The Cinnamon Game

The today’s role play was about the purchase of quality cinnamon used for the production of baby food by a well known enterprise. I was the owner of the enterprise producing the baby food and was negotiation with Frederic, the owner of Mahek Masala selling 1000 kg of quality cinnamon.

Facts known to me in advance:

• Our company’s image was damaged after the government had discovered some quality issue with one of our drug formulations
• The government announces a price subsidy of 10% for manufacturers of baby foods using high quality cinnamon
• Mahek Masala has 1000 kg of high quality cinnamon on sale and we estimate a price of 380 Rs per kg. The seller has no idea of my estimation
• An alternative supplier is offering cinnamon of lower quality than Masala’s for a price of 310 Rs per kg
• Using 70% of the high quality cinnamon and 30% of the alternative cinnamon would still meet the government’s standards in order to get the subsidy.
• Our company agrees on a deal with the government: we provide baby food to government-run children’s homes free of cost in return for an additional 17% of subsidy (so a total subsidy of 27% on production)
• Given that this a great opportunity for our company and that this way we can go ahead with the planning of increasing the the manufacturing capacity our reservation price is 600 Rs per kg. That way we would still make of profit 230 Rs par kg.

my reservation price: 600 Rs/kg
my BATNA: buy only 70% of the high quality cinnamon from Mahek Masala
my perceived ZOPA between 380 and 600 Rs / kg

With this information and the aim of negotiating the lowest possible purchase price I entered the negotiation. However I had no idea about Frederik’s price nor if there were other buyers in the game.

3-4 rounds of negotiation 

Frederik made the first offer proposing 550 Rs arguing that this his cinnamon was of very good quality and that it would fit well with my company which has a good reputation too. Also he told me that he knew about the trouble we had with the government because of recent quality issues. I did not feel good about him knowing that, it actually was weakening my position. I told him that precisely to address this issue we were seeking to work with him, however that the price he proposed was too high. He also revealed that he had another possible buyer offering 390 Rs.

Before making him a counter offer I told him about the deal we’ve just made with the government that is supplying baby food to the government-run children’s homes and that this would give him a great publicity and reputation at the government too if he was supplying the cinnamon for our baby food. I did not mention the fact that I delivered them free of charge in order to be able to get the subsidy. Based on these arguments I told him that I would offer him the same as the other possible buyer. At that moment tough I was not sure if such a buyer actually existed and if this was the price he would really get. But for me 390 Rs would still be a good deal.

Frederik refused my proposal of 390 Rs. He knew about the 10% government subsidy and made an offer of 450 Rs claiming that with the subsidy my actual costs were around the price that I had proposed before, the 390 Rs. He was undoubtedly right about this, even more given that my actual subsidy was 27% and not 10% but he did not know that and I had no intention to let him know. Further he informed me about the fact that the price of the 2nd best cinnamon was around 320 Rs. He was saying that the price gap between the best and the second best cinnamon needs to be higher in order to stimulate the market. Honestly, I don’t remember what the point was of this argument of his.

Anyway, 450 Rs would have already been not too bad of a deal for me but I wanted to know if I could lower it a bit more. So I offered 430 Rs and told him that as he might know we had a good reputation for being very prompt in our payments and that I would pay him by the end of the month. Since I thought he would maybe propose 440 Rs I added that we were interested in a long term partnership as we are keen to keep quality standards high and because we plan to increase our manufacturing capacity in the future. He then agreed on 430 Rs.

I felt very satisfied about the outcome. And I think Fredrik was happy too. However, I would have liked to ask more questions. Instead, I was mostly arguing and trying to have the better arguments in order to convince him to accept a lower price. At some point I thought of introducing the argument that I would only buy 70% of his stock but then again the price was not too bad for me so I decided to go for the whole amount of 1000 kg. Only when debriefing I found out that the other possible buyer would only have bought 70% of the cinnamon. So my negoiation power could actually have been stronger, given that his BATNA was worse than I tought.

This negotiation went much better then the one last week. We were negotiation during more rounds and I had the impression that the arguments were more well-grounded.