Jimi Smoot Entrepreneur / Software Engineer

Using game theory to close more sales

Mastering the art of strategy is crucial if you want to be great at sales. That means understanding and knowing how to apply the fundamental principles of game theory to your interactions with clients and customers. “Strategic thinking is the art of interpreting and revealing information,” write economists Avinash Dixit and Barry Nalebuff in their book, The Art of Strategy“It is the art of putting yourself in others’ shoes so as to predict and influence what they will do.”

Game theory, according to Dixit and Nalebuff, holds the underpinnings of how solid strategic decisions are made in business. Know the fundamentals and you’ll be able to anticipate how customers respond to you in order to earn their trust and cooperation more easily. “Game theory aims to help you think strategically, and then translate these thoughts into action,” they write.

Trust Is Your Most Valuable Commodity

Customers arrive as skeptics and it’s your job to earn their faith. When it comes to sales, that means you can fairly assume customers come into the scenario initially unsure about whether you, the sales person, are honest and trustworthy, says Cambridge economist Partha Dasgupta.

If instilling confidence in your customers is key to closing sales, you will need to think strategically about how to build that trust from the very start. “People invest resources for the purpose of building a reputation for honesty,” writes Dasgupta. “The fact that the dishonest salesman builds his reputation by going against his short-term interests is an important feature to highlight.”

Think Backwards To Move Ahead

Game theorists talk about the theory of Backwards Induction making sure to always calculate backwards, against time rather than forwards, with time. “To analyze how other players will react to your move, you need to play out all the reactions (including yours) to their actions as far ahead as possible,” write Nalebuff and business economist Adam Brandenburger in the Harvard Business Review. “You have to look forward far into the game then reason backward to figure out which of today’s actions will lead you to where you want to end up.”

That means thinking strategically about how your product or service meets the very particular needs of customers even before they convey those needs to you. “To assess your added value, you have to ask not what other players can bring to you but what you can bring to other players,” write Brandenburger and Nalebuff.

Consistency is Key

First impressions are critical, but so too is giving customers a sense that you’re consistent in your behavior and what you promise.

Typically customers interact with your brand through a handful of touch points. “A customer’s journey – from first hearing about a product to purchasing it – involves a vast and growing array of encounters with a product or brand,” according to a Cisco research paper on the future of customer touch points. “In fact, consumers ‘touch’ your brand an average of 56 times between inspiration and transaction.”

When dealing one-on-one with customers, that means your direct interactions with them play a huge role in governing their choices moving forward. “Most business interactions, such as the ones between manufacturers and suppliers, and sellers and customers, are repetitive in nature,” write Stanford’s Feryal Erhun and Georgia Institute of Technology’s Pınar Keskinocak. “The dependency of future actions on past outcomes plays an important role in the current choices of the players.”

Find Creative Ways To Raise Your Added Value

That means it’s in your best interest to create added value for clients. “Good basic business practices are one route to raising added values,” write Brandenburger and Nalebuff. “You can tailor your product to customers’ needs, build a brand, use resources more efficiently, work with your suppliers to lower their costs, and so on.”

But according to The Art of Strategy, offering clients various alternatives to choose from enables them to feel more in control and allows you to find a way to maximize revenues. Game theorists call this strategy “screening.” It can often be challenging to know exactly how much each client is willing to pay for your products or services. In their book, Dixit and Nalebuff suggest one strategy for tackling this strategy creating various versions of the same product offering with differing prices for each version in order to screen customers’ choices.

This enables customers to self-select which version they can afford, rather than creating a make-or-break situation for them. Examples of this range from book publishers offering hardcover and paperback versions of the same book at very different price points or airlines offering first class tickets alongside economy tickets for the same flight. Finding effective ways to manipulate offerings in this way gives you the opportunity to reap the greatest rewards.

Remember: The Most Patient Player Wins

Often we can feel rushed to close a deal for fear of the cost of waiting. But game theory suggests that the biggest winner is the one who can be the most patient, according to Dixit and Nalebuff. That means not just focusing on negotiating the terms of a deal, but also thinking ahead about how to structure the deal so that the cost of waiting is lower for you than it is for your client.

“The more patient player – the one who places more value on money in the future relative to money in the present – has an advantage,” writes behavioral economist Dean Karlan. “The player who is willing to hold out longer has more bargaining power, and so receives a better payoff.”

Hard as it may seem in the midst of negotiations, that means holding the big picture in mind thinking about your long-term repeat business with clients rather than just settling for the quickest easiest deal.

Tags: sales