Saturday, November 08, 2008

The Minimum You Need to Know about Negotiation

I recently sold my old iPod shuffle online, and when I went to meet the
purchaser I was all set to show her the unit and discuss price, but she
met me with an outstretch hand containing the money. I was prepared to
negotiate, so I was surprised and thought this was a tactical error on her
part. But I think I understand.

Of course there are lots of reasons why she might not have wanted to get
into it. But one reason is that she might have thought like I used to
think about negotiation: that it is some kind of begging, or
favour-asking. Since I read this book, The Mind and Heart of the
Negotiator by Leigh L. Thompson - the book which may turn out at the end
of my life to have benefitted me in measurable, monetary terms more than
any other book - I now know that negotiation is just rightful exercise of
your real power. And that is the power to walk away. (if you absolutely
can't walk away, if you *have* to make a deal right then and there no
matter how bad it is for you, then it's not a negotiation, and all you've
got is begging or asking for a favour)

A negotiation actually benefits both partners, because a failed
negotiation means both people lose out. If she had held out for a lower
price money, I would have either had to go with it or walk all the way
back to my office with no more money and maybe wait another few months for
someone else to respond to my ad. Much better to have the money in hand.
So that's power that she had.

The major way to increase your power in a negotiation is with information,
in particular negotiation about alternatives to making this agreement.
Nowadays with the internet this is very easy. So I sold it to her for $35
- I did a quick search on apple store and found you can buy a brand new
second-gen iPod shuffle for $55 directly from them, under warranty,
shipping in 1-2 days. She could have pulled out that fact to explain why
she needed a lower price from me to make it worth her while. That's what I
did, successfully, when negotiating for my replacement to that iPod
Shuffle (though I was foiled, as I talk about later) Doing that kind of
research is called finding a Best Alternative to Negotiated Agreement

Also thinking about the other person's BATNA could help. She must have
noticed I'd been listing it for over 6 months. At this point my
alternatives were to keep it for myself as an inadequate backup in case my
nano ever broke, or giving it to a lower-tech friend for free as a
present. So I might have been willing to go down as low as $15. But it was
important that she not know that.

That value of $15 was what is known as my reservation price, the price
below which it makes sense for me to walk away. As you can see it comes
directly out of my BATNA. So these are the theoretical dynamics of
negotiation: Both parties have a reservation price, which is unknown to
the other. They go back and forth making offers until the price falls
within the zone between their reservation prices, at which point they make
a deal (if there is no zone like that, the deal fails). Both parties
benefit, no one is being exploited. The game consists of trying to pick a
price that is in that acceptable range, but as close to the other person's
reservation price as possible. That's why you should never reveal your
reservation price, the absolute most you're willing to pay for something
or least you're willing to give it away for. My buyer made that mistake
when she wrote in her email, "I can pay $35, I can't go any higher!!"
Assuming that really was her reservation price, I was happy to have it. So
figure out your own reservation price going into it, but don't reveal it.

Making offers and counteroffers is the only real move in a negotiation;
the rest should probably be ignored. For instance people may whine and
moan about how much they paid for the thing they are selling - that
doesn't matter unless they make a counteroffer. Also saying "that's my
final offer" should probably be taken lightly, just go ahead and make your
counter offer. Never make a concession, a second offer, until the other
person has responded to your most recent offer. The Thompson book says
that studies have concluded that the person who makes the first offer does
not have any consistent advantage - unless the other person makes the
mistake of using that as their primary information about how much it's
worth. I think that's what happened with my buyer: I just checked my
facebook listing, and it was for $50, which was even more optimistic than
I realized. She thought knocking off $15 was a good deal, whereas I
probably would have gone for knocking off $35 (though I wouldn't have been
happy about it). Go for the absolute price, not how much off (though of
course I make that mistake all the time at the supermarket)

Something you can do to increase your power in a negotiation is to improve
your Best Alternative to Negotiated Agreement. Besides finding out more
information, you can also start discussions with other people about how
much they're willing to give you. That's why you sometimes hear about
actors lining up offers for movies they don't really intend to do, just to
get into a better negotiating position to demand more money for the movie
they really want to do.

Another way to help your negotiation, for both parties, is to throw in as
many extra issues as possible, especially ones that matter more to one
party than to the other. For instance, if she was having trouble making up
her mind about a particular price, I was prepared to bring out the iPod
protective cover I had and add it to the deal. It would be almost
worthless to me no longer owning the iPod, but potentially valuable to
her. So if she then went for it, we would both win. The book uses the
example of negotiating for a salary, throwing in as many things as you
can. For instance vacation time might be something that is not too costly
to the company, but very valuable to you. Be creative in brainstorm as
many extra dimensions to the deal as possible.

You're probably thinking about how there are ways you can be dishonest in
your negotiation, particularly with regard to your reservation price,
pretending it's lower or higher than it is and not accepting an offer in
that zone of acceptability. And this was my other big misconception about
negotiation, that it was all about trickery and outsmarting the other
person. Almost every single negotiation I've seen in a movie or on tv
falls into that category. But in practice almost all of the thousands of
negotiations that happen each day are in good faith. The book explicitly
cautions you against trying to be sneaky, saying that it very often
backfires and you should concentrate on properly exercising your real

The number one thing Ilearned through trial and error after I read this
book and was fired up about negotiating was *never negotiate unless the
other person is in a position to make a binding agreement*. Not a verbal
agreement. In practice, that means either negotiating right at the point
of making the exchange, or where some kind of legally enforceable contract
can be authenticated. I learned this when I was negotiating for an iPod
nano via facebook messaging. The seller bitched and complained but agreed
to the price. Then I never heard back from him. This happened again when I
negotiated for a whiteboard for the lab over the phone with what turned
out to be the teenage daughter of the owner of the laundromat, who refused
to give it to me for that price when I turned up to claim it. Another
important lesson: never make the mistake of negotiating with someone who
doesn't have the decision-making power. All this doesn't mean you
shouldn't communicate with the person before you start the real
negotiation - in fact depending on how big a one it is, it's a great idea
to build rapport and learn as much about them as possible. The important
thing is to not make any concessions before the negotiation begins, and
try not reveal anything that could help them guess about your own
reservation price. Which can take many tricky forms, but in particular
avoid revealing: how bad you want it, time limitations, what your
alternatives consist of. (of couse all the better if you can find out that
information about them) Best to be opaque and general when the
conversation verges on the deal itself, though enthusiastic about the
prospect of the deal.

Since it is not at all inherently dishonest, I think it always makes sense
to try to negotiate, unless there's a strict rule against it. Especially
for things that you're inclined not to buy because they seem overpriced.
You can always say, honestly, it's not worth it for me at that price, but
I'll give you X dollars right now for it. Now I'm surprised when people
aren't willing to negotiate: did you really list as your first offer your
final offer? Don't you have any optimism that people might pay more than
the absolute minimum price you're willing to sell it for? (have you
noticed that in this country, explicit negotiation is mostly only part of the
daily lives of people on the very low end of the socioeconomic status scale, drug dealers and other underground economies, and the very high end, CEOs and movie stars and
government ministers? Could it be that disdain for negotiation,
considering it not respectable, is a uniquely middle class phenomenon?)

Of course there are going to be cases where for whatever reason you don't
negotiate as hard as you could, that is, you refrain from exercising all
the power you have. One last tip I heard which makes a lot of sense: if
you can possibly get someone else to negotiate on your behalf (i.e. an
agent), that's better. Even though you're perfectly within your rights,
you could imagine some lingering frustration from them over not getting
the price they first wanted, and I can see how that would be best directed
at someone else if you're going to keep working with that party.

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