Looking to buy an 8 x 10 rug for our family room, I visited a local rug seller. Before doing so, I knew full well that the rug selling business has a bizarre business model: first, rugs are marked up by a ridiculous amount; then the merchant touts a ‘50% off sale’, ‘going out of business sale’, ‘liquidation sale’, ‘time sensitive once in a lifetime sale’ – any promotional tactic the purpose of which is to drum up foot traffic. It’s amusing really; this particular rug store has been ‘going out of business’ for the past four years running.
After finding a rug I liked, taking note of the wink, wink, nudge, nudge list price and ‘sale price’, I asked the owner if he was willing to accept a price 25% lower than the ‘sale price’. Knowing what I do about the rug business, that there are fat profit margins resulting from buying rugs cheap in places like Afghanistan and India (I won’t get into the child labor issues here), and selling to naïve North Americans at hugely inflated prices, I was confident that a lower price could be negotiated.
But I turned out to be wrong. The owner looked at me as if I were from another planet. A hostile planet at that. Who did I think I was?! Daring to ask to pay a price less than what is written on the price tag! By the way he reacted, you’d think asking a question is an unforgivable crime.
Still, I figured he was posturing: this was the owner’s opening volley in negotiations. But after he walked away from me, effectively communicating that our short-lived interaction had ended, I realized I misread the situation.
Here was a guy steeped in North American retail culture. A culture that has effectively trained consumers to pay list price. Likewise, retailers have been trained to expect list price to be paid. And if the consumer doesn’t like the price, then there’s only one option: leave the store and go look for a lower price elsewhere.
Florida Flea Market
I was 17 years old the first time I struck a deal with a merchant. In Florida with my parents, we visited a flea market. One of the stalls was selling brand name knock off watches with minor defects (i.e., the tiny Gucci name was changed to Cucci – who would know the difference?).
I saw a watch I liked and asked how much. Ten bucks I was told. Before I could reach into my pocket for the money, my father pulled me aside.
“Offer him $6,” he said.
“What do you mean? The guy said the price is $10,” I naively responded.
“Listen, he expects you to negotiate. Offer him $6. Haggle with him. See what you can do.”
This was all unfamiliar territory to me. But with my father’s encouragement (and a smile on his face, telling me to relax and have fun), I started the process. After a few minutes of back and forth haggling, the merchant offered the watch for $8. Thinking I was doing well, and that eight bucks was a good deal, I returned to my Dad for guidance. He told me to take $7 out of my pocket and place the money in the merchant’s hand.
“Why?” I asked.
“Because $7 is a fair price, and because when someone is putting money in front of you, in your hand, it’s difficult to resist.”
He was right. The watch was mine for $7. And once the negotiating process was over, I felt both a sense of relief and satisfaction. I mean, after I got over my initial trepidation, I saw bargaining as a game to play. As for the merchant, he still turned a healthy profit as his cost for the watches was a whole lot less than what I paid, so I learned afterward.
Bargaining: The Third Option
Negotiating on price is not limited to Florida flea markets or Middle Eastern bazaars. The option to negotiate presents itself in many situations but we don’t know this unless we ask. And when we ask, and find a willing merchant, well then, say hello to a lower purchase price that translates to savings and more dough in our pocket.
So who can you bargain with? I’ve bartered with big telecom companies (i.e., cell phone), department stores when buying large appliances and mattresses, even the Gap when buying clothes for my kids (they threw in extra discounts and coupons for future purchases). Whatever the store, if I see an opening, I try to drive through.
As for retailers who look at you as if asking for a lower price is somehow not playing fair, or as if you’re speaking a language known only to Klingons … that’s their issue. If they’re willing to lose a sale, lose a customer because their ego is bruised, so be it. It’s a competitive landscape out there and you, the consumer, may always take your business to the competitor most willing to meet your terms.
Big Ticket Item No. 1: Automobile
You absolutely need to know that bargaining is expected when shopping for an automobile.
Car dealers typically shoot for a 10% profit. Meaning, there is 10% wiggle room, with most dealers willing to accept a 3-4% profit. But they’re not going to just give it to you! The dealer’s starting position is that you pay list price (Manufacturer’s Suggested Retail Price – MSRP). And if you don’t ask for less, if you don’t even try to bargain, then that’s what you’ll pay.
If you’re willing to give bargaining a go (highly recommended) when purchasing a vehicle, start by grinding down price, with your opening offer being 10% lower than MSRP. The dealer won’t accept such a low offer because they wouldn’t make any profit. But setting your opening bid low gives you room to move up in price and the dealer room to move down to meet you somewhere around 5% less than MSRP.
If you’re not getting as much of a price reduction as you want, lean on the dealer to throw in cash rebates or other incentives. When I bought my last car, and I wasn’t entirely satisfied with the price being offered, I caved to the dealer’s price in exchange for a few goodies, including car mats, trailer hitch, roof rack cross bars and a car box.
And keep this in mind: you always have the option to walk away. Don’t underestimate this option. It’s powerful. It’s a tough business, car sales. Salespeople want your business, and they’ll usually do whatever is reasonable to close a sale.
Big Ticket Item No. 2: Home
After my recent post about buying a home, I received a comment from a reader saying that people need to know, in a buyers market or balanced market, how much under the list price do you initially offer.
Unfortunately, unlike autos, there’s no one size fits all answer. That said, here’s a few pointers:
- Upper Limit. Know what you can afford to pay and do not exceed that number, no matter how excited you are about fulfilling your home buying dream (because if you exceed your limit, you’ll dig your self into too much debt, and the dream morphs into a nightmare, or at least undue stress).
- Do Your Homework. With the upper limit number in mind, as well as the list price, have your real estate agent give you the stats, i.e., sale price of similar homes in same neighbourhood during the past few months, and all other available research relevant to home price and current market activity. And do your best possible sleuthing to try to find out the seller’s situation.
For example, if the seller has already bought another home, and that transaction closes in two months, then you know seller is feeling the heat because they need money from this home to fund their future home. Otherwise they’ll be carrying all the expenses of two homes. Under a time crunch, seller may be more willing to accept a lower offer.
- Don’t Be Reasonable. Right. Not something you hear everyday. But in negotiating, your job is not to look out for the other person. Your job is not to be liked, not to be thought of as a good guy/gal by the seller or their agent. Nope. Your job is to get the lowest price possible. It’s up to the seller and their agent to look out for themselves.
So start with a low ball offer. And don’t fret that an unreasonable offer equates to showing disrespect. It’s not. You can show kindness and consideration to the seller AND make a low offer. One does not cancel out the other.
Then wait for the seller’s reaction. If they ignore the offer, then you increase the bid by a small amount if you’re serious about purchasing. If they counter-offer, then you know you have a seller who wants to get a deal done, even though the lowball bid won’t fly.
Here’s a concrete example. A friend of mine (HomeBuyer) was looking to purchase a home for him self and his family. They found what appeared to be the perfect fit. The home was listed for $595,000. After four months on the market, the seller dropped the price to $505,000. Clearly, a sign that they wanted to sell.
Armed with detailed market research, knowing there were no other offers and the seller was ‘motivated’ (as they say in the trade) HomeBuyer offered $460,000. Seller balked, saying that Homebuyer’s bid was a slap in the face.
Homebuyer tried again, increasing his offer to $480,000. Though Seller wasn’t thrilled with the revised offer, they saw that HomeBuyer was for real and countered at $495,000. Homebuyer, asking to split the difference, made a third offer of $487,500. Seller refused, saying they were already taking a bath if they sold at this price. Still, they gave a little more, reducing the ask price to $492,500. HomeBuyer, believing it wasn’t wise to push any further, accepted and moved into his new home a few months later.
Now remember, Seller could have exited negotiations at any time. But they didn’t. Likely because they were able to alter their perspective, i.e., the home’s value may have been $595,000 to them but in 4+ months, no buyer had agreed with that valuation. So they had a choice: wait for a higher offer or take what was on the table.
When You Try, Sometimes You Get The Price You Want
You won’t ‘win’ every time you step up to negotiate. That said, you’ll never get a price reduction if you don’t even try. So try. See what happens. Experience the thrill (is it just me?), the fun, of bargaining, and odds are you’ll be saving yourself money.