Thursday, 26 July 2012

How buyers use ‘Prisoner’s dilemma' game theory to negotiate

How buyers use ‘Prisoner’s dilemma' game theory to negotiate: by Jason Li 2012 ©

In the middle of the sales cycle professional buyers want to gain control and put the sales person under pressure; enough pressure so that the sales person will concede and give away profit or freebies: and there is no better way than for buyers to use the ‘Prisoner’s dilemma’ game theory to negotiate in their favour.

Game theory

Economics is a brilliant way for academics to analyse the world in a logical way; and game theory is one of these economic theories that helps you understand the world.

Game theory is a way for economists to draw up situations and see what the outcomes are. Economists can replay a situation as a game and get an expected outcome. Let’s say for example if there is a game where three people try to get a slice of cake, and the cake is sliced into 3 pieces, then all three will equally have a slice.

Zero sum game

However, economists know that not all players in a game play fair: you might get one player that wants to eat all the slices of cake, or get their hands on at least two slices – just because they always want more. If one player eats more than one cake, then one other player loses out. If the player eats three pieces, then two other players lose out.

Usually when there is a limited number of cake and you get one player in the game who is greedy for more than a fair even split, at least one other player will get zero consumption – or what economists call utility (utility is a way to measure use or satisfaction).

So one player gets extra utility by having more than one slice of cake: but at the expense of another player who gets nothing.

If we said sellers and buyers were taking part in a game, then we know that sellers try to win the game by selling more than buyers are looking to buy and by making as much profit as possible. As long as sellers keep selling to buyers, the outcome will be more sales revenue for sellers. Most professional solution sales people try to provide fair value and a fair offer. But some sales people will try to be greedy, so the value and offer is nowhere worth what the buyer should pay.

So how do buyers use game theory to try to get a better deal?

Prisoner’s dilemma

This is an economist game based on betrayal and making the prisoner concede. Here is how it works:

Just think of the cop movies where there are two criminals under arrest. When interviewed, both are interviewed in different rooms. The police offer the criminals the chance for one to walk away free if they are the first prisoner to tell all, before the other prisoner gives in.

Now both criminals before entering the interview process swore to each other that they will give nothing away in terms of names or information. They also agreed before being arrested that they would both be ready to go to jail for the full term.

The problem in this scenario is that each criminal cannot listen to the other person’s interview and only rely on feedback from the police. Oh, and don’t forget, the first to concede the information that the police wants can walk away free. That’s really important in this game when you are sat in the interview room; because you don’t know in the real situation how close the other prisoner is to breaking.

In this game, how much can you believe what the police are telling you is absolutely correct, or that the information you get from them is exactly how you interpret it? And if the other prisoner concedes, would you feel stupid for believing the other prisoner that they said they would not give any information away?

Buyers control the process

In the business world professional buyers take the sellers offer and will say:  “Thank you, we will think about it,” or will have a meeting next month... and so on. What they are doing is pumping you for information, then stalling you, then going to the other seller to see what they offer.

While the buyer is doing this, the power is on their side. They can now scaremonger each seller as they gain more information while interviewing each seller. From time-to-time, a seller will reveal new information which can put pressure on the other sellers.

The other sellers don’t get to sit in on the other interviews with other sellers, so have to rely on the buyer for feedback. Sometimes, a seller will also make a big concession such as a special introductory price or favourable terms which the buyer then informs other sellers.

So why is this happening? There are two economic games running at the same time is the answer.

You have sellers playing a zero sum game against each other seller. In this game there is one buyer and at least two sellers. There could be ten or more sellers in a government tender or for business with a big company for a big long term contract. And in this game: the one seller who is the winner takes all.

The second prisoner’s dilema game is where the buyer wants to gain more from the deal then the seller who wins the deal with them. In this game the buyer gets educated on what is the money they have to pay for the product or service they want to procure. The buyer is willing to play each seller off against-each-other in order to maximise gain by getting the lowest quote, rather than say we think x amount is a fair price and we will pay it to the right company. Simply put, if a product is worth £10, the buyer will play to beat this fair value by paying a lot less in order to maximise their gain.

In the prisoner’s dilemma the buyer is separately interviewing each seller to help them win the game by finding a winning low cost seller offer. This is the tool to ensure each seller concedes to lower margin and better terms. The seller that wins the deal may end up with close to no profit on the deal with barely serviceable terms. If that is the case, then the buyer is the winner in this game.

The next time you have a buyer that won’t make that decision today no matter what you offer, don’t think: “I can’t believe it, what more can I offer them! They must be STUPID!” - you now know that is absolutely not the case. Remember, in a game of poker, if you don’t know who the sucker is, it’s usually you!

Buyer’s tools

So beware, buyers are very well trained and very good at handling sellers. When you hear some words like these on your call backs or emails then you are dealing with a well trained buyer:

·         Positive sounds – we are interested, it’s one on the agenda, we just haven’t got round to it (and not give any reasons why)

·         We’re still looking at the proposal (and then they hang up the phone)

·         Another seller says they can do x for us which was interesting

·         Yours is pretty expensive we found

·         We’ve been loyal to our supplier for years, or it’s not easy to change things here.

·         Send me your best quote (and not willing to have a consultation or invest any time with you)

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