How to Negotiate: Preparing for a Negotiation
How to Negotiate: Preparing for a Negotiation
70% of negotiation is in the preparation — increase your value and that of your company by learning to negotiate and learning how to prepare well.
In this article, we'll just be covering the fundamental concepts of negotiation. More specifically, we will be covering how to prepare for a negotiation. More advanced concepts like negotiation-execution strategies (anchoring, contingency clauses, etc.) will be covered next week.
With that said, let me begin by explaining why you need to learn to negotiate.
Why Learn to Negotiate?
Why learn to negotiate? Simply put, whether you know it or not, you negotiate something every day. Although every negotiation is different, the basic elements do not change. Good negotiating also increases your value and the value of your company, and is therefore crucial to learn.
In order to understand the fundamentals of negotiation, we must begin by understanding a couple of key concepts:
What is Negotiation?
What is Value?
Types of Value in Negotiation
How to (Actually) Negotiate
What is Negotiation?
To understand what negotiation is, let us first turn to the textbook definition of negotiation.
Negotiation: Decision-making process by which 2+ people try to come to an agreement on how to allocate scarce resources
There is however, a fundamental issue with the textbook definition: it is extremely limiting and assumes that both parties are aware that they are in a negotiation, which is not always the case. On the contrary, the most dangerous negotiation is the one you don't know you are in.
As such, a more practical definition of negotiation goes as follows:
Negotiation: Process of trying to get what you want from someone who wants something from you
This is a much more practical and inclusive definition of negotiation which we will be using here on out.
What is Value?
Ultimately, negotiation is about creating enough value for both parties such that you can agree to some set of conditions. However, this also requires both parties to understand what value is. In negotiation there are two different types of value:
Economic Value
Social Capital
Social capital is a sociological concept that measures how much you are liked by colleagues, friends, etc. Although often forgotten, it is actually more important than economic value. For example, when you want to lock in a supplier, preferences may be given to those you know.
Social capital is created through repeated interaction. Therefore, in a negotiation you may decide to give up a little economic value in order to increase your social capital with an important client and/or supplier, for example.
Value in Negotiation
While there are two main types of value, economic value and social capital, these two types of value can be leveraged in different ways during a negotiation:
Value Creation: Value creation is about answering the question how much value is being generated? It is a collective concept and represents the size of the pie. Creating more value (growing the pie) makes everyone win, ceteris paribus.
Value Claiming: Value claiming is about who gets how much at an individual level? Explained otherwise, it is about the size of your slice of the pie.
Good negotiating is about creating value. The objective of negotiations that have multiple considerations will be to create value, i.e. identify the other party's interests and ensure they are aligned with yours.
In purely financial negotiations however, value creation is impossible. When there are no other interests in the negotiation other than price, it is a zero-sum game. Every euro you gain is a loss for the other side. As such, purely-financial negotiations are about value claiming rather than value creation.
Nonetheless, the objective of negotiation strategy remains the same: gain as much information as you can such that you can identify what kind of negotiation it is (is price the only consideration? Can you create value for you both?). With that in mind, let's turn to how you would actually go about negotiating.
How to (Actually) Negotiate
Negotiating is 70% about preparation, 20% about strategy and just 10% about execution. That is, if you want to be a good negotiator you need to prepare well.
How do you prepare for a negotiation?
To prepare for a negotiation, you need to answer 3 questions: What would happen we don't have an agreement? What is the absolute minimum/maximum (depending on the situation) price that I'm willing to go? And what would be ideal price? Answering questions directly to the first step of preparing for a negotiation:
Step 1: Calculate your Fundamentals
The first step to any negotiation preparation is to identify your economic fundamentals. The definitions of these metrics will be illustrated in the example below.
BATNA (Best Alternative To No Agreement)
RP (Reservation Price)
Target Price
Let us take a real estate example to illustrate this. Let's assume that a seller is selling land directly to a buyer, without the intermediary of an agent. The seller made an offer. If the seller does not accept the buyer's offer, then the buyer is left with no land, i.e. the buyer's best alternative to no agreement (BATNA) is no land. If the seller has other offers, then his BATNA would be the next offer. Otherwise, it's simply no sale.
Continuing with our example, both parties need to calculate their reservation price (RP). For the buyer, that is the absolute maximum price he's willing to pay for the land. For the seller, the RP represents the absolute minimum he's willing to accept for his land.
Lastly, both parties need to answer the question "what would the ideal price" be? That is, they need to identify their target. For the seller, that may be the selling price. For the buyer, that may be just under the selling price. In either case, it is important for both parties to identify these.
However, just calculating 3 metrics (BATNA, RP and target) for yourself is not enough, leading us to step 2.
Step 2: Estimate the Other Party's Fundamentals
You also need to calculate them for the opposing party. Why will make sense shortly.
For simplicity, let's go back to our land example. Let's say the land is 10 acres about 1hr away from Paris. It's listed on the market for 275.000€. The seller bought the land 10 years ago for 150.000€ and has already received an offer for it; but he is willing to talk to the new buyer to weigh his options. There are no agents in the process: the sale will be done through a 1:1 negotiation between the buyer and seller.
Let's assume the seller read this article, followed my advice and came up with his 3 metrics. His BATNA is the offer he received, cash for 250.000€. Thus, the seller's RP is 250.000€ (second offer) and his target is 275.000€.
Similarly, let's assume that the buyer also prepared his negotiation: his BATNA is no land (but he's in no rush to buy), his RP is 265.000€ and his target 250.000€.
The distance between the seller's RP and the buyer's RP is the Zone of Possible Agreement (ZOPA). That is, it is between these two numbers that the agreement is a better option than the BATNA.
However, this requires that you know the other party's RP. If the buyer knew the RP, then he could place an offer just above it (251K€) that would make the seller accept and the buyer extremely happy. Similarly, if the seller knew the buyer's RP then he could counter-offer with 264K€, at which point the buyer would rather buy the land than not. In reality, neither party knows what the other person's RP is. This is where negotiation strategy comes in.
Note: It is entirely possible that 2 parties' ZOPA do not overlap, in which case it is best not to have an agreement.
Step 3: Create a Negotiation Strategy
Before any negotiation, you need to have a clear strategy in mind, although it must remain flexible. Your strategy should cover: what will be your first offer, how are you going to build trust, how much information will you divulge, etc.
The reason for these questions is because in negotiation, the ultimate objective is to create value for both parties. However, this may not always be possible — it is therefore crucial than you figure out whether that is possible.
Purely financial negotiations will have a financial ZOPA in which case the negotiation is a zero-sum game: every gain you receive is a loss for the other person. When there are other interests on the table however, it becomes an interest-based ZOPA. When you are faced with an interest-based ZOPA, it is possible to create value as it is no longer a zero-sum game.
Let's take an example to illustrate this. Going back to 10 acre land scenario, let's assume that the 10 acres is currently farmland and that the seller would like to keep that way, however the buyer is a developper who wants to create a big shopping mall. If land use is the seller's #1 consideration, he will not sell to the buyer. No matter the price, the interests simply do not align. If the buyer is price-first, then the buyer might be able to offer a little bit more cash in order to have permission to develop a shopping mall. In either case, it is crucial to obtain this information.
As such, the first step of everything negotiation strategy is to get information from the other party. You need to build a strategy of how you are going to figure out what their top considerations are (price, use, new owner, etc.). Are you going to ask them a lot of questions, are you going to honestly reveal your intentions first to build trust?
Your negotiation strategy should also include a first-offer. We'll talk about the importance of first-offers more in next weeks' post, so if that sounds interesting to you, make sure you are subscribed.
Once your strategy is prepared, you're ready to negotiate. Now it's all about execution.