Negotiating means Reaching an Agreement
The first thing to understand is that the purpose of negotiating is to reach an agreement. It's not about beating someone, but rather you should aim for a mutual victory. Someone is selling you need for a given price, and you wish to pay a different price. If at the end of the negotiation you walk away without that service/good/keychain/whatever, and the seller does not make a sale, you both lost. If, on the other hand you walk away with what you needed managing to save a couple bucks, you both won.
The corollary here is that negotiation implies willingness to modify one's position. Stubbornness is the enemy of negotiation. This works both ways: if the seller tells you that prices are not negotiable then he will never make the sale. Similarly, if you offer one price and stick to it no matter what you will never purchase the goods.
As this guy puts it:
Don’t try to be the victor. Avoid zero-sum games where someone else has to lose in order for you to win. If you negotiate like that, you’ll probably win a few, but you’ll lose just as many and kill a lot of good relationships along the way. Instead, find a way for everyone to win.
Furthermore, because negotiating is not a conflict, you should always be happy when doing it. Always keep a smile on your face and be courteous. You will immediately witness how this approach changes the dynamics of the discussion.
The Price Is Right, for You
The second thing to understand is that you will always end up paying more than some people, and less than others. This means that foreigners will invariably pay more than locals. And this is somewhat fair since very often foreigners and tourists can afford more than locals. The point being is that you should not care about how much others pay. Moreover, always assume that you will find that same thing you just bought for slightly cheaper, one block away from where you purchased it. Once again: you should not care.
You should instead pay the price you think is right at that particular moment. "Right" here means a variety of things, and is often subjective (hence why people pay different prices). You know you did not pay the right price for you, if you walk away from the sale feeling either angry because you think you were ripped off, or guilty because you think ripped the poor guy off. These feelings will spoil your mood, and you will not enjoy the rest of the day. Imagine negotiating for a Coracle boat ride in Hampi, India, and feeling foul throughout the whole one-hour ride down the river. You think you would enjoy it?
Moreover, the price depends on offer and demand. If you are stranded in the desert and you meet the only person with spare supply of water, then you will pretty much end up paying an exorbitant price for that water. However, that price will be the right price, simply because that purchase will save your life.
Finally, it helps to know how much the local currency is worth in your currency. It is also important to know what is the cost of living in the country you visit. How much does bread cost? This is a great metric to gauge how much you are effectively spending in local currency terms.
Having understood the afore-mentioned points, you now have the right state of mind to begin negotiating. There are of course a set of techniques you can use. Negotiating is a game. Not only you should enjoy it. You should also make sure you are the seller are both playing with the same rules.
1. Never Quote the First Price
This basically means: never speak first. Let the seller do the talking at the beginning. This will give you a feel of what price range you will be dealing with. Moreover, it will ensure that you don't immediately overpay for something. Remember that you cannot go back on a quoted price. You can however walk away.
2. Everything is Negotiable
This is a corollary of my first "Negotiating means Reaching an Agreement" point. A seller that is not prepared to give in, may it be lowering the price, offering something extra, etc. is too stubborn for you to waste your time doing business with.
3. Every word Spoken when Negotiating is a Lie
Assume that everything you hear or say during a negotiation is a lie. Ranging from "there's a guy down the street selling this for way cheaper", to "these are genuine local products made, you won't find anywhere else", it's all gibberish talk. So embrace this philosophy and don't be afraid to overshoot your statements. Keep a smile on your face and always be respectful, of course. However keep in mind that no souvenir vendor will ever be really offended if you criticise the items on sale, seeing as they have no personal value for him.
4. Act Like an Expert
Whenever you look at something you think of buying, examine it as if you had a PhD on the topic. Look for defects, scratches, dents, threads sticking out, bits of glue missing, etc. Then, point the defects out. Don't be afraid to ask to see a different item of the same kind. You want the seller thinking that you are an informed buyer who will not be fooled into purchasing something that is low quality.
5. Use the Local Culture to your Advantage
Learn a few words in the local language. Greetings are particularly important. If you walk up to a seller and say hello in their language they will stop regarding as a human-piggy-bank-tourist. Nothing beats greeting people in the Souqs in Marrakesh with a "As-salamu alaykum".
Learn the local customs. For example, in Muslim countries, Barakah (destiny) is very important. Making the first sale of the day is very important because superstition says that a good start to a day means the whole day will go well. Always ask if you are the first customer of the day. You will often be able to obtain a bargain with a lot less effort.
6. Older means Wiser
Look out for older sellers. If you enter a family-run business, speak to the grandfather, the father or whoever is the oldest in there. Older people are often less willing to rip you off. Because they are old, they have seen it all, done it all and are not as hungry to make extra bucks by negotiating hard with you. The youngsters, on the other hand will be very hungry.
7. You Can Walk Away
Remember you have the choice to walk away from a sell. Never forget that the buyer is the one spilling out the cash, and this is a tough decision. Way tougher than a seller lowering the price. The fact that you engaged in a half-an-hour discussion with a seller does not in any way force you to purchase anything. If you feel that the price is not right, the item is not the one you want, or if you have other unsolvable doubts, say no thanks, goodbye and leave.