speaking to a larger company and negotiating a contract, you’re already at the “grown up table.” They aren’t going to be pulling punches and should expect the same from you.
Be confident with the product that you’ve created and work towards a place where there’s a mutual exchange of value. Not every potential prospect is going to be a suitable client for you. Try to guide the conversation and look for opportunities to demonstrate value, as you would a boat. Sometimes the current is going to carry you in different directions so it’s best to get comfortable with going with the flow. If there are certain things that a prospect requires, understand why, and see what other aspects there are that you’re able to negotiate on. A negotiation isn’t the same as haggling at a wet market where the only variable is price, there are a number of different levers that you can play with. Your goal should be trying to understand where those levers are and which are the most sensitive.
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