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)

Read more ...

Problems with invitation to tender and being asked to provide your ‘best quotes’

Problems with invitation to tender and being asked to provide your ‘best quotes’: by Jason Li 2012 ©

Many businesses love to have prospects contact them with an enquiry either for an invitation to tender or being asked to provide your ‘best quotes’.

The great thing about this is that your lead generation system or referral system is doing a very good job...

Tell me which business does not want to have incoming leads from people ready to buy?

One of the main reasons sales people like to be asked to provide your ‘best quote’ is that it’s a lot less effort than cold calling, less painful than getting rejection; easier than having to start at a gatekeeper and work your way up the company hierarchy; or even better, save prospecting time as you have the interest of one of the decision makers contact you so you think the prospect is really interested.

So at this point you may be thinking... in order to succeed... all I need to do is know ‘how to tender’.

However, there are many reasons why incoming leads do not convert into orders.

Latent needs

These are needs, problems, pains that the prospect has in the business which they might not know exists.

Or in a lot of cases, the problem is already there, the prospect knows the problem is there, but the prospect has been able for a long time to cope without doing anything about it and put off solving the problem.

Think of a pain like the internet has constant down time or the courier takes ages to book, but just not enough of a pain to do anything in the past...but you do find it bugs you.

In many instances, the prospect is alerted by a business that the latent need is important to sort out, and then it becomes a business problem. But it’s not even at this stage you will get asked by an incoming lead.

Needs analysis and rapport

Your competitor who has contacted the prospect and brought forward the business problem will have been given a lot of consultative time to analyse the need. If they have done this correctly, then your industry competitor will have a very good understanding of the need and built up rapport with the prospect.

At this stage, your competitor will know the decision makers, have a feel about how the prospects’ business operates, and the prospects will start to trust your competitor for their expert advice: they did show the prospect there is a business need after all!

Engineer the vision

Even when your prospect has agreed to a consultation, the prospect is still not contacting you yet. Your competitor will be working on how the prospect wants the results to look like so that they are investing their time and money wisely.

Your competitor with this rapport can help the prospect engineer the vision, to help the prospect see your competitors’ product as the right product to solve their problems and how it works seamlessly in the business successfully

Let’s view the whole of the market

Now that the prospect is pretty happy to go ahead, most professional buyers will check with the whole of the market, just to make sure that what they are about to buy is not out of sync with the market – i.e. they’re not getting ripped off.

So at this stage you FINALLY get asked to tender or ‘asked to quote’, and you get a decision maker from a known company with a decent sized prospective order, and you are feeling really excited.

Only, in reality, your chances are pretty low. Not non-existent, but low.

So what do you do to put the percentages back in your favour?

Big brand

If you are a known brand or a leading player, then use your brand clout and reputation to give yourself a chance. Your aim is to get a fair crack at this, not to just reel off a list of numbers like an order taker; so you want to get commitment to get the decision maker/s to give you time to discuss and consult the prospect properly.

If you are not a big brand or don’t have much reputation in the market, don’t really expect someone to contact you.

You could say:

“As a reputable company we always provide a professional consultation to ensure you get an offer that suits your requirements. What has worked well is for us to provide a consultation regarding your specific needs, just as you might do to provide an exceptional offer to your customers”

Your aim is to create your own way of ensuring that prospects give you a chance to understand their needs so that your offer is a better match than your competitors, and you cannot do this unless you get to know: ‘What is the problem?’

Who is good at blind tenders and converting the ‘best quote’ requests?

Usually very experienced sales people with tender writing skills who have years of experience at both qualifying prospects, gaining commitment, understand the industry and know the competitors who are also likely to pitch to the same prospect. These people have a higher percentage chance of conversation by a blind quote due to understanding from experience what prospects want and what wins the deal.

However, the sales people that have the courage to work on getting decision makers to engage in a proper consultation will usually have a higher conversation rate over the long run... simply because they can tailor an offer that the prospect feels they can see working for them in the discussions.

Read more ...