How Expensive is a Public Embarrassment?

Suppose you are a toy manufacturer located in China.  The news is full of stories of contaminated toys.  Plenty of unfounded rumors are tagging along.  One of your key customers is re-negotiating a contract that is important to you, and price (as always) is an issue.  Your customer raises the quality concerns.  The customer talks about the massive financial risks of a public outcry, involving the “health of our most helpless citizens, the children” (as the press would say).  Your relationship has always been good.  None of these problems have been yours.  In the end, the customer asks for a lower price, “to provide additional protection”.  You know that you have the ability to cut the price – there is enough margin in this particular transaction.  What now?

This is an example of a customer using the public embarrassment as leverage in a negotiation.  Their story is plausible, “I must protect myself from this additional risk.”  They know you want the business.  It’s just one example of leverage in action.

A good negotiator will always ask the question, “What problem are we trying to solve?”  In the case above, the problem is not, in fact, money.  The problem is risk – and worse than that, it isn’t even risk that relates to your own performance.  It’s someone else’s risk, passed on to you by association.

One approach is this.  Tell your customer that you understand the risk involved is tremendous for them – while reminding them that your performance has been exemplary.  Offer to add additional risk-related actions to your contract – inspections or an outside audit – whatever it takes to make them feel secure.  Then raise your price – because risk-abatement is not free, and because it has value to the client.  Let the customer decide if the additional actions are worth the price.  In this way, you will uncover the truth.  Was this just a tactic to get a better price, or was the problem a real one, but one which is solved in a different way than the customer proposed?  Either way, your negotiation position is improved, because your knowledge is better.  Plus, you may actually improve your contract position, rather than cut your margin.  It’s Wise Negotiating.  (TD)