Tue 25 Nov 2008
Here's a quick tip on negotiating price that you will find invaluable when someone asks you for a breakdown of your costs:
- Make sure that the total cost, when you add up each item, is MORE than what you are bidding.
Why? The sum of the parts is more than the whole.
Have you ever taken your car in to replace an automatic window? It can cost over $400 and it is just a small part of your car. If you bought a car part by part, a $20,000 Toyota could cost you $50,000. But by buying it as a whole, your cost is significantly less.
When a prospect asks for a price breakdown, they want to see how you came up with your final number so they can negotiate your price down. They'll say things like "Well, we don't really need this piece so how about trimming that out of your proposal" or "I didn't realize this component costs so much... let's take that out." If you are bidding time and materials, they might say "Whoa! It's going to take HOW long for this subtask?!? You either have to do it faster or reduce your rate."
If you add up each line item price and it equals the cost of your bid, it's very easy for them to tell you what to trim off. That could include profit that you tried to bury in some of your high margin line items.
So, if you make each line item a little bit more expensive so that your total works out to be 20% higher (or more) than the actual fixed price that you are bidding, you can include a line item labeled "Discount" to subtract the difference from the sum of the parts and your actual bid.
This gives you leverage to reduce your discount if they cut out a line item. You can then say "Well, we can take that out, but that will reduce the discount we are able to give you since that is based on the project as a whole based on our initial proposal."
Have a negotiation tip? Comments are welcome.