Negotiating on prices – what’s your business model?

Business processes word cloudHere’s an amusing, but remarkably effective, tool that graphically demonstrates the choices that have to be made in negotiations over the supply of goods or services.

When a potential customer meets this businessman they will see a wooden block and two wooden pegs on his desk. The block has three holes in it labelled quality, cost and speed.

The purpose of the pegs becomes clear as negotiations proceed.

Suppose the customer emphasises really high quality, but also wants the lowest possible price.  The pegs go in the cost and quality holes. The customer’s needs can be met, but only within the current capacity of the company’s production schedule.

If the customer wants their order delivered fast, however, the pegs would go in the speed and quality holes. The businessman knows that to produce high quality goods at speed will mean rearranging his company’s existing schedules or increasing working hours, so speed + quality would increase the production costs.

There is always a trade-off between quality, cost and speed of delivery

While customers inevitably want all three, the fact is that generally there is a trade-off. Indeed everyone knows that overnight delivery is more expensive than second class post, but customers often need to decide what their priorities really are.

If a business is well known for the quality of its goods and services it is likely to be not only successful but also working to full or near-full capacity.

It will not want to compromise this reputation so the businessman’s little wooden block is a very effective way of demonstrating the compromises that may have to be made to satisfy a customer’s requirements.

In Europe, for example, many factories will not change their production timetable but sell their capacity. Customers know what quality they will get, what price they will pay but must wait for the next available slot on the production line. This is in fact a very efficient way of producing high quality output at a reasonable price since it allows for planned production and avoids the mistakes that can be made by disruption.

Businesses need to consider their business model and decide whether they will sell their capacity, i.e. goods at a fixed price, and to have a system for providing quality goods and services. The alternative is to offer speed but recognised that they will need to be flexible to meet customers’ demands.

The one area we believe should never be compromised is quality since this relates closely to the values of the business.

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)

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