The last question that you have to ask yourself is whether or not you have proposed a fair deal to your client. Does your price represent a fair trade for the value that they believe they will receive? Have you done a good job mitigating their risks? Have you addressed the first four elements? If not, they will each come back to haunt you here. Try not to negotiate with people that you have no relationship with. You don’t want to be looking for a problem to solve while negotiating price. You want there to be a clear picture of the value side of the equation. You do not want to have to resort to discounting in order to mitigate your client’s risks and fears.
What’s fair? That depends on the value being received. It is a common practice on Wall Street to charge anywhere between 4% and 7% to help a company raise additional equity to fund their operations. When you deliver solutions to business issues that create value for an organization, you deliver a very similar type of value to your client. If you use this as a ballpark figure, then it would not be unreasonable to expect a client to spend $7 million on a solution from which they expect to realize $100 million in value.
That does not mean that you will get $7 million for your solution. This amount includes any of their internal resources that must be allocated, all additional services and maintenance charges, any financing charges, as well as any infrastructure that must also be added. Your specific solution will usually capture between 15-25% of the total. These are just guidelines to let us know what you are up against.
You also want to be sure that you isolate any discounting from any discussions regarding financing or payment terms. You don’t want to give back all of your negotiated margin by having to eat up interest charges or having payment terms that are tied to milestones that prohibit you from recognizing the revenue from your deal.
It is important to understand the needs of your client with regards to all of these areas before you sit down to negotiate. You must prepare for a negotiation the same way that you prepare for an introductory meeting. You have to think about their needs, their fear, their risks and make sure that you have a way to address each of them.
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-Bruce A. Brien, CEO, Stratascope Inc.
