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Why Do Smart People Make Such Stupid Mistakes?

According to the chief economist at PricewaterhouseCoopers, “the UK is teetering on the edge of a double dip recession." If that is the case the ability to negotiate more profitably is even more crucial for agencies and B2B companies as profitability will decline if left unchecked.

 

The smart companies will grow from strength to strength improving the value they deliver to their clients and the profitability they achieve for their business. The stupid companies will continue to wonder why their profitability is declining.

 

Why do smart people make such stupid mistakes?

 

It’s not dumb to make a mistake. If you never make mistakes you are probably not taking enough risks and aren’t pushing yourself enough. However, what is really dumb is to repeat the same mistake over and over again. It’s dumb not to learn from our mistakes. It’s dumb not to observe, reflect, think and change your behavior, when you can see a particular action or strategy isn’t working well. So why do we find it so hard to learn from our ‘negotiation’ mistakes?

I’ve worked with many really smart people within agencies and in sales teams of many leading companies. However, I see the same mistakes being made in most of those companies, often over and over again. These smart people are generally making quite good money from their clients; however, they could be making so much more.

Here are a few of the typical mistakes smart people make.

 

Mistake 1: Price crumbling

Clients and customers will challenge your price; it’s part of their job to do so. However, price crumbling too quickly will cost you dearly. The more you drop your price and the quicker you drop it, the more the client will expect you to negotiate even further. Clients will see your willingness not as generosity, but that your original price was over-inflated or had so much fat built in that you could easily afford to lose some of it.

Does this mean you should never drop your price? Of course not, there are specific strategies to apply if you do need to. Even dropping by as little as 1% or 2% can have a major impact on your overall bottom line profitability.

 

Imagine you are looking to buy a new house or flat. You go to see one priced at £300,000 which you like and decide to put in an offer. You decide to put in an aggressive offer of £250,000 expecting it to be refused. Instead the vendor enthusiastically says ‘OK.’ Instead of feeling delighted, you are now thinking you should have gone even lower and that maybe something is wrong with the property as the vendor seems so desperate to sell. The relationship and trust between buyer and seller is not looking good.

Yet how often do we do something similar for clients, agreeing to provide essentially the same proposal but matching their lower budget rather than our original proposed higher price?

 

During the recession, agencies told me their clients had threatened them that they had to reduce their fees by 20%, 30%, 40% and even 50%. If you are over-dependent on that client, you are left with little alternative but to comply.

Most people price crumble – often in the belief that they will lose the deal unless they drop their price. Whether it is from desperation or in order to show the client how keen we are to work with them, we often drop our price. The paradox is that the more we drop our price, the more the client wants us to drop our price still further. So will we lose a deal if we don’t drop our price? Maybe, maybe not. Dropping our price too easily creates mistrust and can seriously damage the relationship rather than strengthen it. If you don’t believe in the value you provide, then why should anyone else?

General Motors instructed all their agencies in the US in 2008 that their fees would be reduced by 20% due to poor sales in the automotive industry. How would you respond if your client demanded that of your agency? (A 20% drop in the revenue from this client will impact your profitability significantly more than 20%.) For many companies which make less than 20% profit this may mean losing money.

When we give things away for free there is a danger that clients see the value as just that – free or zero.

When we come up against a tough negotiator who may use aggression, a tough negotiation stance and even threatening behaviour, it is so easy just to give in to their demands and drop our price.  Subsequently, most of us regret that decision. 

Decide in haste, repent at leisure.

 

Next time: Chris discusses two agency mistakes: Lack of preparation and Thinking great ‘client service’ is always saying ‘yes’ 

 

Chris has published his latest book, ‘Why Do Smart People Make Such Stupid Mistakes?’ using his years of experience as a guide to those who are looking for new ways to increase revenue and profits through our tough economic times.

‘Why do smart people make such stupid mistakes? ‘ is designed to help agencies and sales people make more informed choices, by choosing more appropriate responses and then working more efficiently. He shares his strategies, techniques and tips on how you can be more profitable, whilst delivering huge quantities of value to your client and building stronger client-agency relationships. Value which takes your clients’ businesses closer to achieving their critical business goals and, in so doing, will take you closer to achieving your business goals.