Tuesday, January 18, 2011

When Negotiating Think in Real Money Terms but Talk Funny Money

There are all kinds of ways of describing the price of something.

If you went to the Boeing Aircraft Company and asked them what it costs to fly a 747 coast to coast, they wouldn't tell you $52,000. They would tell you 11 cents per passenger mile.

Salespeople call that breaking it down to the ridiculous.

Haven't we all had a real estate salesperson say to us, "Do you realize you're talking 35 cents a day here? You're not going to let 35 cents a day stand between you and your dream home, are you?" It probably didn't occur to you that 35 cents a day over the 30-year life of a real estate mortgage is more than $7,000. Power Negotiators think in real money terms.

When that supplier tells you about a 5-cent increase on an item, it may not seem important enough to spend much time on until you start thinking of how many of those items you buy during a year. Then you find that there's enough money sitting on the table to make it well worth your while to do some Power Negotiating.

I once dated a woman who had very expensive taste. One day she took me to a linen store because she wanted us to buy a new set of sheets. They were beautiful sheets, but when I found out that they were $1,400, I was astonished and told the sales clerk that it was the kind of opulence that caused the peasants to storm the palace gates.

She calmly looked at me and said, "I don't think you understand. A fine set of sheets like this will last you at least five years, so you're really talking about only $280 a year."

Then she whipped out a pocket calculator and frantically started punching in numbers. "That's only $5.38 a week. That's not much for what is probably the finest set of sheets in the world."

I said, "That's ridiculous."

Without cracking a smile, she said, "I'm not through. With a fine set of sheets like this, you obviously would never sleep alone, so we're really talking only 38 cents per day, per person." Now that's really breaking it down to the ridiculous.

Here are some other examples of funny money:
  • Interest rates expressed as a percentage rather than as a dollar amount
  • The amount of the monthly payments being emphasized rather than the true cost of the item
  • Cost per brick, tile, or square foot rather than the total cost of materials
  • An hourly per person pay increase rather than an annual company cost increase
  • Insurance premiums expressed as a monthly amount rather than as an annual cost
  • The price of land expressed as a monthly payment

Businesses know that if you don’t have to pull real money out of your purse or pocket, you're inclined to spend more. It's why casinos the world over have you convert your real money to gaming chips. It's why restaurants are happy to let you use a credit card
although they have to pay a percentage to the credit card company.

When I worked for a department store chain, we were constantly pushing our clerks to sign up customers for one of our credit cards because we knew that credit card customers would spend more and also buy better quality merchandise than a cash customer. Our motivation wasn't entirely financial in pushing credit cards. We also knew that because credit card customers would buy better quality merchandise, it would satisfy them more, and they would be more pleased with their purchases.

So when you're negotiating, break the investment down to the ridiculous because it does sound like less money, but learn to think in real money terms. Don't let people use the Funny Money gambit on you.

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