Tag Archives: reservation price

Setting your sights in a negotiation: The stars or the floor?

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In any given negotiation, a negotiator must at least implicitly answer two questions.

The first comes at the beginning: What’s my goal?

The second arises near the end: Am I satisfied?

Answering each question requires a metric—a standard of comparison. But I’m here to tell you that many negotiators adopt the wrong metrics—indeed, precisely the opposite of the metrics they should. Since adopting the right metrics and answering the questions appropriately can make life negotiable, let me explain what I mean, with thanks to the research that has examined these issues.

  1. Question 1: “What’s my goal?” In debriefing in-class negotiations, I often ask my students what their goal was. The resounding answer is clear: I set out to do better than my bottom line. For example, I sought pay less than the maximum I could afford, or earn more than the minimum I could stomach. Negotiators who offer such answers—and it’s far from just students—are essentially saying that they shot for the floor. While reasonable, the serious and semi-obvious problem is that doing so almost inevitably lands them just above the floor. Floor-shooting negotiators actually pay pretty much their maximum or earn pretty much their minimum. Research is unequivocal: Negotiators who shoot for the stars instead of the floor perform far better. That is, negotiators who set an ambitious and optimistic target far-removed from their bottom line, knowing that reality will probably make them back away from it, almost inevitably achieve better outcomes—primarily because they try harder but also because they sometimes motivate their counterparts to do so.
  2. Question 2: “Am I satisfied?” When considering whether they’re satisfied with an emerging or sealed deal, negotiators go back to their goal (i.e., the floor) and evaluate the outcome accordingly—right? Well, some do, but many surprisingly don’t: The grass being greener, many negotiators late in a negotiation or shortly thereafter suddenly set sight on a star and get remorseful that their rockets didn’t carry them there. What if I could’ve gotten the product for $X (low number) or negotiated a salary of $Y (high number). Unfortunately, having such thoughts retrospectively is counterproductive as everyone’s rocket fuel is spent—it’s just too late. Additionally, by fixating on a newfound star, negotiators stand to make themselves abjectly unhappy, or even to reject emerging deals they shouldn’t. Instead of retrospectively wishing upon a star, negotiators are advised to retrospectively evaluate against the floor. That is, when reflecting on an outcome as opposed to bringing it about, it’s time for negotiators to consider whether a deal clears their bottom line, and thus whether they should probably accept it. By doing so, they’ll probably walk away happier and resist the gnawing temptation to reject good deals in a flurry of frustration.

In sum, many negotiators shoot for the floor at the outset and evaluate against the stars at the end. But that’s exactly the opposite of what a productive and healthy negotiator should probably do, which is to shoot for the stars at the outset (particularly by setting their sights on an aggressive goal), then evaluate against the floor at the end (particularly by comparing a deal against their bottom line). Do that, and I think you’ll find yourself approaching the stars without ever losing sight of the earth.

The unreliability of our gut: Intuitions in negotiation

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The recent summit between President Trump and Kim Jong Un has brought the issue of intuition in negotiation to the fore. The North Korean dictator reportedly spent years planning for such a meeting, trusting little to his gut and everything to his analysis and preparation. President Trump, in contrast, is widely known to rely on his gut, for example by saying that he would simply intuit whether a deal with Kim was possible within the first minute.

Given these two divergent approaches, each with its own appeal, it’s probably worth considering the reliability of our intuitions in negotiations. Unfortunately, I’m here to suggest that they are not very reliable at all.

In the spirit of making life (if not world events) negotiable, consider the following five ways that our intuitions can fail us. Our intuitions often tell us…

  1. To avoid making the first offer. Seems intuitive to let the other party move first. That way, we can learn about their preferences and maybe get a great deal. Right? Well, often wrong. As I’ve suggested often before, if we do that, we miss the golden opportunity to focus the other party’s attention on our own goals and desires, making us counteroffers very much in line with our own thinking. Instead, we end up making offers very much in line with theirs.
  2. To deal with one issue at a time. Seems intuitive to agree on each issue in turn, and probably the easiest first. Right? Typically wrong again. If we do that, we treat each each issue as a competitive fight, losing the opportunity to link and trade issues. Accordingly, we leave ourselves with a tremendous problem when we come to the truly contentious issues, typically at the end.
  3. That if I want something, you don’t. Seems intuitive that two negotiators want two opposite things. Right? Wrong more often than you’d think. People do want the opposite of some things, typically money or other quantitative issues. But, as I’ve suggested often before, they often want the same thing on qualitative issues—or at least care less about some qualitative issues than others, paving the way for tradeoffs. Intuition fails us again, precluding the possibility of a win-win.
  4. To focus on our bottom line. Seems intuitive to focus on our bottom line, and especially whether the deal under discussion is better than said line. Right? Wrong or at least woefully incomplete. If we focus exclusively on our bottom line, chances are that we’ll settle for something just better than that line, which is often not very good at all. Instead, we need to focus on our target, only coming back to our bottom line when we need to, at the end.
  5. That everyone negotiates pretty in much the same way. Seems intuitive that everybody around the world pretty much thinks about and approaches negotiations the same that way we do. Right? No, totally wrong. Mountains of evidence now indicate that negotiators from different cultures very markedly in their strategies, interests, and the ethical or legal standards they bring to the table. Intuition fails us again, and this time with a bang.

So you see that, appealing as our gut may be, it’s not particularly reliable in negotiations. And now that we all understand as much, maybe we can collectively convince our political leaders.

Preparing to negotiate? Use your “BRAIN”!

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Most people know to prepare before a negotiation. If not, then negotiation instructors like me frequently remind them. So the problem is not a lack of awareness about the need to prepare. It’s the lack of a framework describing what to prepare. What exactly should negotiators ponder before arriving at the bargaining table?

Since knowing what to prepare is pretty much a prerequisite for preparing itself, and preparing itself a prerequisite for a negotiable life, let me suggest you use your BRAIN (via the following acronym):

  • BATNA. All good preparation starts with a consideration of alternatives—specifically a negotiator’s next-best alternative if the current negotiation fails (i.e., their Best Alternative to Negotiated Agreement or BATNA). Otherwise, they’ll never know how much power they have or how far to push the envelope.
  • Reservation price. Great negotiators transition directly from their BATNA to their bottom line, walk away point, reservation price. Otherwise, they don’t really have the foggiest idea whether to get to yes or get to no and go with their BATNA.
  • Aspirations. BATNAs and reservation prices are great, but negotiators who spend too much time pondering their alternatives or minimally acceptable agreements (i.e., their reservation prices) tend to get them. To get something better, great negotiators also define their goals, targets, aspirations—actively considering what they really want when their counterpart demurs.
  • Interests. The acronym might as well stop there (and consider the acronym if it did), but the preceding letters alone tend to elicit a very competitive negotiation. Great negotiators know that spending the whole time competing to attain their aspirations, clear their reservation price, or avoid their BATNA results in a competitive scramble over the crumbs of a very small pie. Instead, they know they need to identify and find creative ways of fulfilling both negotiators’ overall objectives (i.e., their interests), and thereby “grow the pie.”
  • Negotiation counterpart. So why not BRAI then? Because that makes very little sense as a word and even less sense as a preparation strategy—the latter because it completely omits the other party. Negotiators who BRAI, and most negotiators do, fail to anticipate their counterpart’s situation and thus find it immensely hard to understand or respect that situation while negotiating. So great negotiators repeat the preceding letters for their counterpart, taking a wild albeit educated guess as to their counterpart’s BATNA, reservation price, aspirations, and interests.

So the next time you sit down to prepare for a negotiation, don’t just use your mind—use your BRAIN! Doing so can’t spell the difference between a smart negotiation outcome and an outcome that everyone deems dumb.

Three responses to a perilous question: What’s your bottom line?

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The world is full of people who want to know your “bottom line.” Real estate agents are immensely curious about “your budget.” Car salesmen are sure to ask how much you can afford, in total or each month. That company you hope to work for? They’d love to know your minimum salary requirements.

These are all attempts to ascertain your bottom line, i.e., your reservation price (RP). Though not necessarily malevolent, these are questions that you probably shouldn’t answer, at least not directly. If you do, you’re likely to get an outcome that’s just barely better. So if you admit your minimum salary requirements are $30,000, what’s your probable salary? Somewhere around $30,001.

But suggesting you shouldn’t reveal your RP, as I did in the linked article above, is not the same as saying what you should do. Indeed, I’ve found that having some readymade responses to this omnipresent question can make life substantially more negotiable. So here are three strategies for responding to RP questions, along with some advantages and drawbacks.

  1. Don’t answer: Perhaps the most straightforward way of answering the question is not answering it. Everyone gets a little distracted now and then, and the moments after the RP question might be a great time for you to take an immense interest in the sunroof on this car or the tinted windows on that one. If the questioner takes the bait, this strategy can effectively avoid the issue. And it’s a good “strategy” if no other strategy comes to mind. The downside, of course, is that they’ll likely ask again. And this strategy is unlikely to work twice.
  2. Respond with your target: My favorite strategy is to answer a different question. They asked about your RP, but there’s no law saying you can’t answer about your goal, i.e., your target. So when the real estate agent asks your budget, you can certainly tell them what you’re hoping to achieve. And when they scoff and grumble about how hard that will be, well, that’s great…it means you’ve motivated them. So the upside of this strategy is that it motivates the other side and actually provides them with useful information. But the downside is that the agent may then avoid showing you a few houses that you would actually consider. So if you use this strategy with a real estate agent, combine it with some judicious Trulia searches on your own.
  3. Ask theirs: Experienced negotiators know that it can be morally “squishy” to ask about a counterpart’s RP. But they often ask anyway since so many people answer. So it’s worth considering the most aggressive response to the RP question, which is to ask about theirs. When the car dealer asks what kind of a monthly payment you can afford, for example, you might ask the minimum price for which they’d sell you the car. They probably won’t answer, but they probably will start respecting you and stop asking RP questions. That’s the upside, but the downside is that this strategy can create some momentary hostility that you’ll have to overcome.

There are certainly other approaches, and the right one certainly depends on the context. So you wouldn’t want to aggressively ask a future employer about their own RP, for example. Combined with your own good judgment, though, these strategies can be immensely useful for responding to other people’s immense interest in your RP.

Have you used any of these strategies—or others—to deal with the RP question?

I need more money! Five topics to ponder before requesting a raise

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“By failing to prepare, you are preparing to fail.”

–Ben Franklin

 

Despite that supposedly low inflation rate, everyone’s cost of living seems to constantly go up. With rising costs come the need for a rising income. Increasing your income, in turn, often requires you to request a raise.

Asking the boss for more money is tough! But Ben Franklin’s advice makes even the toughest challenges negotiable.

Although Ben’s quote did not appear in one of his negotiation blogs, it might as well have appeared there: preparation is probably the single-biggest predictor of negotiation success and failure, especially in important and complicated negotiations like raise requests. The real question, then, is what to prepare—what things to think about in the heart-pounding moments before the request?

Well, imagine yourself palpitating at your desk, two hours before the raise meeting. Before this or any other important negotiation, always consider the following five issues:

    • Your interests. Why do you want a salary increase? “Because I need more money!” you’re thinking, as well as, “What a stupid question!” Truth-be-told, it’s often far from a stupid question. To see why, force yourself to ask yourself “why” again. Why do you need more money? Are you planning to buy something big? Struggling to pay your bills? Saving up for school? All of these are common reasons to request a raise, but each has very different implications for the types of solutions that might satisfy you. If you’re planning to buy a house next year, an end-of-year bonus might help, but if you can’t pay your electric bill right now, an end-of-year bonus won’t do you much good. If you’re saving for school, your company’s educational reimbursement policy is probably more relevant than your paycheck.
    • Their interests. What’s likely to motivate your boss? When she initially demurs, why? Is this year’s budget already gone? Would paying you more create inequity? Is she just demurring to demur? Again, knowing why means knowing what solutions might work. If she doesn’t have any money right now, maybe she will at the beginning of next fiscal year. If it’s inequity she fears, maybe offering to assume more responsibility would make a raise more palatable. If she’s demurring to demur, maybe you should just justify your request.
    • Your reservation price. What’s the worst outcome you would accept? This of course depends on your best alternative to your current job. If you don’t have one or haven’t thought about what it might be, then you’d have to accept almost anything (or nothing) in the way of a raise. But if you have an attractive, high-paying job offer burning a hole in your personal inbox, you should set an aggressive minimum for your current company and accept nothing less.
    • Their reservation price. What’s the most they’re likely to give? This of course depends on their best alternative to you. If they could step out the front door and sneeze on somebody with your skillset, then they’re sure to act like Scrooge. But if finding another “you” would take months or years of aggressive recruiting, then they’re likely to say yes to anything reasonable you request. Most importantly, if the most they’re willing to give is less than the least you’re willing to accept, you’d better start looking for another job and/or come up with a creative way to satisfy your interests that doesn’t involve a salary increase.
    • Your target. What’s the best salary you could realistically expect? That number should be much closer to their reservation price than yours. And since their reservation price is a number that they would be willing to give, they will not be offended when you focus on it and use it to make a first offer during the negotiation, which is generally what I’d advise you to do.

 

The bottom line: in this and any important negotiation, listen to Ben Franklin. What do you think about while preparing for an important negotiation?

 

PS If you like what you’re reading and would like to learn more, I’m teaching an open-enrollment course on Strategic Negotiations in November. I hope to see you there! http://carey.jhu.edu/academics/executive-education.

Four strategies to win any negotiation (especially with the car dealer)

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A few posts ago, I talked about how to out-negotiate the car dealer: by cultivating your alternatives. We’ve also tried to out-negotiate toddlers (with first offers), employers (with reservation prices), and cable companies (with targets).

In all of these areas, life’s negotiable!

Yet, at this point, I need to introduce an important wrinkle: To REALLY win any negotiation, you need more than a single, simple strategy. Although each strategy will give you a great start on each problem introduced so far, life rarely lends itself to simple solutions. Ultimately, what you need is the negotiation Jedi’s ability to wield all four strategies at the same time!

Does that sound daunting? Today, you’ll see that it’s not—that all four strategies actually fit together naturally once you know how. To illustrate the connections without introducing new complexity, today’s post will reopen a problem we’ve already seen—the car dealer—briefly applying each of the four strategies to this particular problem but focusing on the overall process. The upside of brevity and reiteration is that you’ll not only learn how to master ANY negotiation; you’ll develop particular prowess at taming the car-dealing crocodile.

So, for today’s example, imagine that you’re in the market for a lovely Ford Taurus. You’ve found a stunning red model at the local dealer, priced at an attractive $25,000. What to do now? Here’s a four-step process that I would recommend for nearly any negotiation, including this one:

1. Define and try to improve your BATNA (best alternative).

As discussed in the original post on car dealers (which you should feel free to see for more information), one of the easiest and most important ways to avoid succumbing to the crocodile is to find another Taurus at a different dealer that you could buy in place of the red beauty. Better yet, find another Taurus at a different dealer that you could LOVE like the red beauty—ideally one with a similar or lower price. For example, suppose you search high and dry, finding another Taurus that—though blue—is competitively priced at $23,000. If the red Taurus is still tugging just a little bit harder at your heartstrings, the blue Taurus is your BATNA—and it sounds like a pretty good one.

2. Use your BATNA to define your reservation price (bottom line)

As discussed in the post on jobs, knowing and growing your BATNA is not quite enough: you also need to have a clear idea of what to do with your BATNA. Specifically, you need to translate your BATNA into a numerical bottom line (i.e., a reservation price) for your primary negotiation over the red Taurus. If you’d be willing to pay $1000 more for the ecstasy of red than blue, you might say to yourself: “Self, I won’t pay a penny more than $24,000 for the red Taurus.” Sounds like a reservation price for the red Taurus.

3. Define your target (goal)

As discussed in the post on cable companies, determining a bottom line is still not enough: if that’s the only number in your head, you run the risk of accepting a deal that’s kind of / sort of / barely / minimally acceptable, maybe. To avoid that kind of deal, you need to know what you really want! In other words, you need to set a target. But how to do it? In this case, the $23,000 price of the blue Taurus seems like a good place to start. Make that number your goal for the RED Taurus; think about it and focus on it instead of the $24,000 you’re actually willing to pay. Only remember the $24,000 figure at the end—to decide what to do and determine how well you’ve done.

4. Use your target to make a first offer

As discussed in the post on toddlers, your job is still unbelievably not done. Why? Because YOU know your target but your counterpart still has no idea what it might be. Unless your counterpart starts thinking about YOUR target, they’ll probably think about theirs. Luckily, there’s an easy way to bring the crocodile around to your way of thinking: by making the first offer. Before he can even snap his jaws, you should make an offer—and one that clearly communicates your target. If your real target is $23,000, you might offer something slightly more aggressive in hopes of eventually landing at your target: perhaps $22,000.

So you see that the four concepts discussed in the context of four separate problems actually apply to all four problems—and to many other problems you’ll probably face throughout life. Future posts will discuss new problems and strategies, but these four will always remain at the core.

What do you think of the four-step process?

Bring down that cable bill! Setting a target

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Should I really pay that much to watch five channels? Many of us wonder with each cable bill, or at least when our contract comes up for renewal. Although few of us probably act on that thought, many of us probably should.

If we’re truly paying too much, the cable bill is negotiable!

Let’s focus on what happens when the cable contract comes up for renewal, and let’s imagine that you’re currently with Comcast. When that happens, you have a basic choice. It’s not: should I negotiate or accept it? It is: should I stay with Comcast or go with another option (Verizon, Netflix, rabbit ears)? Even if you don’t really want to go with another option, Comcast doesn’t know that. All they know is that you can. In short, and in the terminology of the post on car dealers, you have a BATNA (alternative). And Comcast knows it.

Suppose you realize you don’t really want to switch (too much of a pain), but you’re willing to switch if Comcast plays hardball. With that decision in hand, now’s a good time to determine your reservation price (bottom line; see the post on job negotiations) for the upcoming negotiations with Comcast. But it’s also a good time to determine your target: the best possible outcome you could realistically hope to achieve with Comcast. Note that this number is very different than your reservation price—it’s what you really want, not the minimum you’re willing to accept.

How do you come up with a target? One way is to identify your BATNA and “mark it up.” So try exploring what an alternative company has to offer. Oftentimes what they’re offering is a great deal! Switch to Verizon, and pay $19.99 per month for the first year! Take that number and ignore the part about the first year; make your target with Comcast $19.99 per month for the whole two-year contract.

Note again that this is not your bottom line; you’re probably willing to pay more. Also note that this perfectly ethical. You’re not misrepresenting the Verizon deal to Comcast (they already know what it is); you’re simply focusing on the Verizon deal and trying to do even better with Comcast.

Targets are stretch goals, but they’re not pipe dreams. They’re also critically important because they focus our attention on what we really want, instead of what is kind of / maybe / possibly ok. Finally, they motivate us to keep trying when the inevitable stumbling blocks arise.

So take that $19.99 target into your negotiation with Comcast, and just ask for it! Of course, they will say no, but here’s the most critical point about a target: keep thinking about it, and keep asking for it until you’re absolutely sure you can’t get it, or at least until Comcast gives you a counteroffer that’s better than your bottom line. What if they don’t? You can switch to Verizon—and you should if they haven’t done better than your reservation price. What if they clear your reservation price but don’t meet your target? You’ve already done better for yourself, and if you don’t think you’ve done well enough, you can end the call by politely indicating that you’ll “think about it.”

So next time you’re fed up with the “deals” being offered by cable companies (cell phone companies, insurance companies, car dealers), try to define an aggressive but realistic target, even while you understand your bottom line. When negotiating, forget your bottom line and focus on your target. At the end of the negotiation, recall your bottom line to determine whether the new deal is acceptable, and to bask in the glory of how much better you’ve done.

Should you accept that job? Defining a reservation price

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There comes a time in all of our lives (approximately every three years) when we must decide whether to change jobs. This decision may seem difficult (and it is). But it’s negotiable!

Now, negotiating a new job offer requires a whole host of negotiation concepts and skills, including the ones I’ve described in recent posts. But today, I’ll focus on one that becomes particularly important when you’ve actually gotten a job offer and are deciding whether to stay or go: your reservation price.

To be clear, this is the situation: you’ve already looked far and wide for the best alternative opportunity; you think you’ve found it, and they extended an offer. This alternative job, in the parlance of the last post, is your BATNA. You’re now deciding whether it’s good enough to get up and go.

Now’s the time to consider your reservation price. It may sound technical, but the concept of reservation price is already second-nature: it’s just your bottom line. How you define a reservation price and what you do with it, though, is more like third or fourth nature for many of us. That’s where this post seeks to help.

Suppose, for the sake of argument, that your current job pays $50,000. You like the job; your coworkers are friendly; the commute is manageable; you see a clear career path forward. It’s just that pesky $50,000, which doesn’t seem to pay the bills and still leave enough for that long-awaited Hawaiian vacation. Thus, you decided to hit the job market and eventually found a similar job in the same field. Though waiting for the actual offer, you do have some concerns: your prospective coworkers don’t seem all that welcoming; you would have to drive 45 minutes instead of 20; and you’re not sure of the promotion opportunities. Now—before you receive the offer—is the time to define your reservation price.

In any upcoming negotiations over the new job, you will have a BATNA—your current job—and it will have a value: the $50,000 salary. Yet, $50,000 is not your reservation price; your reservation price is your numerical bottom line, adjusted for all of the intangibles. $50,000 doesn’t yet reflect the intangibles. Since you like your current coworkers, commute, and career prospects, you might say to yourself: “Self, I will not accept the new job with ambiguously-friendly coworkers, a longer commute, and unclear prospects unless it pays at least $60,000. That number, not the $50,000 salary, is your reservation price. The extra $10,000 makes up for the intangibles.

Now the situation becomes a lot clearer. If the new employer extends an offer of $65,000, you should probably eventually accept it; if they extend an offer of $55,000, you should probably negotiate. If you deploy your best negotiation tactics (and hopefully the previous posts will help) but still can’t clear the $60,000 hurdle, then you should probably decline.

Easy enough, right? Yet, few people define a clear reservation before entering into a negotiation. Still fewer both define a reservation price and then resist the temptation to “adjust” it once the offer comes in. Receiving the $55,000 offer, they convince themselves it’s “good enough.” But to perform reasonably well in negotiations, this is exactly what you cannot do. Only by clearly defining a reservation price and sticking to it unless your BATNA changes dramatically can you hope to avoid a poor outcome.

Reservation prices don’t have to be prices; they can be conditions: “My office has to be in Fort Worth rather than the Dallas to accept this job” (for example). Regardless, my advice to any negotiator would be to understand with clarity where the line falls between what will and will not work. Drawing and not deviating from that line, though far from easy, is nothing short of essential.

Have you defined a bottom line in a previous negotiation? How?