Buying Domains, Domaining Mistakes, Selling Domains September 5th, 2007
A recent study published in the Journal of Personality and Social Psychology analyzed the tactics people use when negotiating, and how well buyers and sellers feel that they negotiated once the deal is done. The study contains some interesting lessons for domain name professionals and anyone else who deals with products with negotiable prices. It turns out that most people don’t bargain very well, and don’t get the best possible price, whether they are buying or selling.
Many People Don’t Bargain Well
The study was carried out by professors Richard Larrick of Duke University’s Fuqua School of Business and George Wu of the University of Chicago’s Graduate School of Business. By talking to buyers and sellers – including professionals with MBAs – about how much they would have been willing to either pay or reduce a price, the professors found that the people in the study generally captured only about 50% of what was available. So buyers only captured 50% of the possible discount, and sellers only obtained 50% of the price increase that the buyer was prepared to accept.
The funny thing is that both buyers and sellers felt that they had done quite well, pushing the opposite party to the limit. Why does this happen?
Professor Larrick says:
“The problem is that we rarely learn the truth about how far we could have pushed the price in a negotiation. We talk about the fact that if you’re a buyer and are too optimistic about how low you can push a seller, you’ll figure out that your ‘ambitious’ estimate was wrong. But if you incorrectly believe you won’t be able to push the seller much at all, you begin the negotiation too modestly and give away too much, too easily. Your modest estimate becomes self-fulfilling through your modest actions. It’s this lack of feedback on the truth that really traps people into thinking that they have always pushed the price close to their opponent’s limit.”
To put it in domaining terms, suppose I want to sell UOLV.com, and suppose I am hoping to get $5,000, but would settle for $4,000. I might set a price of $8,000. The buyer comes at me with an offer of $4K, I counter with $6K, and we settle at $5K. I come out of it feeling good because I got my price target, and the buyer is happy because he got the domain for $3K below the asking price. Since we don’t talk to each other afterwards and say, “How much would you really have settled for?” we both believe that we bargained well, when in reality I would have sold for as little as $4K, and maybe the buyer would have paid as much as $7K if I had pushed.
So my $5K price target became a self-fulfilling reality, and I’ll never know that I could have gotten more.
Street Market Negotiating Skills
The professors say that people who come from countries where street markets are common and haggling is standard practice do better in these kinds of negotiations. They are able to recognize the following kinds of statements as bluffs or negotiating tactics:
Buyer: “I absolutely can’t go any higher.”
Seller: “This is barely above my wholesale cost.”
Buyer: “My boss won’t approve the deal if I go higher.”
Seller: “I’ll be losing money if I go any lower.”
Buyer: “Take it or leave it.”
Seller: “This price is firm, non-negotiable.”
Once when I was fifteen years old I was at a sprawling street bazaar in Saudi Arabia, looking for a watch. I had grown up in the United States and knew very little about negotiating. I found a Casio that I really liked. The seller, a wizened Yemeni fellow, gave me the price. I responded with an offer about 30% below his asking price. The seller suddenly became angry. “Are you trying to take food out of my children’s mouths?” he said loudly. “Are you trying to ruin me?” Shocked, I apologized and walked away.
Now, looking back, I recognize that his behavior was nothing but a particularly dramatic negotiating technique. Every culture bargains in their own way. I live in Panama now. People haggle here as well, but the style is more apologetic than accusatory. I’ve learned to ignore the bluffs that are commonly thrown up. Of course it also helps that I’ve been here long enough that I am familiar with the normal price range.
On the other hand, long negotiations have a downside: they take time, which for some people affects the opportunity cost of the deal. A big-time domainer with 100,000 domains earning millions of dollars a year may not want to spend three days bargaining over a $5K domain name. His time is worth more than that. A speedy deal and a little less aggravation may be worth another $500 to you on a given deal. That’s a choice you have to make.
Three Important Price-Setting and Negotiating Tactics When Selling a Domain Name
1. Pricing: The professors came up with a specific conclusion about the best way to price something for sale and get the best price possible. Professor Larrick says, “For us, the key is to get an accurate picture of the range of prices, target the favorable end of the range, and then be a little more aggressive than that in setting your opening offer. It’s only by doing this that one avoids the ‘self-fulfilling’ cycle…”
2. Countering Bluffs: I would add that you should learn to recognize and counter the most common bluffs that buyers use. If a buyer says, “I can’t go any higher,” don’t give in, and don’t call him a liar either. Instead counter with a reasoned argument like, “I understand what you’re saying, but this domain name will ultimately save you money by bringing you targeted leads. The extra money is worth it.”
3. Small Increments: To get the best possible deal, move away from your initial offer in small increments. So if I’m selling a domain for $5,000 and the buyer offers $2,000, rather than counter with $4,000 I might come down just $200, to $4,800. This causes the buyer to move upward towards my end of the price spectrum, rather than me moving downward to his end. Of course it also results in a longer negotiation.
Know the market, learn as much as you can about your buyer, and bargain hard.