Musings of a twenty-something entrepreneur.
Jun
25
Image from theinteract.net , a new project I’m launching August 2010!

Growing up in the U.S., I was generally raised under the impression that prices and services are fixed. There’s a price tag, and there are few opportunities to negotiate this price or what the price includes.

But when you’re in business, and particularly when you are bootstrapping, you will undoubtedly be presented with opportunities to negotiate, and in extreme cases, negotiating well could be the difference in ultimate success or failure of your startup.
The following is a list of tips I picked up the hands-on way in over a dozen different negotiations. Negotiation skills are not something you’re just born with. With study, practice, and experience, you can learn to be a successful negotiator. But to be sure, negotiation is an art. Use these tips as helpful pointers of things to consider, but each situation is unique and there is no ideal formula for negotiating successfully. That’s why you have a brain!

These tips were specifically written for those negotiating with developers for software projects, but most of them apply to any negotiation, no matter which side you’re on. I welcome any new suggestions or anyone who disagrees with any of these; leave your thoughts in the comments!

Negotiating Tips and Tactics

1. Be fair

Bargaining often comes down to information disparities between two parties, which presents opportunities to exploit your information edge. Don’t do this. You’re negotiating for a deal that works for both parties, and the value of this relationship will in large part depend on trust between the two parties. The basis of any transaction is that both parties will be better off as a result. Be fair, and enter negotiations with the goal of crafting a WIN-WIN situation.

2. Establish trust

The amount of trust you are able to establish is going to determine how much the other party is willing to accept the assumptions you’re bargaining under. Your promise of referrals is worth a lot more if they believe you.

Establishing trust is an art unto itself, but for starters don’t try to pull any cheap shots. Be transparent about what your requirements are; doing otherwise can cause serious headaches down the road.

Have an online presence and reputation that gives “social proof” that you’re legit. Don’t ever be late for a payment. Start with small projects and demonstrate your trustworthiness there.

Remember that trust is hard to earn and easy to throw away. Don’t blow it.

3. Pay on a project basis, not hourly

Not only does this help you control costs, but it also removes the administrative burden for your team of having to track their hours. Let them focus exclusively on what they do best. Besides, you should be paying for results, not time.

Project costs, as opposed to hourly costs, are also easier to negotiate since hourly rates are perceived as more sticky. Think about it: if you’re measuring your value in dollars per hour, you will be conscious of and resent rates below what you feel you deserve. Paying on a project basis places the emphasis on output, which should be a shared goal between parties.

Of course many startups hire full-time developers, but salary negotiations are a different beast. This assumes you’re hiring non-permanent outside help.

4. Request a breakdown of project costs

Its hard to trim the fat if you don’t know where the fat is. Find out how long certain features take to implement, and use that in prioritizing and selecting which features are practical and which aren’t necessary.
In addition, breaking down the work this way allows you to negotiate on a smaller scale as well as a larger scale. For example, you might find yourself saying: “Three days to integrate Facebook connect? That should be easy, this should only take one day max.”
Be careful though; if you don’t know code yourself, it can be easy to over/under-estimate what is actually required to implement something. In fact, even if you do know how to code software, estimating how long software development takes is a notoriously tricky task.

5. Add intangibles

You can offer things other than money to help reduce the price in a negotiation. If you’re negotiating with a developer, offer to put a “Powered by [Firm Name]” box in the footer. Be in a position to offer referrals (see below), offer a pleasant working environment, or be time-flexible. Share your vision, and let them be compelled by it. Money is not the be all and end all for most people, and making their life easier and their work more enjoyable can work to the benefit of both parties.

6. Don’t be the CEO

Atleast don’t claim to be when negotiating. You need a higher authority that can say “no”. In essence, this is the “good cop bad cop” tactic. “Good cop” is you, working through the details and utilizing the other tactics I’ve mentioned here. “Bad cop” is the “boss”, who, despite your best efforts to convince, says “No” when you’ve reached a stalemate or when terms of the deal are unacceptable.

7. Be prepared to walk away

If the other party knows that you need them, you’re at a significant disadvantage. Even if you *do* need them, don’t ever reveal that. At the same time, this can be a point of weakness in the other party: if they need *you*, then this gives you a significant advantage.

I’m not saying don’t use  as one point of leverage, but refer to #1 and be sincere in not taking advantage of another party’s desperate situation.

8. Prioritize what you need

In a negotiation, both sides have to give way a little. Sometimes you have to make sacrifices depending on time requirements, financial constraints, and technical complexity and competence. Maybe that one not-so-important feature is difficult to implement and is taking up a larger percentage of your development costs than it deserves.

The best way to prioritize is by being open about the uses, priority, and importance of the various features of what you’re developing.

9. Get a third party to help you evaluate

You’re hiring someone because you need that expertise. Not having that expertise yourself makes it difficult to evaluate costs and the technical competence of the person you’ve hired. You need a thirdy party. This can be a friend or a consultant, but this person’s interests must be totally aligned with your own.

Be transparent about this. This person is there to help all parties, not just you. They can ask the technical questions that will help the person you’ve hired to be critical of their own approach. They can discover potential problems, limitations, or opportunities that you might have missed otherwise. Just make sure they know what they’re doing and understand what you’re trying to do.

10. Be payment-flexible

Sometimes you can negotiate a reduced rate by making upfront payments, so if you’ve got the cash to make it happen this is a good point of leverage. This can be particularly effective with smaller firms, who are typically much more cash flow dependent.

11. Create competition

Some folks recommend hiring two or three separate teams for the first phase of your project, and then selecting the “best” one after the first stage of completion. In theory this is a good idea, but often whose work is “best” isn’t easily discernible. A working prototype may be limited in how well it can scale, whereas an intelligent architecture from another provider may not look so glossy at first sight.

My recommendation is to find someone who you trust, rather than trying your luck with many providers. Even so, it can be helpful to subtly remind them that they are not your only option. If you have quotes from other providers, you can use these as benchmarks and negotiating points with whomever you select.

12. Be the first to name a price

I’ve read some heated debate on this topic, but I’m still wavering on what the right move is. The conventional wisdom is that the party that states a price first is at a disadvantage.
A large part of it depends on what the costs are for the other party. If their costs are relatively inflexible (for instance material costs or licensing costs), then best to get their price first and work from there.

If the other party’s costs are more flexible, I’d prefer to name a price first to set the tone. This takes advantage of a psychological effect known as “anchoring”, which basically makes the price you namethe foundation for negotiation, rather than that of the other party’s. If a provider names the cost as $5,000, its going to be difficult to get them down to $4,000. But if you named $3,000 first, then it becomes much easier.

During negotiations, the other party will ask you what your budget is or how much you expect to spend. You don’t have to answer this. My suggested reply is:  “Lets see. First I want  to work on an estimate for what it will take to get this done”. You don’t have to tell them your budget, and you need to have a firm resolve beforehand not to breakdown and spill the beans, because it will be tempting.

And remember, you shouldn’t feel bad for negotiating or offering an amount less than what they ask. Its part of the process, so just don’t be an asshole about it.

13. Think first, act later

Negotiating is neither a race nor a beauty pageant. You’re not trying to be the fastest or the slickest, you’re trying to get from Point A to Point B, so take your time and make sure you do it right.
A good rule I use for important emails is to write them, then give myself atleast 4 hours before I send them. Four hours later, you’ll catch all kinds of stuff you wouldn’t have caught earlier. If you’ve got a partner, work collaboratively to fine tune your messages.
Don’t underestimate the value of external feedback and input. Making stupid judgment calls can throw everything off.

14. Know a ballpark figure

Before you can name a price, you need to have an idea of what they would normally charge. Then, as a starting point, throw out a number 50% to %20 lower than what you expect. However, what % discount you estimate depends on the circumstances. Tim Ferris says go for 70% lower, but I think shooting this low will only offend the opposing party. Just make sure that you don’t OVERshoot it.
Also, “ballpark figure” is a misnomer. You really need a “ballpark range”, on both the high and low end.

15. Be a great “boss”

When you’re deciding on a job offer, you’re not just thinking price. And neither is the party you’re negotiation with. If they’re going to be responsible to you for getting something done, they need to want to work with you. They need to believe in you, and its your responsibility to create a pleasant work environment.
From my experience, in a nutshell: Give the other party full access to the scope and vision of what you’re doing. Make them a part of the team and give them meaningful work. Be flexible and understanding. Recognize your role as the person who is ultimately responsible for how things work out, and act that way. Ask for their input. Understand their peculiarities and help them manage their time effectively.
Do some of these things, and they’ll recognize and appreciate that you aren’t just a nutjob with a little bit of money and an idea.

16. Be forthcoming in providing referrals

This is part of being a reputable person. Have results to show, have an established web presence, and demonstrate that you know what you’re doing. At the very least, seem like the kind of person that has a lot of connections and that people would ask for referrals. This makes you a valuable customer, and one worth negotiating with. (See #22 below for a related tip.)

17. Do NOT offer equity

OK, never say never. And in many negotiations, you may be tempted to offer equity in return for a price reduction. DON’T. It will be a legal headache and they probably don’t want it anyways. Besides, equity is one of your most valuable assets. Don’t give it away for cheap. Saving $1000 now may cost you a hundred times that in a matter of months.

Please note that I am not saying to try to hog all the equity for yourself. 100% of $0.00 is $0.00. Get people on your team and be fair in distributing equity. More on that another time. But here I’m talking about a negotiation with an outside party, where the point is to not bring someone on full time and dilute equity.

But I repeat: don’t take the ship down with you because you’re so concerned about preserving equity. A rising tide lifts all boats, and your first priority should always be the success of your startup.

18. Barter

This won’t apply in most cases, but be open to the possibility that you might offer services in return for a discount for your project.

19. Get rid of emotions

Easier said than done, but don’t let a momentary flash of anger, swagger, or over-confidence obscure your judgment. To avoid this, don’t make decisions in a rush; giving yourself some time to make important decisions helps mitigate emotion’s impact on a decision. Even better, talk through your logic with someone else, and do so in a way that encourages them to be critical.

Working with people over the internet can actually increase the danger of emotional interference. That’s because never know exactly what’s going on with the other party. You may shoot off an angry email demanding a reply to some urgent matter, only to find out that the other party hasn’t had internet for three days because of a monsoon. (That’s actually happened to me.) Keep it friendly, and even if you assume the worst, give the other party a chance to explain before being an asshole.

20. “Split the difference”

When you get to a point where each party has drawn a seemingly unmoveable line in the sand, “splitting the difference” can help bridge the gap. Its a good phrase to use because it implies that both parties are “suffering” equally from the compromise, which on a gut level strikes people as fair. This tactic should be one of the last ones that you use, because the difference must already be firmly defined prior to splitting it.

21. Bonus Tip: Outsource Simpler Tasks to Lower-Cost Providers

If you’re spending $40 an hour for a developer, you don’t want them spending their valuable time on pieces that don’t require their particular level of expertise.

Work with whomever you’re hiring to identify areas that could be outsourced for lower costs.When employing this tactic, you need to communicate your needs very clearly to your main developer and the outsoruced one to make sure that it will integrate properly with the site.

22. Bonus Tip #2: Offer future work

If you work on a lot of projects, let them know that this one is somewhat of a test run, and pending solid performance will lead to more work from you directly.

Equally important, remind them that once the project is launched it will still need their help afterwards, which means ongoing work for them assuming they get the project.

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About jesse:

"I move Onward, the only direction. Can't be scared to fail- searching perfection... Loiterers should be arrested!" -Jay Z Find out more about me at www.JesseMaddox.com

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