Pawn Stars Teaches Entrepreneurs How To Not Negotiate

Pawn StarsI was recently working at my kitchen table while my adolescent son was watching the History Channel’s reality TV show Pawn Stars. The show caught my attention, as a litany of extremely unsophisticated individuals sold their family heirlooms and other “treasures” at cut-rate prices to the professional negotiators who star in the show.

Having appeared on a reality TV show, I am well aware of the lack of reality involved in such shows. As the Producer of the show I worked on told me, “There is very little that is real in reality TV.”

Even taking into account the show’s lack of reality, I found it to be an entertaining way to coach my son regarding basic negotiating tactics.

 

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Multiple Teachable Moments

The banter was incredibly consistent, irrespective of which of the Pawn Stars was doing the buying. The discussions went something like this:

Pawn Star: “What’s ya got there?”

Rube: “My grandfather told me it is a _________________” or “I’m not sure.”

Pawn Star: “How much do you want for this thing?”

Note: If the item is not a family heirloom, the Pawn Star’s question is: “Do you mind if I ask what you paid for it?” The Rube always tells them the amount they paid.

Rube: States the amount, in the form of a question, often sounding more like a plea. For instance, “I’d like to get $150?”

Pawn Star: (Arms folded and shaking his head back and forth) “That’s not going to happen.”

SILENCE

Rube: Fills the silence with an apologetic statement and in some cases even reduces the amount they “want,” effectively negotiating against themselves.

Pawn Star: Proceeds to explain all the things wrong with the item (chipped paint, cracks, discoloration, etc.). After pointing out the flaws, the Pawn Star says, “Knowing that, how much do you want for it?”

Rube: Continues to negotiate against themselves, often offering yet an even lower price than previously stated, without the Pawn Star ever countering the initial price.

Pawn Star: Once he agrees to a low-ball price, he unfolds his arms, smiles broadly and shakes the Rube’s hand, while saying, “Let’s write up the paperwork.” The handshake psychologically locks in the seller and reduces the chance of seller’s remorse thwarting the deal.

Adolescent Education

My son and I role played the typical Pawn Star negotiation, with me playing the role of the Rube, as follows:

Son (as the Pawn Star): “What’s you got?”

Me (as the Rube): “It is a 1932 decoder ring that was put in cereal boxes by Post. I have seen prices on eBay and private auctions which range between $150 and $225, depending on condition. This item appears to be in VG-EX condition, which makes it worth about $200.” 

Son: “What do you want for it?”

Me: “A market price which leaves you enough room to make a reasonable profit. Since you are the expert, what percent margin do you think is fair?” Focusing on the potential margin diverts the negotiation from the overall price, while highlighting the difference between the market price and the price the Pawn Star is willing to pay.

Son: “How much did you pay for it?”

Me: “That’s not relevant to its current market value or the percent of your margin.”

Son: “Do you have plans for the money?”

Me: “I appreciate you are trying to make conversation, but what I do with the money, if we are able to agree upon a fair price, is not pertinent to our negotiation. You are the expert. What margin would you like to make on this item?”

If this were a real pawn store negotiation, the store owner would likely terminate the discussion once it became clear that they would not be able to extract their typically egregious profit on the transaction.

Tactics You Can Use In Any Negotiation

As noted in Monopoly, there are three skills which are vital to the success of every startup: (i) selling, (ii) networking and, (iii) negotiating. In addition, an entrepreneur’s two most valuable assets are time and money. Thus, judicious Frugality is vital, irrespective of the amount of money a startup has in the bank. Thus, even though pawn store negotiations are atypical of the type you will encounter operating your startup, studying them does yield some valuable lessons, such as:

JV vs. Varsity – The Pawn Stars have a huge home field advantage. They buy and sell items all day, every day. The typical seller might sell a handful of items to a pawn shop in their lifetime. As such, the Pawn Star negotiators are professionals, while the Rubes are rank amateurs.

The paradigm is similar to the relationship of Venture Capitalists (VCs) and entrepreneurs during the fundraising process. The most prolific, serial entrepreneur might raise money from a VC a dozen or so times over their entire careers. Conversely, an experienced VC can easily craft hundreds of fundraising transactions over their professional tenure. This experience puts them at a tremendous advantage, which is why entrepreneurs should offset this experience deficit by relying on battle-tested startup lawyers, as discussed more fully in Roping In The Legal Eagles.

Powerful Knowledge – Not only is negotiating experience important, but knowledge about the item being negotiated is also crucial. A surprising number of sellers on Pawn Stars have little-to-no knowledge about the item they wish to sell, let alone its approximate market price. This significantly handicaps the seller, as they are unable to evaluate the Pawn Star’s counter offers. It also makes the sellers reliant on the Pawn Star’s experts, who have a vested interest in providing information that favors the buyers and not to the sellers.

BATNA – Most of the Pawn Star Rubes do not appear to have a Best Alternative To a Negotiated Agreement (BATNA) in mind when they enter the store. They clearly want, “as much as they can get,” but they generally are unwilling to walk away without a deal. As noted in Maximize Your Exit, it is impossible to obtain an optimal result if you are not prepared to negate the deal.

Qualified Buyer – Just as you should qualify your sales prospects, you should perform similar research before approaching a potential buyer. In one episode of Pawn Stars, a Rube brings in a sketch by well known artist. During the negotiations, the Pawn Star negotiator says something to the effect of, “I run a pawn shop, not an art gallery, I can’t pay that much.” The seller should have listened to this remark and sought out an art gallery. Instead, he sold his art to the Pawn Star at a deep discount.

Thus, one of the key considerations to ensure a successful negotiation is to only enter into discussions with a negotiator capable of agreeing to terms that will maximize your outcome. Getting the “best price” from someone who cannot afford to pay a market rate is not a successful negotiation.

Use of Funds – Rather than trying to maximize the value derived from their item, many Rubes hope to generate enough cash for a specific purpose. In one instance, a Pawn Star seller wanted enough money to go on a trip, while another wanted to buy a gift for their grandchildren. Your intended use of the proceeds should remain separate from the market value of the item being negotiated.

Close the Bid / Ask – In many negotiations, there remains a spread between what the seller wants and what the buyer is willing to pay. One way to bridge this gap is to identify non-financial variables that can supplement the value of the overall deal.

For instance, a startup might request premium service at no charge or smaller, more frequent deliveries to allow them to reduce their inventory levels. In the case of a Pawn Star negotiation, the sellers should first identify one or two items in the store that they want, before the negotiation commences. Once it is clear a gap exists between the “bid and the ask”, they can request that the Pawn Star negotiator “throw in” one or more of the previously identified items, to augment the purchase price. This might be advantageous for the Pawn Star, as the list prices of his products already include a hefty margin and thus the real cost of including one or more additional items is less than their perceived value.

Consignment – One-sided negotiations can sometimes be neutralized by utilizing unconventional approaches. In the case of pawn store sale, the seller might realize more money, albeit over an extended time period, if they partner with the pawn store and sell their item on consignment. In this way, the store would not purchase the item from the seller. Rather, they would place it for sale in their store and once it is purchased, they would retain a portion of the proceeds and remit the balance to the original owner.

Entertaining Tutorial

I encourage you to watch a couple of episodes of Pawn Stars, preferably with your children, and identify the sellers’ mistakes and how they could have obtained a higher price for their treasures. By avoiding some of the more obvious negotiating missteps, you may never become a Pawn Star, but you may become your startup’s negotiating star.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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