What the alternative is worth in money

The carrier has announced a 12 percent increase, the management team has given a mandate of 4, and the alternative looks cheaper than it really is. In the last issue I promised to work through that gap, and I do it here, because the arithmetic decides whether the buyer can say no with a calm stomach or is simply bluffing.

The case is a freight agreement up for renegotiation in January. The buyer sits on one side of the table and the carrier's key account manager on the other. The alternative is a different carrier, 3 percent more expensive than today and with no lock-in. That number is in practice the only reason a mandate of 4 percent can hold at the table.

The arithmetic with round numbers

Say freight costs 10 million a year in your own currency. The numbers are mine and chosen because they are easy to work with, and the unit does not matter, since the whole exercise ends in percentages.

If the buyer accepts the increase, freight costs 1.2 million more next year. The mandate allows 400,000. The gap is 800,000, and that is what the negotiation is about.

The other carrier costs 300,000 more than today. If that is the only number on the table, the alternative looks far better than the mandate, and this is where most people calculate wrongly. A quote from a competitor is the price of one element in the alternative. The rest is the cost of switching.

What has to be added on top

It takes time before a new carrier performs at the same service level as the old one, and the first months cost money in delays and extra follow up. A switch costs internally in new systems, new contacts and new ways of working. Rebates and bonuses built up over several years of trading disappear. Notice periods in the old agreement can mean you pay in two places for a while.

Then there is the management time needed to carry the switch through. That is the item nobody wants to put a number on, because it is your own time and your colleagues' time. It gets spent anyway, and it is taken from something else. The price of the alternative has to include every cost of switching, otherwise it is a number that falls apart the first time the other side pushes.

It is hard to calculate. In the academic paper Switching costs in logistics service, buyers answer that the total cost of changing supplier is difficult to calculate objectively, because several of the items can only be assessed qualitatively and are perceived differently by the individual people in the purchasing department. That is an argument for putting a number on it anyway and writing it down, so everyone in the management team works from the same figure.

Set those items at 250,000 for the first year in this example. Then the alternative costs 550,000, or 5.5 percent.

What the number tells you

Anything above 5.5 percent is more expensive than switching, and there the buyer can stand up from the table without bluffing. That is the walk away point, and it is set by the BATNA, the best alternative if you do not reach agreement.

The alternative alone does not bring him down to 4 percent. Between 5.5 and 4 percent lie 150,000, and the variables have to find them. A year more commitment, a fixed volume or different payment terms are worth something to the carrier, and each of them has to be priced, so the buyer knows what he gives and what he gets back.

If the arithmetic instead shows that the alternative costs 7 percent, then the mandate of 4 percent is a wish, and it is better that the management team discovers it now than at the table. Either the alternative has to be strengthened, for example with a real quote from a third carrier, or the mandate has to move.

What the other side hears

An experienced key account manager can hear the difference between an alternative that has been calculated and one that has merely been mentioned. He asks about lead times, about when the old agreement can be terminated, and about who at your end will run the switch. If the answers are missing, he knows the alternative will never be used, and then the mandate is in reality whatever he announces.

I have not myself been in a situation where an alternative failed when it had to be used. But as an adviser I met the same companies again and again, and they rarely lacked knowledge of what they ought to do. They lacked the discipline to carry it through, and somebody who disagreed with them before the decision was made. The price of the alternative is a good place to put that disagreement, inside the management team and before the other side gets the chance.

The same arithmetic in grocery retail

In grocery retail the pressure typically comes from four directions that a supplier knows in advance. The chain demands marketing support on top of the price, threatens to delist the product, plays suppliers against each other for the same shelf space, and puts private label on the table as its alternative. The Danish Competition and Consumer Authority described already in 2014 that negotiations had become harder, that the chains' strength increases if they can use foreign suppliers, and that suppliers' marketing support helps finance the chains' activities.

Private label is the chain's priced alternative. McKinsey describes in an analysis of procurement in retail that the chains have to be able to calculate how much value each product creates and which prices are actually possible. When private label is put on the table, it is a calculation the chain made at home, and the supplier who brings only his own price has nothing to hold it against. For the supplier the alternative can be the volume that could move to another chain, another channel or another market, and what it costs to move it. That number is rarely ready when it is needed, and then the negotiation becomes a fight over one percentage point. Today I am Global CCO at Palsgaard, which supplies ingredients to the food industry, and before that I worked in FMCG companies at the other end of the value chain.

How few bring an alternative

It is not only in freight that the alternative is missing. Scotwork, an international firm that trains negotiators, published in 2026 results from its own survey of how negotiators work. Only 18 percent have a fallback plan if they do not get a deal. Only 24 percent find out at the start of the negotiation what the other party wants. The survey comes from a training company and the report does not state how many responded, so the numbers are an indication and not a verdict. They still point the same way as the arithmetic above, namely that most people walk in with their own number and without a priced alternative.

What you can do on Monday

Take the agreement that comes up for renegotiation first and calculate the alternative in money. Start with the price from another supplier and add the five items above, including management time. Then compare the three numbers, the announced increase, the alternative and the mandate. That shows you whether the mandate sits below the alternative, and how much the variables have to find.

Then give the calculation to a colleague who is not going to negotiate, and ask that person to shoot it down. If the colleague finds an item set too low, correct it before the number goes to the management team.

The tool for this is called Det omvendte T, the inverted T, where the alternative, the variables and the mandate stand on the same page. It is a free one page preparation tool, in Danish, at https://upscalestrategy.com/s/indspil-en-2026-44-det-omvendte-t-o7xf. The method is trained in a Danish language course at forhandlingsuddannelse.dk.

The annual agreements for 2027 are being negotiated now, and there is still time to get a real quote and work it through.

Sources

Konkurrence- og Forbrugerstyrelsen (2014). Fremtidens detailhandel, Konkurrence- og Forbrugeranalyse 01 2014. https://kfst.dk/media/2829/20140410-analyse-fremtidens-detailhandel.pdf

McKinsey & Company. Rethinking procurement in retail. https://www.mckinsey.com/~/media/McKinsey/Industries/Retail/Our%20Insights/Rethinking%20procurement%20in%20retail/Rethinking-procurement-in-retail.pdf

ResearchGate. Switching costs in logistics service. https://www.researchgate.net/publication/262710655_Switching_costs_in_logistics_service

Scotwork (2026). Negotiation Skills Capability Survey, UK. https://www.scotwork.co.uk/wp-content/uploads/sites/7/2026/04/NSCS-2026-UK.pdf

Claus Dahlmann Larsen
Upscale Strategy