Imagine that you purchased a new laptop. You are meeting an interested buyer later today to sell your old one. You want to make a good deal, but what counts as a “good” deal, really? You can’t rely only on your impressions or your gut feeling; that’s the best way to regret the deals you make. Instead, you need reference points and simple decision-making rules.
The negotiation in our scenario focuses on a single issue: the price of the laptop. We refer to such negotiations as distributive because one party’s gain is the other party’s loss. Said differently, distributive negotiations determine how fixed resources, such as money, are split.
Using the laptop scenario, I will introduce you to the common parameters of distributive negotiations. Combined, these parameters will help you make good decisions when you negotiate. Ready? Go!
Step 1. What do you want from this negotiation?
Set yourself an ambitious, yet reachable goal. It would be great if the buyer offered you the original price you paid for the computer, but that’s not realistic. To keep things simple, let’s guesstimate a number together.
You bought the laptop new 18 months ago for $2,600. The warranty is only available for another 6 months, which is an issue you need to factor in. You believe the laptop is still in good condition, however, so you hope to sell it for $1,600.
In negotiation terms, $1,600 represents your aspiration point, the amount of money you will get from the buyer if everything goes your way.
Step 2. What’s your exit rule?
Determine the lowest amount of money you’re willing to accept for your laptop. The number you choose depends on the alternatives you have and how bad you need the money.
Let’s pretend that you made an online submission yesterday to a computer store, and they offered you $1,000. The offer is not a great alternative in your opinion, but it’s the only one you have so it’s your best alternative. Negotiators call such an option your Best Alternative to a Negotiated Agreement or BATNA.
You have no interest in accepting any offer that’s worse than your BATNA. Thus, $1000 represents your reservation point, the amount below which you will walk away from the negotiation and turn to your best alternative.
Step 3. What does the other party want?
It takes two to tango. You don’t know the interested buyer yet, but you have every reason to believe they are an equally smart and motivated individual who’s looking for a good deal.
Although people openly discuss their aspiration points, they rarely share their BATNA. Why? Because a negotiator’s power in a distributive negotiation depends on how good their BATNA is. Think about it, you will have a much harder time getting a good deal if the buyer has excellent alternatives. The better their BATNA, the easier for them to walk away.
You won’t know their numbers before the negotiation, but these numbers do exist. Their interest is to buy your laptop for the lowest price possible, so let’s imagine that they set their aspiration point to $900. They have determined that price to be an ambitious yet reachable goal. They have a good BATNA, with an alternative seller offering them the same laptop you have for $1,300.
What does our negotiation framework look like?
We know that you are willing to accept a price between $1,000 and $1,600. We also know that the buyer is willing to pay a price between $900 and $1,300. Looking at the overlap between the two ranges, you are both willing to accept any deal between $1,000 (your reservation point as a seller) and $1,300 (i.e., the buyer’s reservation point). We call this range the Zone of Possible Agreement (ZOPA).
Of course, you would much prefer getting $1,300 for your old laptop than $1,000, which is your BATNA. We call the difference between the negotiated price and your BATNA, your negotiator’s surplus.
Keep an eye on your negotiator’s surplus throughout the entire negotiation. Don’t accept any deal worse than your BATNA, even if you are nervous. Focus on capturing as much surplus as you can.
Instead of approaching a negotiation as a vague and uncertain process, you now know how to set practical decision-making rules for yourself. This is only a starting point, however. In my next issues, I will address several important topics:
- How to prepare for negotiations. In our example, your BATNA was rather weak. We will discuss how to improve your BATNA to increase your negotiation power.
- How to make first offers. I’ll give you advice on crafting the right first offer to maximize your negotiator’s surplus.
- How to expand the pie. Negotiations don’t have to be distributive. Bringing new issues into the negotiation can help you create more value for both negotiators.
Do You Want to Improve Your Negotiation Skills?
Sign-up using the form below. Not ready to commit yet? Read more about my newsletter.