Keep Calm and Pay Up: The Financial Folly of Haggling Over Price and Setting Onerous Payment Terms
Everyone does it these days. Haggling over price and then insisting on oppressive payment terms. We’re living in the age of "Crushing It," and sticking it to everyone, everywhere. This is due to our overly masculine business culture and our dependence on management by "numbers." Simply measuring outcomes expressed numerically obscures the "how" of "how" you arrive at those numbers. Most of the "how" involves dealing with people "about" numbers, not "as" numbers. The numbers are often in the form of compensation and rewards. Oppressive terms and poorly constructed compensation plans inhibit the ability to form meaningful relationships among staff and between companies thus hindering the "how" we mentioned above. Simply put it's demeaning and demotivating. People see themselves as unimportant and irrelevant and stop caring. This might be the language of the modern MBA, but in this edition of the Verdict, we look at why it is financial folly.
Nowadays, prices seem to be suggestions. There's a scene in Monty Python's Life of Brian that illustrates the banality of this trend. Brian is in the marketplace, rushing to buy a beard and is consequently happy to pay retail. The market stall owner, unused to that behavior insists they observe the custom of "haggling." There's a modern-day example of this in a video entitled "What if we negotiated in the B2C world the same way we do in the B2B world?". The closing restaurant scene with the customer conceding to pay, after his initial refusal, but insisting that the chef "reveals the method so he can bring it in-house next time"...would be hilarious if it wasn't the absurd reality that is now routine. These days every transaction takes on the appearance of a Persian bizarre. The final insult is the payment terms that also get presented by larger companies. They are in a word…exhaustive. Net 60, net 90? It defies common sense, but these are conditions that result from the financialization of business as Rana Foroohah eloquently writes and are handed down from people who have lots of authority but little feel for the nuances of commerce. So, where did this behavior come from, why has it become the new normal, or did it always exist? Finally, why we would encourage you to proceed with caution when you think about "sticking it" to your latest vendor, especially when you're buying services (which includes SaaS these days). Remember, when you sign a services contract, it's only the end of the beginning.
Loss of Trust
In the tech industry, buyers felt let down by vendors and their implementation partners' high prices and low deliveries. Large ERP and CRM projects cost millions in software and services and seemed to universally under-deliver. While buyers should not be excused their role in underwhelming enterprise implementations, one of the consequences was that buyers started to refuse to pay multiple seven-figure price tags for a product they construed as "write once and sell many." So, maybe buyers suffered a loss of trust from companies over-promising and under-delivering?
Loss of trust is a common phenomenon. It's a subject we return to regularly. It's a consistently occurring theme in modern business and life in general. The only legitimate discussions are NOT that it exists, it's really that it has always prevailed, and that once more it's just become more "magnified" by the pervasive media and consequential information overload. It is becoming generally more accepted that more information isn't necessarily good information. There's a difference between noise (unintelligible, tells us nothing meaningful and consumes our senses obscuring meaning) and signals (that while they might need further deciphering, are significant and are relaying useful insight).
Are people and information less trustworthy than before, or has it always been this way? Some might argue that the greater exposure caused by the media explosion has led us to a greater sense of wariness, which should be a good thing. In other words, we have always been getting duped we didn't notice that everyone else was too. Now we're forewarned, we're forearmed and better able to challenge those out to deceive us; hence we don't trust the first price people give us and "haggle" accordingly.
The Culture of Chaos
The professionals of in procurement would agree with the argument above. Their narrative would be one of previous crimes and misdemeanors by vendors, resulting in the creation and rise of the professional procurer seeing themselves as the guardians of justice and righteousness. This might be a legitimate claim. The 1980s saw a parade of "success manuals" about negotiating everything claiming you "don't get what you deserve, you get what you negotiate." These contributed to the popularization of an attitude which marked a decline in business culture, particularly in the financial sector. Lower standards and the lack of moral compasses, for example, lead directly to the meltdown of 2008. It became all about "getting yours," (and of course "Crushing It") which in the financial sector is a zero-sum game. Someone wins, and someone loses.
Moreover, sometimes, someone wins, and everyone else loses BIG-TIME. After the Mortgage Crisis, Wall Street won big, and Main Street? Not so much. Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar paints a grim picture of business culture, specifically in the finance sector. The 1986 movie Wall Street's attempts at warning us of this cultural demise backfired. Oliver Stone ended up glorifying characters like Gordon Gekko. Greed is Good became a rallying cry, not a warning. The effect was the promotion of a macho business culture advocating "negotiation" as winning or losing and part of the new narrative. It positions everything as a zero-sum game. So, if I can't trust anyone anymore, AND I must ensure I'm maximizing MINE, it's no wonder everyone wants to argue about everything. The choice became one of being "ScrewER" or "ScrewEE" - the kind of feeble binary thinking we have succumbed to.
Combining a lack of trust with the "zero-sum-game" thinking creates a potent formula. One that increases friction, handicapping the commercial system. The continued (management) manipulation has obscured the effects of this in the US economy by the Fed's perpetual quantitative easing and low-interest rates. Smaller companies are having to use AR financing to combat the onerous payment terms inflicted upon them. These credit facilities are now standard, enabled by the availability of cheap money thanks to The Fed. However, these circumstances work to the benefit of the largest companies, and to the detriment of the invention and innovation that derives from the small and start-up companies as they struggle to finance themselves. This myopic management is stifling the very companies we need to flourish.
It's Not as Bizarre as You Think it is…We're Just Human
Psychologists might show us that humans are once again guilty of faulty thinking. Annie Duke's book "Thinking in Bets" argues that we are victims of "extreme views." For example, big wins or terrible losses with nothing in the middle. Anything that is not a spectacular success must be an abject failure. While that's just not true, it does represent the fashionable thinking of "go big or go home," which conditions us to view outcomes in the extreme. When it comes to "doing deals" that seems to translate into the old, "I must do unto others before they do unto me." A binary proposition. In Factfulness, Han Rosling calls this the Gap Instinct. Again, we think of polar opposites. It's a dramatic way of looking at life, and as we know, we all love a good story, and we all love some good drama – right? Sure, it's human nature. Haven't we always been on guard against getting ripped off by the "snake oil" salesman? It was always Caveat Emptor – buyer beware. The marketplace has ever existed, and smart people negotiated every dotted "I" and crossed "t." Life and business are and always have been one big Persian Bizarre. It's gotten more so as technology has eradicated one of the tenants of classical economics, the buyers' imperfect knowledge of the market. The customer is King, and he's going to let you know it.
Heads I Win, Tails You Lose
The counter-argument to all this is that companies are compelled to make profits. This is how they provide future security. Security is one of the basic human needs, as seen in Maslow's Hierarchy. In the modern world, stability and predictability around jobs and earnings are the contemporary equivalents of the more basic of human safety and security concerns. To provide security, companies have a responsibility to grow. It is from this growth that they can continue to provide employment. Growth creates jobs, wages are paid, monies spent, and the multiplier enabled, leading to further growth, wealth, and a thriving economy that provides future security, and the cycle goes on. To do this, the argument is that companies need to be as financially efficient as possible – keeping costs low by being economically prudent, driving hard bargains. This view demonstrates an ability to think longer-term and provides a thoughtful response; however, the evidence suggests otherwise.
Security is indeed the desired result of company growth. The challenge is that companies are not providing security to all stakeholders equally. We have seen this objective perverted in the last 20 to 30 years as constant growth in shareholder value has come to outweigh all other interests. Jobs have been sent offshore to save money, and the promise of automation provides little comfort or security to the average worker.
The Verto Verdict
It's a messy scene out there right now. Prices seem to be suggestions. The price negotiation conundrum becomes an infinity loop. Vendors assume customers will negotiate their price down, so they inflate it. Customers think vendors have raised their price (whether they did or not) and try to discount it. Professional buyers are compensated for extracting the most excruciating terms they can. Relationships sower right out of the gate, and then customers wonder why their projects are not a top priority. People are people, mistreat them at your peril and what looks like a good deal in the short term will soon fade. As the Benjamin Franklin quote goes, "The bitterness of poor quality remains long after the sweetness of low price is forgotten." Relationships go sower, and bitter people are not motivated to deliver high quality. So once more we return to the idea of balance, acknowledging that finding it is no easy task, here's our Verdict;
If you are working for someone else, you might be obligated to negotiate the price, or step aside while Mr. (or Miss) Excitement from procurement enters to "do the pricing thing." If you're in a mid-size or smaller company and senior enough to have some juice, or run your own company, you should think hard before haggling for the hell of it.
We're not suggesting that you become financially careless either. Do your research and get some points of reference for comparison. Understand and assess the value this product or service is providing. If you conclude that the vendor's price is too high, you need to have lined up your logic in reaching this conclusion. Ask the vendor to justify themselves and be prepared to share your thinking in return. This is a reasonable and grown-up way of conducting business. All this "we don't pay the rack rate," or "we never pay the first price offered" approach is juvenile and self-defeating, despite what they taught you at that over-priced business school you went to (BTW - did you negotiate the fees they charged you?)
When buying services, remember agreeing on the price, and signing the contract is just the beginning. You're dealing with human beings (well at least for now) who have feelings and memories. Mistreat them, and quite rightly they'll remember. What is hilarious are those people who misbehave – they beat down vendors on price and terms and then still pay late, and still wonder why they get ignored. Our advice is not to screw your vendors down. You will get a better service by being reasonable and preserving a good relationship.
Once you have agreed on the price and terms, move on. Don't spend time second-guessing what you have decided or putting the vendor through the mill every five minutes. That doesn't mean you don't monitor deliverables and KPI's. If you pay the retail price, you have all the right in the world to be demanding. The vendor will have made commitments, and promises and one of the reasons to pay them what they asked is precisely that you can hold them VERY accountable.
Find the balance between the needs of the shareholders and the needs of other constituents. In other words, all the stakeholders. We appreciate the need for a company to grow, and to do so, it must be financially successful. However, that financial success must be reflected in more than just stock repurchases. It must benefit all stakeholders; that include employees. Finding this balance is a difficult task, but it's what provides real long-term security, and that's why executive leadership of large companies gets paid the big bucks.
Final thought? Another way to look at this to look at where you'd rather spend your time – making revenue or reducing costs. As we said, we're not encouraging you to be reckless or careless with the company cash, but let's face it, you're not going to save your way to success. It would be best if you focus on the revenue side. Why does this idea seem to be lost these days? Because it’s become widely believed that (despite what is said in public) it’s easier to cut expenses than win new revenue. How uninspiring. What a shame.