The Cinnamon case: sales negotiation

The Cinnamon case: sales negotiation

            For this simulation, I was the owner of Offshoot Intermediaries Limited, a family-run enterprise offering drug formulations and baby-food products.

            I just had been informed by one of my contacts in the government that an ordinance was going to be issued mandating the use of a specific set of ingredients in baby-foods and one of these ingredients is high-grade cinnamon.

            Because of an old issue, the government wasn’t willing to extend the state subsidy of 10% for the manufacturers of baby foods who use high-grade cinnamon in their products but the day before the negotiation with the cinnamon supplier, I met the Food and Drug Authority (FDA) commissioner and could plea my case in front of him and the government council. They finally agreed to put an end to the strict action that had been taken against my company so I could beneficiate from the 10% state subsidy. For this agreement to see the day, my company had to agree to supply baby food to government –run children’s homes, free of cost. In exchange for signing this obligation the FDA commissioner granted my company an additional price subsidy of 17% for all the baby food production.

            I knew that this opportunity was a one-time opportunity that would allow me to go ahead with the planned increase of the company’s manufacturing capacity.

            Let’s talk about numbers before the negotiation! Here is what I knew:

-       Mahek Masala is selling a 1,000 kg lot of premium-quality cinnamon powder

-       My estimation for cinnamon of such high product quality is around Rs. 380 per kg.

-       I have an alternative supplier but the product’s quality might be inferior.
Price: Rs. 310 per kg

-       If I buy 30% of this inferior-quality product and 70% of the high-grade product, the mixture of the two would easily meet the FDA standards (my BATNA)

-       To supply baby food to government-run children’s homes, I’ll need around 100 kg of cinnamon powder

-       My company beneficiates from the 10% subsidy from the state

-       I’ve been granted and additional 17% subsidy but it’s not public knowledge

à Total price subsidy: 27%

-       My goal is to get the lowest possible purchase price

-       I am willing to consider paying up to Rs. 600 per kg

à Profit: 230 per kg

-       Price of 1,000 kg at the estimated market price: Rs. 380,000

à with the 10% subsidy (38,000): Rs. 342,000

à with the 27% subsidy (102,600): Rs. 277,400

380,000 – 342,000 = 38,000

380,000 + 38,000 = 418,000

            Negotiation proceeding:

-       850

-       800

-       400

-       600

-       550

            We talked a lot during this negotiation. It was important for me to get as much information as possible and to not make the same mistake as during my last negotiation simulation. We talked about the deal, our companies, the qualities of our respective products and the reason why we wanted to do business together.

            I didn’t want to make the first offer because except from a personal estimation of the market value of high-grade cinnamon and the price of an alternate supplier of lower-grade cinnamon, I didn’t had enough information about my counterpart’s expectations or BATNA. Thus I chose to ask a lot of questions such as did she get other offer from buyers, if yes for how much? She Answered me about another buyer who just wanted to buy some of the production and told that I was a better client thanks to my companies’ reputation to be prompt in payment terms. At this level of the negotiation, I understood that I had a stronger BATNA than her and that I was in a stronger position.

            When I asked about “what a good offer” was for her, she spoke about Rs. 850 / kg. This price was over anything that my company could afford and I decided to be very honest with her by telling that it wasn’t me but that my company couldn’t afford to buy cinnamon powder at this price. She proposed another figure: 800 / kg… Still way out of my league… And I told that to her. Then, she asked me to make an offer since I rejected hers. I could have started at 380 / kg but knowing about the subsidies and the lower-quality cinnamon price but I told her that my offer was an honest one…Which…. kind of was. Indeed between 380 000 and 600 000 I didn’t have much leeway while she seemed to be more flexible.

            She told me that she could not accept this offer knowing all the production and stocking costs and told me about the state subsidy of 10%. I had a feeling even before the negotiation that the other side would not know everything about our recently acquired subsidy (the day before).  That’s why I chose to bluff and explain to her our delicate situation with the government because of a drug issue and that my company was currently negotiation to get this precise subsidy. That wasn’t right… But it just happened de day before, so there was no way this supplier knew that not only I got the subsidy plus an additional 17%. This little lie could help me convince her to lower her price expectation, indeed, she started asking for much more money than I could afford. I must confess that I felt a bit bad by this lie, but I was trapped, and I really wanted to not fail this negotiation because I felt bad after the last one.

            Also I told her that unlike the other buyer, I could pay her immediately and moreover I would buy the entire lot so she would not have costs related to the stocking of the merchandise. Knowing those elements, I asked her for a reasonable offer. She asked for Rs. 600 / kg. I could actually afford this much, but it was my top max and by proposing 600, she reduced her expectations of 200, I though that this meant that she was flexible and that I was possible for her to sell for less. I explained to her that because of my difficult situation with the government I really needed good quality cinnamon to meliorate my corporate image… I also told her that at this price I could not afford to buy the entire lot. I didn’t want to ruin her, so I asked if 550 / kg could be sufficient for her to cover her expenses. She agreed on this offer, we shook hands and signed the agreement form and we both felt happy about this deal.