Start-up lessons direct from Patpong market

Ruslan KoganThe Patpong market in Thailand has known a few unsavoury practices, but for me, it’s the birthplace of negotiation strategy, and a place where every businessperson can learn something.

 

Patpong market has lots of stalls selling t-shirts, hats, handbags, watches and all the other things tourists like to buy in Asia. Although there are hundreds of stalls, most of them sell the same products.

 

A few years ago I was backpacking through Asia with some friends and we ended up at Patpong one night. A few of us split up and we went shopping. One of the things I purchased was a t-shirt for 200 baht.

 

When we all met up again, I noticed a mate of mine had purchased the exact same t-shirt but from another stall.

 

When I found out that he had paid 500 baht for the t-shirt, it gave me a good opportunity to have a laugh and tease him a bit.

 

But then it got me thinking – how do I know that even at 200 baht, I didn’t get ripped off and wasn’t a laughing stock for the locals?

 

I realised that there was only one way I could know what the right price for that t-shirt was. I needed to know the highest price at which a stall owner would let me walk away after they declined my offer.

 

The mission

 

Given that about 20 stalls were selling the same t-shirt, I set out on a mission.

 

I walked up to the first stall and offered 50 baht. The stall owner laughed at me and said that his best price was 600 baht.

 

I told him my final offer was 50 baht and walked away – he didn’t chase me to seal the deal. I walked up to the next stall and offered 60 baht, the same thing happened.

 

I kept doing this until I got to an offer of 120 baht. After offering 120 baht, the shopkeeper declined the offer. When I started to walk away, she chased me screaming “Okay, okay.” Bingo.

 

Other than getting a bargain, this transaction made me realise that when I purchased my first t-shirt for 200 baht and thought I got a great deal, I overpaid by 65%.

 

This showed that in business, you never know if you are getting the best price in a transaction unless you know the highest price at which the seller is not willing to transact.

 

Applying the lesson

 

This is a very handy strategy when you are purchasing something that isn’t sold in an open and transparent marketplace – such as advertising space.

 

Sometimes we’ve been offered advertising packages for over $10,000 and ended up securing them for under $5,000 by using the strategy I learnt at Patpong.

 

We reply to them with a counter offer of $1,000 and then show no interest for a week and see how they respond.

 

We then continue slowly raising our offer until we find the highest price at which they are not willing to transact, and then we offer slightly lower to ensure we reach a win/win transaction and we get the package at the best possible price. This is our duty to our customers.

 

Asian markets can be a great learning ground for business strategy. One other thing I noticed at Patpong is that every single stall had four different colored plastic bags that were all the same size – black, red, yellow and green.

 

I noticed that shops would give different customers different coloured bags but couldn’t work out what it all meant.

 

Not knowing bothered me so much that I took aside one of the shopkeepers and offered him 200 baht to tell me. He was happy to spill the beans.

 

He told me that most of the shops at the market had the same owner so they were not competing against one another.

 

The color bag system was actually a way of cooperating. He said: “If somebody is a crazy American who pays a big price, we give them a green bag.”

 

“If somebody pays a medium price, we give them a yellow bag. Low price, we give a red bag. Best price gets a black bag. We look at what bags any new customer is holding and know what price to give”.

 

It all made perfect sense. By cooperating in this manner they were able to increase their customer conversion rates by quoting prices that would tempt the buyer to transact immediately, also increasing their profitability.

 

I looked at the bags I was holding. The first t-shirt I purchased was in a red bag, the second was in a black bag. The t-shirt my mate had purchased was in a yellow bag.

 

It showed that even the basic looking markets in South-East Asia have a better system for understanding their customers than many established retailers in Australia.

 

Getting a win/win

 

When in Patpong I quickly learnt that when you’re dealing in markets without transparencies that you might ordinarily rely on, you need to revert to basic principles. A fair contract is formed when you have two parties in a win/win situation.

 

All else being equal, the objective of negotiation is to get the lowest price possible. This means that you need to find the point at which a transaction is still a “win” for the other party, but the lowest point.

 

You need to be patient, and realise that the first deal offered is very rarely the best. You need to test the market fully, before locking yourself in.

 

I’ve been using these principles to ensure Kogan always gets the best deals from our manufacturing partners, allowing us to pass savings on to our customers.

 

These basic principles have applications across many business situations – from HR, to marketing, and, of course, buying. It goes to show that even if you’re taking a hard-earned break, you should never stop thinking about what you can learn and translate to business success and profitability.

 

Ruslan Kogan is the founder and CEO of online technology retailer Kogan.

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