Claiming value in a negotiation
The approach to claiming value depends on whether it is a distributive or an integrative negotiation process. Distributive negotiation is a fixed- sum game where one person’s gain is another person’s loss. In such a scenario, there are directly conflicting interests, and each party attempts to maximize his or her share of the payoff. The challenge in simply dividing the “pie” is that the two parties generally do not know exactly how large it is. In these negotiations, first offer is the most sticky and therefore critical in terms of the timing and precision. Research shows that precise first offers are more sticky, as long as there is a logic for the precision. Making a first offer is risky when you lack knowledge. It is essential to build some rapport before making an offer.
Extreme offers, however, damage relationships. The relationship capital is depleted when the first offer is outside the bargain zone. Often, an extreme first offer is a bait. The more time an extreme opening offer has to justify itself, the more the counter-party is baited into the offer.
One way to deflect an extreme offer is to make a counter offer. Another way is to dismiss it outright as an inappropriate starting point for a conversation: “Let us take some time to evaluate and reconvene when we have a better starting point.” It is important to recognize that an extreme offer makes the recipient uncomfortable, but he or she can consciously decide to become comfortable with that discomfort.
Before entering a negotiation, you need to assess three things: your goals, your best alternative to a negotiated agreement (BATNA), and the reservation price.
The goals should be quantitative and precise, and the negotiator must be held accountable for them. They must be somewhat difficult to achieve and must be recalibrated over time. A caveat is that “reaching a fair agreement” is nota goal. There is no such thing as dividing the pie fairly because fairness is not an objective metric. If the counter party does better than you do, you feel it is unfair even though you may have achieved your goals.
BATNA is the alternative to the deal if you cannot come to an agreement. The reservation price is the walkaway point that you will not breach and which you cannot reveal at any cost. For an outcome lower than the reservation price, no agreement is preferable. The final deal is usually secured between the goal and the reservation price. The bargaining zone is the space between the buyer’s and the seller’s reservation price. The zones must overlap for a possible agreement. While the BATNA is your source of power, you also have to assess your counterpart’s goal, BATNA and reservation price.
Often, concessions are made in the course of a negotiation. A clear rationale must be developed for each given concession. Moreover, concessions must always be reciprocated. If you make unilateral concessions in a negotiation, you will end up on the losing side. The value of the concessions must go down with time; you should not be making large concessions toward the end of a negotiation because then you are giving away value.
Closing the deal
One tactic for closing deals is to split the difference, i.e. meet in the middle, especially if the differences are small. Another way is to throw in a sweetener at the end. But it should not breach the reservation price. Sometimes the counter party asks for something towards the end; that is not a sweetener – that is a “nibble.” A sweetener is voluntary, whereas a nibble is forced. The only way to deal with a nibble is to nibble back.
Sometimes one party may “assume the close” and behave as though the deal is done. It is important to be aware of whether you are really in agreement or you are signing out of politeness because the other party assumes the deal is done.
In some negotiations, ratification is used as a deliberate strategy, i.e. when the deal is almost done, the counter party says they have to check with their boss. Therefore, before starting negotiations it is important to check who the decision maker is. When you are dealing with a large organization, you may never see the ultimate decision maker. In such cases, you may have to factor a buffer into your calculations as you can expect a nibble at the end.
Deciding who in an organization will negotiate has to be an informed choice because the power dynamic will emerge in a negotiation. If you want to develop a relationship, it is better to match the level of the negotiators or even go one step higher.