Everything is Negotiable

mike_imm_saving

Throughout my time working at a New York based Private Equity firm, the angriest my boss (one of the Managing Partners at the firm) ever got at me had nothing to do with my job performance. Instead, he was disappointed with the steep rent price I was paying for my NYC studio. I explained to him it was the cheapest option within walking distance of the office. He immediately questioned me, “Did you negotiate the price?” I shook my head no. He responded with three words that have forever changed my perception, “Everything is negotiable”, then walked away.

I know he did not invent this quote, I had heard it before. However, I always attached “Everything is negotiable” to a used car salesman or Antique Roadshow, thinking it was just a corny sales line more than anything else. It was not until my Managing Partner, someone whom I deeply respect, recited this quote to me that I took it heart, and began to really analyze why “Everything is negotiable”.

Why is “Everything is negotiable”

The main reason “everything is negotiable” is because marketplaces are inherently inefficient. In a marketplace where a product is priced to maximize profits, a company forgoes potential profits on customers who are only willing to buy the product for a cheaper price. For example, picture the following conditions for a T-shirt company:

Cost of T-Shirt Production: $9.00

Number of Customers if T-Shirt Price is $20.00= 20 customers

Number of Customers if T-Shirt price is $10.00= 30 customers.

In this scenario, the T-shirt company company will make a larger profit listing its T-shirts for $20.00 ($220.00 profit), than $10.00 ($30.00 profit), and thus list the shirt for $20.00.

However, if the T-shirt company could price discriminate (charge different prices to different people based on their demand for the product), they would sell their T-shirts for $20.00 to the 20 customers ($11.00 profit per customer), then sell 10 shirts for $10.00 to the customers who are only willing to pay $10.00 for the shirt ($1.00 profit per customer). When price discriminating, as long as the company is making a profit (total revenue> total cost), it always makes sense to sell a t-shirt at the price.

Use Negotiation to Allow Price Discrimination:

Two examples of price discrimination are age-based discounts (Senior Citizen or Children discounts) and time of week price cuts (gas stations will cut prices on specific week days, where only price sensitive customers will realize the discount). However, as you can likely tell, the problem with price discrimination is it’s almost impossible to market. Both these examples capture some price discrimination, but do not come close to fully realizing potential discrimination. Thus, most companies will not price discriminate their products, and will find a single price that optimizes their profits.

The moral of the story is that companies want to price discriminate, but they are unable to. However, through effective negotiation, we (the customer) are able to expose the minimum price a company will be able to sell a product at. While in reality it is likely impossible to try to negotiate “everything” (I do not think you are going to be able to negotiate the price of a bag of Cheetos at a Walmart), there are many products you can negotiate which you may not have known are possible. 

A few examples:

1. Hotel/ AirBnB prices: If a hotel is in off-season, or simply has excess rooms, they will likely be able to give you a discount. This is especially apparent during COVID, where the hospitality industry has been struggling. At the very least, you may be able to get some added benefit or a better room for the same price.

2. Media Subscriptions: Subscription based media companies (Netflix, Xfinity etc.) often charge a monthly postpay. However, they would prefer their users to prepay an annual subscription, as it guarantees customer retention and increases their cash flow immediately (to reinvest into the company). Thus, media providers will often provide a significant discount if you are willing to commit to an annual prepayment. The best part: you do NOT even have to negotiate. Third party platforms like Ubund will negotiate a 30%+ discount to your media subscription for you if you commit to a 1 or 2 year prepayment. 

3. Furniture: Furniture showroom price is often much higher than its manufactured price. It is always worth attempting to negotiate on furniture before you purchase.

4. Gym Memberships

5. Electronics

6. Medical Bills

Tip for Negotiation: Increase Your Bargaining Power

Before you negotiate, always do your research to figure out how you can incentivize the seller to sell to you for less. Bullet 2 above is a great example of using research to increase bargaining power. These third party negotiation platforms understand that media companies prefer being paid upfront for a longer commitment, so they leverage the preference for an added discount for their customers. You can apply a similar negotiation tactic to anything you want a discount on. If you want a discount on a long-term stay on an Airbnb, explain to the Airbnb owner the benefits of your long term commitment (increased customer retention), then tell the owner you will only stay for an additional discount. Even if you do not have a bargaining angle, use the power of time. Tell the furniture salesperson that a couch you want is slightly over budget, but you are willing to purchase it immediately if provided a reasonable discount. Even if a negotiation attempt does not work, you will see over time that “negotiating everything” will consistently save you money. 

Comment below where you like to negotiate or any other negotiation tips you may have!

Robin9

Poster is in the USofA

Apodemus

Robin9 said:

Poster is in the USofA

Clearly!  And perhaps the investment board is not the best place on MSE for a discussion on this.

But it is an interesting topic and in UK we are so bad at negotiating prices - I speak from a personal failing here!  Problem is partly that both sides of the deal need to understand that prices are negotiable - if the salesperson doesn't "get it", they will walk away from a potential deal and miss out on a sale.  I have painful memories of buying a whole house-worth of white and electrical goods from one of the big high-street chains and trying to haggle over the inclusion of 13 amp plugs for the appliances!

TBC15

Do you take cash?