K&R believes (and teaches) that you should understand your “leverage position” in a negotiation. As a seller, the worst position you can have (in terms of the price you can get) is to be a commodity, the best is to be a monopoly. As a buyer, you will get your best prices and terms when buying commodities, your worst when buying from sellers who have a monopoly position. The primary criteria in most cases is “will the purchase satisfy the business need?” Once that criterion is met, the number of available, suitable solutions directly influences the price. What (arguable) monopolist is being moved down the leverage slope this month?
Monopoly power allows the party who holds it to do things that their client base doesn’t like. A simple, current example: Microsoft announced some time ago that Windows XP would no longer be available for retail sale (or sale with new computers) after June 30, 2008. The user base is not so happy about this, as the Microsoft alternative (Vista, in its various forms) has significant issues of support, and requires more expensive systems to run it effectively. Petitions and user outcry had no impact on the decision. After all, as pretty much a monopoly in this market space, who can stop them? (Please don’t send us any Apple objections; this article is not about that.) However…
Enter the OLPC, ASUS Eee PC and others. Sales are booming, and prices are low. An entry Eee PC sells for $299. The OEM price of a copy of Windows XP is rumored to be $120. The original Eee ran Linux, not Windows. Windows wasn’t affordable. The buyers decided that a Linux solution “satisfied the business need.” The popularity of these machines and the unpopularity of Microsoft’s position combined to break the monopoly pricing position. As of now, Microsoft is apparently willing to again offer Windows XP to OEMs of similar machines, at a price of about $40, until June 30, 2010.
Realistic alternatives for buyers can have a tremendous impact on prices and negotiating positions (such as dates of sale). A 67% price drop is a big one. For Microsoft to hold their price, they needed to convince the buyers that there was something they would get from Windows that they could not get from Linux – they failed at that.
As a buyer – remember that your best friend in a negotiation is a set of realistic, competitive options. As a seller – remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”. The struggle over position on the leverage slope is the real negotiation – if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)