Why Should Companies Negotiate Prices With Customers?

Companies that sell directly to consumers, or B2Cs, stand to benefit more from haggling than they would lose.

There is good reason for retailers and shoppers alike to avoid haggling over expensive items: Fixed-price deals are quicker and simpler for a number of reasons. Many consumers waste their time doing price comparisons and haggling just to be duped by lose-lose strategies like the bait-and-switch. New studies suggest, however, that sellers might benefit more from a flexible pricing approach that includes negotiation than from one that uses only a set price. Consumers who are aware of how and when to negotiate prices can better steer clear of fraudulent businesses.

Why Should Companies Negotiate Prices With Customers?
Companies that sell directly to consumers, or B2Cs, stand to benefit more from haggling than they would lose.

Car dealerships, real estate agents, and vendors of leather coats are just some examples of sellers who are willing to negotiate price in order to gain insight into the buyer’s interests and willingness to pay (WTP), allowing them to better tailor their products and services and ultimately increase sales and profits. Just how much, precisely? Preyas Desai and Pranav Jindal conducted a research using data from 98 million eBay ads, and they found that, on average, buyers were 8.5% more likely to make a purchase when the price was up to negotiation. Furthermore, a rise in consumers’ WTP accounts for between 21% and 39% of the profit achieved through negotiating.

If a business wants to increase sales and customer satisfaction, it should be willing to negotiate with buyers to find out what they care about and then try to provide extra value in the form of customization, complementary products or services, price reductions for bulk purchases, loyalty points, and so on.

One further possible gain from bargaining is the opportunity to strengthen relationships with clients, which may transform one-time buyers into repeat customers. Relationships improve not because of any extra value or perks provided, but because customers come to trust the company whose salespeople negotiate with them by first listening to and learning what they consider valuable, then making an effort to create offerings that do, in fact, create value, and finally, by assisting them in obtaining the best or fairest deal possible. In sum, going into price negotiations with a potential client can provide value and profits beyond those of fixed-price deals.

Price high, but give a discount

There is a potential for unethical use of study findings demonstrating that sellers might gain more than buyers via discussions. Another work by Jindal illustrates that sellers can benefit from using win-lose methods against buyers, such as anchoring on a high price and then proactively giving a reduction (termed an initial perceived discount) (IPD). With a high anchor and an IPD, the buyer is more likely to not bargain at all or to negotiate less actively than they would with a set price and no IPD. Specifically, the study indicated that a $1 rise in IPD resulted in a 5.7-cent decrease in the negotiated price.

Why Should Companies Negotiate Prices With Customers?
Price high, but give a discount

The vendor can implement this hybrid technique by advertising a high but negotiable price with a proactive but limited-time reduction. This combination entices customers with high negotiation costs (e.g., little time or patience, fear of or hatred of discussions) to make an initial purchase at the reduced price and a subsequent purchase at the full, original price after the discount has expired. It also attracts bargain-hunting shoppers with little bargaining power.

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It can be used selectively, as is common practice in retail, on several product categories. Conversely, in order to avoid being taken by surprise by the pricing tactic, purchasers can either insist on negotiating such hybrid rates after doing their homework or just disregard the first reduction. Potentially manipulative pricing strategies can be transformed into win-win negotiations by introducing additional value levers (such as bundles, add-ons, etc.) from the buyer’s perspective.

Invite-and-drag may not benefit anyone

The invite-and-drag is another common win-lose sales strategy. Desai and Jindal discovered that, in contrast to a fixed-price strategy, buyers were more inclined to buy from sellers who dragged their feet once a negotiation had begun when using a hybrid pricing strategy. The buyer’s sunk cost bias and increased negotiation expenses are increased by the protracted length of the sale. But if you use this strategy before the discussion even begins, you’ll likely fail since clients will balk at the prospect of paying more in the bargaining process.

Read more: How to make Consumers Happy after your algorithm Rejected them

But, even if the invite-and-drag vendor succeeds in making a deal, the client is likely to regret their purchase, be angry at the seller, and want to avoid them in the future. Furthermore, sellers may find it too expensive to negotiate if they are forced to do things like recruit and train additional people or face price pressure from competitors.

When not to negotiate

A seller with a healthy margin and low negotiation costs should work to reduce the negotiation costs of buyers by being as transparent as possible about things like prices, how long they are valid for, if they are negotiable, what products fall within a certain price range, what sizes are still available, and so on. There is no requirement for a set selling price since the seller can keep haggling and making adjustments until the buyer is comfortable with the vendor’s honesty and is ready to make a purchase.

In a low-margin, high-competition market, sellers have no negotiating power and should not try to lower their prices. A consumer has the option of just leaving. Setting and maintaining the price at cost may be the most effective technique in the extreme scenario of a zero-profit margin, such as when the merchant wishes to get rid of inventory. Nonetheless, there are numerous situations in which it benefits both parties for there to be room for negotiation, especially if it is a win-win.

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