Negotiate with People who can Negotiate

Today’s tip on negotiating is one we all learned at a very young age.  Only negotiate with someone who has the authority to give you what you want. We learned this when we were children asking our parents for something.

In the real world this negotiating technique shows up in a slightly different manner. You are sitting at the car dealership with the car salesman and you are going back and forth about which options are in or out and what the final price will be and how much you will get for your trade in. You finally come to an agreement and the salesman says “Great! Let me just run this by my boss real quick and we’ll get you out the door”. He comes back a good time later with a glum look on his face and breaks the news to you that the price he gave you was too good and his boss won’t allow it. Then the salesman will say something like this “but if you can just raise your offer a little bit I’m sure I can talk the boss into this deal.”

This is where if you don’t remain alert you are going to get burned. This dealership is trying to manipulate you.

You aren’t negotiating with the person who can give you what you want.

How to deal with this problem

  1. Validate

Before you start any negotiation always learn about the other party. This goes back to being a good communicator. A basic question you should always ask is, “do you have the authority to make an agreement with me or do you need further approval.” You probably don’t want to negotiate with someone who can’t make an agreement. Try to deal directly with the person who can make the deal happen.

  1. Fight Fire with Fire

Try using the “I need to ask my boss or the one with authority” in reverse sometime, it is rather funny to see. Negotiate your heart out on the car of your dreams and when the salesman asks you to sign on the dotted line tell him you first have to run it by your significant other, who isn’t there at the moment. Later that month you can call the salesman back and say your significant other was not happy with the price and won’t be letting you get the car at that price, but if you could just drop it down a few hundred dollars you think you could talk them into it.

In my professional career when negotiating with contractors for the mine it is standard practice to validate that the other party has the authority to make a final decision. I wanted to share with you the best response I have heard to the validate question, which I have brazenly taken as my own standard response. When asked if you are able to authorize an agreement always say that you are authorized up to a certain amount. This incentivizes the other party to give concessions in hopes of having you not escalate the issue and also gives you the option to escalate if needed. The next contractor I hear use this exact line I’m going to buy a box of doughnuts for because I figure hey if I can’t win the negotiation I might as well try to bribe them.

Do you have an experience negotiating with someone who wasn’t able to negotiation? How did you feel?

I wanted to end with a quick reminder that negotiating should focus on creating a win for everyone. Work to make the pie bigger for everyone. You will always make more money making a bigger pie than you will by getting a bigger piece of the small pie. With that said I still find it helpful to have the tools necessary to acquire a bigger piece of the pie even when the pie isn’t going to get any bigger.

Negotiating Strategy and Tactics – Anchoring

Yesterday I started talking about negotiation as a skill to develop to lead a more efficient life.

Have you ever been in a negotiation where you made an offer and the other party immediately accepted your offer and left you feeling like you offer way too much?

Today I’m going to talk about the strategies and tactics I use when negotiating to help avoid that feeling like you could have done better. Be aware of the strategies and tactics available for you to use in a negotiation makes seeing through them easier.

The first strategy is anchoring. Anchoring is the idea that people are attached to the first number they hear or see. Retailers everywhere use anchoring to make you think you are getting a better deal than you really are. Look at this watch below. Do you really think anyone ever paid $695 dollars for it. No, but it makes you think at $59.99 it is a pretty good deal.

Watch anchor

Tactics for using anchoring

When you should give out the first number

If you have a solid understanding of the value of an item or service and there is a well-defined market you should eagerly try to provide the first number in the negotiation. Of course, your number should be slightly higher than you expect to get, but should be a reasonable number. You are trying to anchor the other party to this value in their head.

When you shouldn’t give out the first number

If you are negotiating over something that doesn’t have a well-defined value or market, you should avoid making the first offer because you may inadvertently give away a large portion of the negotiating range without realizing it. If you have done this, a poor negotiator will immediately accept your offer leaving you with that feeling like you could have done better. An experience negotiator will immediately recalibrate their expectations and bargain with you further, you’ll never know you gave away a bunch of value. Next time you are negotiating and hear someone accept your offer a little too quick take that as opportunity to learn that you likely left money on the table during that negotiation.

How you should react after hearing an offer

You’ve managed to avoid giving the first number and now you’ve just heard what the other party’s offer will be. It is a better offer than you could have imaged and you want to jump up and down and accept it immediately. DON’T! Everyone will feel better about the negotiation if you act interested but not impressed. Use this time as an opportunity to learn more about the other party and how they arrived at that number. Once you’ve learned more about the offer if you find it is truly remarkable go ahead and accept it otherwise feel free to politely counter it with and offer of your own. If you do chose to the counter the offer you should expect that the final number will end up being split between their initial offer and your initial counter offer.

What are your experiences with making the first offer or not making the first offer? Let me hear your story below.

Be Efficient with your Skills – Learn to Negotiate

Negotiation is one of those things that crosses many different realms of efficiency. It is definitely a skill that you can acquire through practice. When it is done well you will see massive gains in both capital and time. Negotiating only takes a few minutes, but can make large percentages of cost go away.

Being a skilled negotiator requires two primary skills:

  1. Good Communication
  2. High Level of Awareness

Good communication is critical because it opens doors that weren’t always obvious. Good negotiators look for ways to create a win-win situation. They do this by understanding their counterpart and learning where they are deriving the most value from the transaction. There are often negotiations where two parties have interests that are not in direct in conflict with one another.

You might be asking how can that be? When negotiating you either pay more money or less right? Not quite. The biggest mistake in negotiating I see is that people assume they are fighting over a fixed piece amount. Fix NegotInstead you should always look for ways that you can make the total amount you are fighting over larger. This comes in many forms. Great communicators are able to find those points where everyone can win. Instead of focusing on the size of the piece of a hypothetical pie you are going to get try to focus on how you can add additional pie to the deal. It is always better to split two pies than one. This is how win-win negotiating should look.

Winwin Negot

Let me give you a fictitious example about how understanding value can create a win for everyone. Let’s say I have a pair of old couches that are sitting in my garage and my wife has said if they aren’t gone by the end of July she is going to hire someone to take them away. I really don’t want to pay anyone to come take the couches away because I think I could sell them for at least $400. Yea they are old, but they are very well built, real leather, and from a non-smoking home. Definitely not trash. The master negotiator comes over to look at the couches. He determines they are not worth $400 dollars to him, but he would be willing to pay up to $200 dollars. We continue to talk and he asks all kinds of questions and eventually learns of my predicament and how the couches are going to wind up trashed unless I sell them. This is when the master negotiator comes up with a win-win situation.  If not sold, he would be to offer to buy the couches at a reduced rate at the end of the month, just before the moving guys show up to haul the couches to the dump. This gives me a chance to sell them at the value I think they are worth, but also prevents me from taking a loss on the couches should I not be able to find a buyer by the end of the month.

In my next post I’m going to talk about ways to raise your awareness when negotiating, including many of the ways you can get tripped up in the negotiation process.

I also happen to have two couches for sale. I may or may not have to sell them by the end of July. If you know someone in the market maybe we can work out a win-win-win deal where you paid a commission.

Why 2% is Such a Big Number

The average American spends 94.6% of their income every year.  This means the average American saves only 5.4% of their income!  I’m going to show you how much impact the tactics of using a rewards credit card (that I showed you last post) can change your savings and life.

I’m going to present two cases to you and demonstrate the long term effects.  Case One: You use cash and debit cards for your spending and save the average American amount of your income (5.4%). Case two:  You use your 2% rewards credit card for spending, with the rewards earned invested forever.  You save the average American amount of your income (5.4%) plus your rewards from your 2% cash back credit card.

First things first, I need to talk about my assumptions that I’m making for this exercise.  My engineering professors would be so pleased with me right now.

ASSUMPTIONS

  1. Over the long term, your investments are going to make 7% a year. Some years better some year worse. This is considered your compounding rate.
  2. Inflation is going to chew up 3%, leaving you with a real gain of 4%. This 4% is considered your safe withdrawal rate.
  3. You’ve won the game and are financially independent (you do not have to rely on any particular job for income) when your investments are equal to your expenses divided by your safe withdrawal rate. This means your investments income is greater than your expenses. You should know your expenses because you’ve been tracking them on your balance sheet, right?
  4. You have a constant savings rate. In reality nobody gets paid the same amount and saves the sames amount throughout their life, but seriously the math turns into calculus if I don’t make this assumption.

These are rough assumptions and we could debate them all day, but they work for getting my point across.

So to put this into terms everyone can relate to I’m going to measure everything in years that it takes you to reach financial independence. The point where your investment makes as much money as it costs you to operate your life style at your current efficiency levels.

The math involves solving for the future value of a normal annuity (a fixed amount of money) where the future value is set to the amount of money you need to be financially independent.

Here is the formula for the future value of a normal annuity

Normal Annuity

Now here is what that formula looks like when we substitute in our variables.

Sub in our variables

We can also substitute our variable in for the amount of money needed to be financially independent by taking 1 minus our savings rate, which is equal to your expenses rate. You are either spending money or saving money. The expenses rate divided by your safe withdrawal rate gives us the total assets needed to be financially independent. Here is what that formula looks like.

sub in assets

 

And now by the power vested in me by my TI-89 we can solve for Years. Here is what the final formula looks like.

Sub final

Here are the results for the cases using the above formula.

CASE 1 (Cash or Debit Card)

Case 1

 

CASE 2 (Rewards Credit Card)

Case 2

 

As you can see, FOUR AND A HALF YEARS of a person’s life are saved just by upping their savings rates by a small fraction!

The readers of this blog; however, are decidedly better than the average American, you wouldn’t be reading a blog that talks finance or efficiency if you weren’t. So I’ve also included a table were you can look up how long until you are financially independent.

FI Tables

I made a spreadsheet to do all of these calculations.  I have made it available as a download from my Dropbox.  For those of you who want to tinker with my assumptions please go for it. Spreadsheet

If you have any questions about how I came to these conclusions please let me know in the comments.

 

The One Credit Card Everyone Should Have

Previously I talked about how important it is to use rewards credit cards. Today I wanted to share with you the best credit card I have ever found and explain why it is the card everyone should be carrying.

Unlike basically every website in the world that discusses/reviews/recommends credit cards I am not getting anything in return for this recommendation. In fact, when I was doing research for this post I found that most credit card sites don’t even mention this credit card. My only motivation for creating this post is purely to help you operate your lifestyle in a more efficient way. I have no bias what so ever when I give you this recommendation.

So what is this secret miracle cure all credit card?

The Fidelity Visa Signature Card.

IMG_1725
My Fidelity Visa Signature Card

This card is special because it offers 2% cash back on EVERYTHING. If you are using cash or debt cards to make your purchases this is a life changing amount! You might think, oh who cares 2% is nothing, but the difference is huge. It is going to take me an entire post next week to fully explain the implications.

This card does require you to sign up for a Fidelity brokerage account to receive your cash back. This is a slight inconvenience, but only takes a one-time effort to setup and from then on you can deposit your cash back into your brokerage account and have your brokerage account transfer the cash into your normal checking account.

Another point worth mentioning is that this card does not have any annual fee. You will never have to worry about using it enough to justify its cost like other rewards cards.  The interest rate is 14.24% on purchases, but it shouldn’t matter because you will not be paying interest on the card, right?

There are other cards out there that offer higher percentages of cash back rewards (and I recommend a few of them), but none are as simple as this card. Everyone should be carrying this card as a baseline. Without having to think you can be assured you are getting 2% cash back everywhere Visa is accepted.

Let me know in the comments what tactics you typically use when it comes to credit cards.