9 rules for credit negotiation
Frankly, most credit negotiations are a brief, unprepared haggle. The phone rings and you’re haggling about whether the customer should pay over three weeks or six weeks. In two minutes it’s over and you’re talking to the next customer. You can’t spend hours preparing for such negotiations, and many of the techniques that are taught in generic "negotiation courses" don’t work.
When we first developed a seminar on credit negotiations, we looked at other negotiation courses which were over two or three days and decided they were a bit long and slow. So we designed a day-long course. Then we decided that because we had more things about psychology that we wanted to teach people, we’d combine our negotiation course with some psychology, so we made the negotiation part shorter and punchier. We cut it to half a day and renamed the course, Psychology of Credit Management 2.
Gradually, the practical psychology element - how not to get beaten up in conflict situations, the payment hierarchy for Pacific Island customers, and so on - encroached on the negotiation material to the point where the negotiation segment of the course is now the very concise "Hattaways’ 26 rules of advanced credit negotiation". In this article, we only have 1000 words to play with so I’ve picked nine of those rules to tell you about.
1. Remember PRICK
In most credit negotiations you want the money. That’s obvious. But what else, or what else if you can’t get the money? There are four other standard goals of credit negotiation which may apply. We’ve come up with a helpful little mnemonic to assist you in remembering them. Clearly the word "prick" relates to pins, and anyone who thought of anything else should be ashamed.
The five goals are:
- Payment (get the money)
- Risk reduction while waiting for the money (get some security, a personal guarantee, etc)
- Interest while waiting for the money
- Customer retention (keep the customer's business - assuming you still want it)
- Knowledge (if nothing else, get more information on the situation)
2. Know that your power lies in "walk-away options"
If you walk away with no deal, what do you do then? When you begin any negotiation it is really important to be very clear on your walk-away option - the course of action you would take if you do not reach an agreement. For most credit staff your walk-away option is likely to be to stop credit, to send it to debt collectors, to sue, or to write off the debt.
Your walk-away option is also referred to in the textbooks as the BATNA - Best Alternative to a Negotiated Agreement.
As the agreement emerges from the negotiation, ask yourself, is this better than my walk-away option? If it is, go with the deal. If it is not, walk away from the deal, and use your best alternative. Estimating the cost of your walk-away option is not always easy. If your walk-away option is to sue, work out what that would cost (time, effort, and money). It may be that negotiating with the debtor to pay even half the debt would give you a better return than suing.
3. Always "flinch" at the first offer
This simply means show some surprise, dissatisfaction or discomfort at the first offer (no matter how happy you are with it). If you leap to accept it, you probably leave your customer feeling they should have offered less.
4. Gain agreement on what you can
There is real benefit in getting the other side to start agreeing with you on anything you can.
- That was a great game on Saturday night, wasn’t it? [Yes]
- Can we agree that there’s no dispute over invoice 454357? [Yes]
- Neither of us wants to make lawyers rich, do we? [No]
5. Avoid the "soft bargaining" trap
This is a negotiation where at least one of the parties wants to be friends, and their goal is agreement. Soft bargainers disclose their bottom line and trust the other party. However, they often make too many concessions, are too ready to accept the other party’s answer, and yield to pressure. If their opponent is a hard bargainer, the soft bargainer will give way and end up the "loser" in every negotiation.
In credit negotiations, the problem is often that the "nice" creditor has to wait while the debtor pays the "nasty" hard bargainers.
6. When you get stuck, take a break, make a small concession or offer to meet halfway
These are simple, but often effective, ways to try to break a deadlock.
7. Put aside ego
Remember the movie "Pretty Woman"? Julia Roberts and Richard Gere negotiate over price and agree on $3000. Later, Julia tells him that she would have stayed for $2000. He responds that he would have paid $4000. Neither seems upset to find that they could have done better. If the result was within the range that you should be happy with, don’t worry if you find you could have done better.
8. Build rapport
In some collection negotiations it won’t matter, but overall, the better you are at building rapport with people, the greater your success.
Some simple techniques for this are:
- Talk about common interests.
- Look for problem solving alternatives and easy trade-offs.
- Be quick to acknowledge the other party's point of view.
- Maintain the formality or informality set by the customer. Always greet and treat everyone with respect, but then wait for them to set the tone of your discussion.
9. You generally get the behaviour you give
If you’re [insert the behaviour you want - polite/honest/friendly/open-minded/fair/etc] the other party will tend to be the same. Treat people the way you want to be treated and the norm of reciprocity kicks in. Of course, this isn’t always going to work, but even so, it’s a good guideline to follow. Lying or using blatantly manipulative tactics hurt you in long term relationships.
Peter Hattaway is a director of credit management training experts, Hattaways - www.hattaways.com.