That’s my bottom line. Knowing when to walk away.
Most negotiators come to the table with little to no preparation. Sure, they give some thought to what they want, but they often rely on their experience to get them through. And while they know what they want and hope to get, they don’t usually reduce that to a bottom line. This is a critical mistake.
In the world of negotiation, your “bottom line” is known as your reservation point – your worst possible deal that you will accept.
We have a friend who finds discussions on negotiation topics particularly fascinating and incredibly useful. During one such discussion, he really locked on to the idea of a reservation point, particularly appreciating our characterization of it as the worst possible deal one is willing to make. He and his wife, who were relocating out of state, desperately wanted to sell their home and he and she (a finance whiz) decided to calculate their reservation point, which in this case was $480,000. If they could not get that price, they planned to rent it out instead, although being out-of-state landlords was something they were hoping they could avoid.
A couple of weeks later he approached us – as joyful as could be – and said that he and his wife had engaged in protracted negotiations with a prospective buyer who eventually came up with a final offer of $475,000 and not a penny more.
Okay, let’s stop right here. Who takes that offer? Be honest. Maybe you do, maybe you don’t, but certainly, many would, and we assumed our colleague was one such person because he really did not want to rent the house and he was beaming when he announced the $475,000 offer.
To confirm our suspicion we said, “So, did you accept the offer?’
“No.”
“No? But you seem so happy.”
“Exactly -- and thank you so much!
“And you’re so happy? Why?”
“Well, thanks to you we knew we had to get $480,000, so when the talks stalled at $5,000 apart and neither the buyer nor seller would move, others did. The buyer’s agent and our listing agent each shaved $2,500 off of their commission, so the buyer paid $475,000 and we got the benefit of a $480,000 sale. Thank you very much!”
Okay, so you’re thinking what’s a measly $5,000 on a sale of almost half a million dollars?
That’s fine, we’re not offended, but here’s the point: Wouldn’t you rather have $5,000 than not have $5,000? Our friends certainly did! Once they understand the power of their reservation point, they were able to get the deal they wanted without an unnecessary compromise.
So why do many people settle for less than they need? One common reason is agreement bias. It occurs when negotiators are so intent on reaching common ground that they are reluctant to recognize differences of interest. In other words…
Agreement bias is the tendency to reach an agreement even when it violates at least one party’s objectives.
Colloquially, we often refer to this as “buyer’s remorse” (which is actually a bit of a misnomer, given it also happens to sellers). Research indicates that a negotiator’s reservation point has the most direct influence on their final outcome. Our friends’ negotiation over the house is a perfect example.
So remember these two points:
1) Failure to assess your reservation point can lead to agreeing to an outcome that is worse than what you could get elsewhere (see also last month’s discussion of BATNA);
and
2) Losing sight of your reservation point may cause you to reject an offer that is better than what you could get elsewhere.
Neither of these scenarios is inevitable. When preparing for a negotiation, always determine your reservation point. And during negotiation, never forget your reservation point.
Do both of these things and you will always know when to walk away!
Linda L. Barkacs & Craig B. Barkacs
Love these man.
I also love negotiating - I find it a really fun hobby. Human interactions are amazingly complex, and trying to work with another person to change their point of view (to get them to move their offer) is an incredibly complex “art”. But in negotiations the result of this “art” can be very clearly measured. You know at the end how much each side moved and whether it was a “good deal” or bad. Which is so fun to me.
Another topic that personally I find many fail to grasp in negotiations is - it’s not a zero sum game. You cannot (or at least you won’t be very successful) go into negotiations thinking “I’m going to change their mind, I’m going to make them sell this for less than they are prepared to do”. That’s very difficult/impossible. Instead you have to go into with a mindset of - how do I make this the best deal for them and and for me. How do I find out what’s really important to them, and what’s not important for me, and find the best combination that works for both of us? And best for them could be many many things.
Many times - time to sale is a critical factor and the seller wants to “lock in a deal” quickly (so making an offer that says “we can close Friday if you agree to X price would be great for them). Many times the seller has a high mental effort associated with negotiation, so they want to only negotiate once and not negotiate with a lot of different people (so you may want to make a clear offer early on to make it easy for them, rather than drag out negotiations - this works often if the person is selling something personally and sees the whole process as a pain/distraction). In more complex deals the other side may be less concerned with cost and more with other factors like payment terms, publicity, access to people/customers, or length of agreement.
Maybe your negotiating with a small company that just started, I’d bet getting stable cash flows and getting a referral customer would be really important to them, so maybe you can get a lower price if you pay up front and tell them you’ll do 2 referrals if they hit x metrics.
But as a buyer or seller, the most important thing you can do is find out what is important to the other party and making sure you are helping them get the best deal for them on what’s important to them, while also getting what’s important to you. That is by far the biggest different between good negotiator and bad ones. Those that know what the other side wants negotiate the best deal. The best know what the other side wants better than they know it themselves.
It’s so fun!!