Stop Bleeding Money: The Hidden Cost of ‘Just a Small Discount’ That’s Killing Your Bottom Line
Learn How Cognitive Biases Like Relativity and Anchoring Are Draining Your Profits.. One Tiny Concession at a Time
The Weekly Walkaway highlights negotiation in its ‘good’, ‘bad’ and sometimes ‘downright ugly’ forms. Issue No. 94 (15th November 2024).
Let’s talk about something that's apparently no big deal to you guys but it's rotting your bottom line!
The Law of Relativity! A Cognitive Bias..
I was involved in a deal the other day where the other team just gave away ninety thousand pounds.. As a goodwill measure to get the deal done!
It was insignificant to the value of the deal.. In their mind.. and especially when communicated like this;
‘We require a 0.009% concession to get the deal signed!’
Picture this, you've been negotiating with a client worth a cool one billion pounds sterling.. I know.. OMG!
(in your reality this could be twenty five thousand, one hundred thousand or a million, it doesn't matter…)
…. but your counterpart casually says;
‘Oh, sure, take ninety thousand off the deal to get it over the line, to get it done. What’s ninety thousand off a billion anyway, right?’
That's not a lot to get the deal over the line. Is it?
And here we are, sitting at the negotiation table, watching ninety thousand pounds sterling just flutter away like it’s loose change falling out of someone’s pocket, all because, well, it’s just 0.009%.. ninety thousand right?..
RIGHT?
WRONG!
Ninety thousand is still ninety thousand… and it's your responsibility to remember that, fool!
Consider this instead.
So, you’re at the end of a one hundred thousand deal and someone on your team says;
‘discount it, take off ninety thousand…’
Just. Ninety. Thousand. Pounds. No big deal, right?
Ah.. hmmm. you feel it now, do ya?
Because, hey, ninety thousand in the shadow of a billion must be pocket change to you.
Sure, ninety thousand might sound like pocket change if you’re Elon Musk. But for the rest of us mere mortals, ninety thousand isn’t exactly the kind of money we’d drop on a whim.
That’s a deposit on a house, a new car, or two, or one absolutely unforgettable wedding for your son or daughter or your fiancee or fiance.
In most people’s worlds, ninety thousand isn’t a number you’d just shrug off and carry on. You’d fight for it!
BUT, because it’s not your money and it’s just a ‘small percentage’ of a big deal, it feels like no big deal at all.. Someone else's problem.. I did my job.. I got the deal through.
Newsflash: ninety thousand doesn’t care about percentages. Ninety thousand is ninety thousand…
Here’s the thing, though.. Ninety thousand is a pretty decent chunk of change, whether you’re buying a house, a car, or, you know, trying to avoid running your recruitment business into the ground.
It’s funny (or horrifying) how our brains are wired to think that money shrinks when it’s stacked next to something larger.
Psychologists call this relativity bias the ‘law of relativity’ and it’s linked to Anchoring.. You remember anchoring don’t you..?
Here’s the psychology
People tend to see value in relation to other values. Fact.
Anchoring
Anchoring is a cognitive bias where people rely too heavily on the first piece of information they encounter (the ‘anchor’) when making decisions or judgments, even if the anchor is irrelevant..
For example if you priced your fee at 25% of permanent salary and later discounted it to 20% your clients perceive it as a better deal than if you were to originally pricing at 20%.
This is all linked to;
People are lazy! People avoid effort.. So when you move from your anchor they don't need to;
Framing: Your anchor sets a frame of reference that pre-conditions, guides, their lazy thinking;
Emotional influence: People's laziness allows them to perceive high anchor equals higher value or quality.
Relativity
Relativity on the other hand is when someone compares options relative to one another rather than evaluating them in isolation.. This shapes your perception, making one option seem more appealing in contrast to another. The lazy human brain perceives differences between items more sharply when they are placed side by side.
People don’t think about that ninety thousand in isolated terms.. they’re just stacking it up against a much larger number and saying, ‘Mehh, it’s peanuts.’
I mean, imagine going to the bank and trying to get a ninety thousand loan!
The law of relativity rears its ugly head here, there and everywhere and in this economy, when budgets are tight and ‘some’ business is hard to come by this ‘law’ will be used against you time and time again! And you wonder why your EBITDA is dropping!
Why ‘It’s Just… ’ is Death by a Thousand Concessions
It’s funny, too, because if you ask these same people about giving away thousands of their own money, you’d get a very different answer.
But hey, it’s the company’s money, right?
This relativity bias, this sneaky little cognitive glitch, makes us downplay real money.
To put it in perspective, if every team member decided ninety thousand was ‘nothing’ on a billion pound deal, think about where that lands you.
Every junior in the company starts tossing around nine thousand discounts like confetti, and seniors are giving away tens of thousands as if they are Donald Trump and Elon Musk at a swing state rally.
It adds up. By the end of the year, the company is essentially left bleeding.
Imagine what you could do with that ninety thousand.
a sleek marketing campaign;
a few new hires;
or maybe just a lot of free coffee or a top draw Christmas office party.
The point is, all those ‘just ninety thousand’ moments add up to lost opportunities and actual pounds that could be working for you, not just keeping the client’s budget happy as you get to play Mr nice guy or Miss softy!
Imagine if everyone in a company does this on every deal, that’s money bleeding out!
And you wonder why you’re all talking about losing millions over the course of the year.
Multiply that over every deal, every year, and its financial death by a thousand paper cuts.
Oh, and another thing! Relativity Concessions Create Historical Precedent
When negotiators start handing out discounts like candy, it signals that it’s easy to take advantage of the company, which in turn sets a precedent that’s hard to reverse.
This relativity bias tricks people into thinking, ‘oh, it’s just a drop in the ocean’, but the thing is, once you let a concession like that slide, it sets a precedent.
Next time, the client’s going to come back and assume that the ninety thousand giveaway is part of every deal.
Why?
Because you taught them that ninety thousand is a ‘drop in the ocean for you’..... On every deal.. However large or small!
You’ve let relativity run your show and now you are your company’s most expensive charity!
At the end of the day, it’s our job to remind clients and team members that money is money.
Every pound given away to ‘just close the deal’ is a pound that could be working toward the company’s long term survival or growth goals.
How about looking at it this way.. That could have been your raise next year…!
When you look at it that way, ‘just ninety thousand’ sounds like a pretty expensive way to buy goodwill.
It’s on you as negotiators to bring that healthy bit of perspective back into focus.
Not all of you will be negotiating billion pound deals but you will all be affected by anchoring and relativity.
If it’s one thousand off a twenty thousand deal or ten thousand off a one hundred thousand deal it's not small change, it all adds up.
And once you start throwing away however many thousands on every deal, you’re setting a dangerous precedent.
Just remember, if you wouldn’t leave a cool one thousand pounds of your own money on a table in your local cafe and walk out, why would you do it at the negotiation table with someone else's money.
In the end, let’s leave relativity to the physicists.
Your job is to treat every pound like it counts, because it does.
Try these:
Show ME the Money (They’re Losing) - smack people in the face with a simple graph showing what all these ‘tiny’ concessions add up to over time;
Ask what would you buy with that concession - New software, marketing or, I don’t know, a better coffee machine. Give them a little perspective;
Set Some Firm Guardrails - Set up pricing committees and set negotiation limits with predefined thresholds to keep your cash locked up nice and tight. This gives your negotiators an easy out, you remember, dis empowerment - ‘Sorry, can’t go lower, it’s company policy’.
Until next week..