Chapter 3 - Basic Tools
This chapter will discuss some of the basic tools of negotiation, including concepts that can be applied universally, in any situation.
Alternatives
A critical prerequisite to entering any negotiation is to consider alternatives. The reason for entering into a negotiation is to achieve an outcome with the assistance of another party. Can you think of ways to achieve it without them? Can you abide the consequences of not achieving it at the present time?
For example, an inventor with a great business idea has various means to obtain financing: money from investors, a small business loan, borrowing from friends and relatives, getting a government grant, taking out a second mortgage, etc. He also has no real pressure to start a business immediately other than his own impatience or fear that someone else will come up with the same idea. That is to say that, if he is walking into a bank, he doesn't really have to cut a deal with this specific banker - he has alternative methods to get what he needs.
Alternatives are important to keeping the right perspective on a negotiation. As a general rule, the party that is in the more desperate situation must be accommodating in a negotiation, and lack of alternatives creates a sense of desperation.
Consider the example of an unemployed person attempting to negotiate a job offer - given he is not earning an income and still needs to support his household, his lack of alternatives makes him more likely to accept a low salary offer - and if the hiring company knows he is unemployed, they can take advantage of his desperation. If he already has a job, or financial resources to carry him for a while, or is considering multiple offers, he has the ability to take a tougher stance in negotiations, and the hiring firms must recognize that they stand a chance of losing him as a candidate.
(EN: A particular problem with this example is it is treated as a competitive negotiation but it is the entree to a long-term relationship. An employee who takes a job but feels he was taken advantage of at a time of weakness will likely not be loyal and continue seeking opportunities. A manager who hires an employee but feels he paid too much will look to be rid of the employee as soon as a cheaper replacement can be found. As such the competitive attitude the author suggests in this instance is myopic.)
In theory, a negotiator should not accept any deal that is less valuable than an alternative - which is easy advice to follow when the stakes are defined and measurable, but often if a negotiation falls through, the alternative is to negotiate with someone else, and you cannot be sure of your success.
There are also instances in which there are multiple benefits to a given decision. Taking a job involves more than a salary, but working for a specific company, in a specific location, working certain hours, insurance and benefits, etc. As such a person may consider a lower salary to work for a stable company, close to home, that pays an annual bonus and offers a great benefits package.
The author gives the example of a person negotiating a price with a vendor, and is able to point to lower prices that are available online in order to negotiate a better deal. Since it's a hypothetical example, it's easy to insist that everything but the price is identical - but in reality, there are often other factors: ordering online means paying shipping charges, waiting for delivery, taking the risk that the wrong item will arrive and need to be sent back, etc.
It's suggested that in instances in which you have few alternatives, you can often find them: a company that receives a buy-out offer is likened to a homeowner who receives an unsolicited offer to buy their house. The first step is not to consider the offer absent alternatives, but to have the business/home appraised and consider what others might offer for it, to put the unsolicited bid in perspective.
Another suggestion is to strengthen alternatives. Using the same example, a business might be able to negotiate for a better buy-out offer if they restructured their debt, or a homeowner might be able to ask more of buyers if he painted his home and performed a few basic repairs. In the same way, employees who are unable to negotiate for better pay individually gain strength by forming a union.
Reserve Price
The concept of reserve pricing comes from auctions: it represents the lowest price the seller is willing to accept, and unless the highest bid exceeds it, a sale will not take place. Generally, this is not disclosed to bidders because they will be reluctant to offer much more if they know the minimum price the seller will not accept.
The same concept should be applied to any negotiation: to have a clear idea of what you hope to achieve, but also an absolute minimum that you need to achieve. As in auctions, it's not something to disclose casually to the other party in a competitive situation, but it should be kept firmly in mind in order to avoid negotiation to an unacceptable resolution.
The author suggests that a reserve price must be realistic. If you have unreasonable expectations about the value of your business or your home, or want an unreasonable amount of pay for a job, then negotiation is simply a waste of time. Unless your opponent is very gullible or uninformed, they will not be convinced to offer the amount you demand.
(EN: A more common question, which the author does not presently consider, is how much your opening bid in a negotiation should be above your reserve price. If you set it high the other party will not be willing to negotiate at all, but if you set it low they may offer less than they might have been willing to give.)
Appraisals and surveys can be helpful in determining a reasonable price. There are standard methods of valuating a business, details about home prices in various locations, surveys of salary in various professions, and other sources to get a sense of the fair price.
And just to be sure: the author mentions that a price is not the only thing that can be taken into consideration as a reserve. There may be other conditions of a deal, quantifiable or not, that are must-have qualities of an agreement. For example, the geographic location of a job may be a point on which a candidate may not be interested in negotiating
(EN: My sense is that a reserve point, unlike a reserve price, is something that can be disclosed in advance because it is not negotiable. To state, that "I want a house in Florida" is not something that a seller in Idaho can change about his property, nor will a candidate who insists on having medical coverage likely convince a company to offer it if it does not already.)
Area of Agreement
The area of agreement is a range that is between the lowest price the seller will accept and the highest price a buyer will offer. That is, if the seller will not consider an offer less than $200K and the buyer will not pay more than $250K, then the range of $200-250K is their "area of agreement," or a range in which both will be amenable to the price. If there is no area of agreement, there is no chance for a successful negotiation unless one party capitulates to the other.
All of this seems straightforward, and the two parties could readily come to an amenable agreement if they simply disclosed their prices to one another - but that seldom happens. It is right believed, particularly in competitive negotiations, that if the seller knew the buyer's budget, he would price it at exactly as much as the buyer would pay when he might otherwise have sold for less, and vice versa. And so, they dance about, each attempting to serve their own interests and work into the area of agreement.
In some negotiations, it may be possible to add conditions that will encourage one party to move outside their reserve range. A seller may offer additional items or conveniences to convince a buyer to meet his desired selling price, or a buyer may suggest that a seller remove unwanted features to get his desired buying price.
In collaborative rather than competitive negotiations, parties may be more amenable to being forthcoming about their needs and budgets, trusting the other not to take advantage of this information but to work with them to help them achieve their goals within budget or even under it. Even competitive negotiations may result in the disclosure of a reserve: a seller may indicate they can't accept and offer below a certain amount or a buyer may state that they cannot possibly pay more for an item - but because this is often done dishonestly, it is seldom trusted.
In business settings there is often a double or triple layer of deception: the accounting department tells an executive they have less budget than they really do to purchase a piece of equipment, an executive then tells a manager an even lower number, and the manager is left to haggle with a supplier given an unrealistically low offering price.
From a negotiation perspective, you should be honest with yourself about your reserve and recognize what the other party must do to reach the zone of agreement, and assess whether they are likely to do so before initiating negotiations. Given the volume of information available online, you can do some research to get a sense of their costs and what others have paid to have a better sense of what their reserve price might be,.