Note that this chapter is mostly about a fixed amount of value, so it’s a zero sum negotiation.
Preparing To Negotiate
Step 1: Assess Your BATNA
Step 2: Calculate Your Reservation Value
Your reservation value is the value for which you’re willing to walk away from the negotiation. It is your indifference point. It is the value at which you are indifferent between taking the offer and walking away.
Step 3: Assess the Other Party’s BATNA
Step 4: Calculate The Other Party’s Reservation Value
Step 5: Evaluate the ZOPA
Evaluating the ZOPA will give you an estimate of how much value is up for grabs. Your job isn’t merely to make a deal, it’s to capture as much value as possible.
Negotiation Postmortem
Do not evaluate performance based on how well you went beyond your reservation value. Do it by figuring out how much of the value you managed to claim. If the other party would have paid you a lot more, you didn’t do that well.
But of course, you may not every know how much the other party was willing to pay.
Common Negotiator Mistakes
- You made the first offer when you were not in a strong position to do so.
- You made a first offer that was not sufficiently aggressive.
- You talked but did not listen.
- You tried to influence the other party but did not try to learn from him/her.
- You did not challenge your assumptions about the other party.
- You miscalculated the ZOPA and did not reevaluate it during the negotiation.
- You made greater concessions than the other party did.
Should You Make The First Offer?
Whether you should or not depends on how much information you have. If you believe you have sufficient information about the other side’s reservation value, it pays to make a reasonable offer that serves as an anchor.
If you suspect you don’t have enough information about the ZOPA, you’d be wise to defer an opening offer until you have more information. If you make the first offer, it may be too much to the other side’s benefit.
How Should You Respond to Their Initial Offer?
This section is if they start with an offer.
Strategy 1: Ignore the Anchor
Strategy 2: Separate Information From Influence
Strategy 3: Avoid Dwelling on Their Anchor
The common refrain is that if the other party has an aggressive anchor, you should ask them for some justification. His concern is this makes the anchor even stronger.
His preferred approach is to probe just a little to see if there is any legitimate information. If such information is not forthcoming, switch to your perspective and ignore the anchor.
Strategy 4: Make an Anchored Counteroffer. Then Propose Moderation
If you go this route, keep in mind that the likelihood that both parties will end up at an impasse is higher. So do an aggressive counteroffer, and then suggest you need to work together to bridge the gap.
Strategy 5: Give Them Time To Moderate Their Offer Without Losing Face
If their offer is way too extreme, tell them their offer is not a basis to start the discussion.
What Should My First Offer Be?
How aggressive should you be? Consider the four factors:
Keep the entire ZOPA in play
To do this, make an offer that is outside the ZOPA - so you’ll know they’ll not accept it. Force them to negotiate their way into the ZOPA. If your first offer is within the ZOPA, you’re giving up a chance to gain value.
Provide a Justification For Your Offer
You do still need to justify your offer, though.
Set High, but Realistic Aspirations
You generally will fall somewhere close to your target price prior to negotiations. Therefore set a high price!
Consider the Context and the Relationship
You must know the context of the negotiation. What type of relationship do you intend to have with the other person. Will tough bargaining be poorly received? Will it impact your reputation?
How Can I Determine Their Reservation Value?
You need to get an idea of their reservation value. To do this, follow the following steps.
Step 1: Exhaust all pre-negotiation sources of information
Note that if you’ve done your research, the other side is likely to respect you more and take you more seriously.
Step 2: Identify Your Assumptions Prior to the Negotiation
Make an explicit list of all your assumptions, and what you do not know prior to the negotiation.
Step 3: Ask Questions That Challenge Your Assumptions
Ask questions to disconfirm your hypotheses! Don’t begin serious negotiations until you do.
Step 4: Ask Indirect Questions
Step 5: Protect Yourself From Lies and Uncertainty with Contingency Contracts
If the other party is giving justifications for their position that you think are not true, put contingency contracts that will be costly to them should they turn out not to be true.
Whenever the other party refuses to accept a contingency clause, be very cautious!
Effective Haggling Strategies
Strategy 1: Focus On The Other Party’s BATNA and Reservation Value
Strategy 2: Avoid Making Unilateral Concessions
Do not make concessions without asking for something in return.
Strategy 3: Be Comfortable With Silence
After you make an offer and the other side is silent, do not feel the urge to speak! You’ll end up bargaining against yourself!
Only speak when it’s your turn.
Strategy 4: Label Your Concessions
Whenever you make a concession, state it explicitly! Do not make a concession quietly. Make it known that this cost you.
Strategy 5: Define What It Means To Reciprocate
When you make a concession, both label it and specify what you want in return.
Strategy 6: Make Contingent Concessions
“I can pay higher, if you deliver quicker.”
This is a bit risky though. If you do it often people get annoyed.
Strategy 7: Be Aware Of the Effects of Diminishing Rates of Concessions
This is basically telling you not to fall for Ackermann Bargaining. If the other party makes smaller and smaller concessions, don’t assume you are near their reservation value!
Negotiating The Relationship
Tactics to preserve the relationship:
- When the other side makes an offer that is great for you, don’t be too quick to accept! It will signal to the other side that you’re taking advantage of them. Take some time to evaluate the offer, and then accept it without enthusiasm.
- Another approach: Make a counteroffer and ask for concessions. The other side will often feel more satisfied if some work went into it!
- Another approach: Give them what they want and more.