The first step to becoming a deft negotiator is realizing that everything can be negotiated. In many situations, such as employment agreements and home purchases, virtually everyone knows that they can and should negotiate the price. In other transactions, including buying clothing at a department store or booking a hotel room, most people are conditioned to accept the formally printed sticker price without batting an eyelash.
In general, people expect the price to be negotiable on expensive transactions, but accept the price on inexpensive ones. This phenomenon is rooted in two considerations, one valid and one not.
The first consideration, perfectly valid, is that there is a tradeoff between negotiation and time. Though it would not make sense to negotiate for a week to get a twenty percent discount on a $50 item of clothing, it does make sense to spend the time if you are buying a $500,000 home.
The second, unfounded, consideration is rooted in the ubiquitous human behavior of conflict avoidance. Many people require a minimum amount of expected benefit before they will even begin to negotiate. This minimum amount is required to compensate them for the stress of engaging in perceived conflict. If you view every opportunity to negotiate as a pleasurable learning experience, then the threshold quickly drops to zero. In fact, people invest good time and money to enter such conflict when they take a negotiation class.
Putting the factors of the very real time tradeoff and the unjustified conflict fear together, you can see that it makes sense at least to try to negotiate for that $50 piece of clothing. If you expect to get $50 or more of value out it, then the worst that can happen is that the sales clerk will not budge on the price. It is worth thirty seconds to figure this out no matter how wealthy you are.
Keen negotiators also know that price is not the only attribute in the mix. You can negotiate most elements of a transaction, including timing, quantity, quality, and additional services. You should concentrate on the manageable set of factors that matter to you and to the party with whom you are negotiating.
Though everything can be negotiated, it does not mean that everything should be. If you do negotiate literally everything, you friends will desert you and your significant other will leave you. As in all things, find the balance.
The following tips, with practice, rapidly will turn you into an incisive negotiator.
Gain an information advantage before you start negotiating
The single greatest factor that separates good (and sadly poor) negotiators from great ones is the effort spent gaining an information advantage before the formal negotiation even begins. Within your given time constraints, your mission is to gather as much intelligence on both tangible and intangible data.
Imagine that you have found a home that you want to purchase. Most people begin their quest by researching tangible data. For example, at what price have comparable properties sold for in the recent past? How much did the seller originally pay for the house? Are home prices generally increasing or decreasing? Is the property in move-in condition or is it in need of substantial repairs? How long has the house been on the market? It is also critical to establish the value of the purchase to you which is generally independent of information related to the seller.
While information-gathering, you also need to explore the world of the intangible. To do that, get inside the seller’s mind. What is his or her situation, needs, motivation? Is the seller under contract to purchase another property already? Is the house being sold by a relocation company that will absorb a lower price? What does the seller know about you and how will he or she use that information?
The more that you can find out about your counterparty (and the less you disclose about yourself), the better off you are. However, there is one caveat: you should clearly understand the motivations of any party providing you with information. In a house transaction, for example, you should expect your broker to be generally honest and ethical, but less than fully transparent. Assuming your broker gets a percentage of the transaction, his or her incentive is to close as fast as possible and at as high a price as possible. You know the score going in; rely only on unbiased sources for information and heavily discount, if not completely disregard, everything else.
Determine your reservation price and know your best alternative to a negotiated agreement
To be a skillful negotiator, you must determine your reservation price before you commence formal negotiations. If you are buying, the reservation price is the maximum price that you will pay. If you are selling, the reservation price is the minimum price that you will accept. Good negotiators say to themselves: “I would like to pay around $10.” Great negotiators say to themselves: “I will pay at most $10 and will walk away for even a penny more.”
The reservation price is your antidote to emotional involvement in the transaction. It provides a clear signal that tells you when to disengage. You need to determine a precise reservation price prior to negotiating. Once you start a negotiation, you should change your reservation price only in exceptionally rare circumstances. Remember, you came into the negotiation with an information advantage drawn from unbiased sources. The negotiation process itself and your counterparty (especially in a zero sum or ‘winner-take-all’ transaction) are far more likely to provide you with information that is a wolf in sheep’s clothing. If you hit your reservation price, then stop negotiating, period. You always have the option to cool off, gather additional information, and come back to the table with the same or a different counterparty.
The reservation price is not affected by tangible and intangible information about your counterparty. Rather, the reservation price is wholly dependent on the value of the transaction to you and on your next best alternative. The value of the transaction to you is the easy part.
The real secret sauce lies in engineering your best alternative to a negotiated agreement. In other words, put diligent effort into building your Plan B. If you want to buy a house, negotiate for two properties with different sellers instead of one. Although you will certainly improve the transaction price with every additional provider you throw into the mix, two is typically the right number to balance economic gains against time and effort. Finally, you should know when ‘do nothing’ is the best alternative.
Shape the game
The three strategic levers in negotiating are information, time, and power. By shaping the game, you gain control over time and power. In almost every circumstance, you can limit your sense of urgency, determine the issues on the table, and select your counterparty.
Carrying on with the home purchase example, imagine that your goal is to occupy a property by the start of the next school year, to minimize the disruption to your children. You can control the sense of urgency, by starting your information-gathering process in the winter and conducting your negotiation in the spring. Determine the issues such as price, occupancy date, financing, and so on. Finally, based on the information that you have gathered, choose which sellers to negotiate with and which ones to avoid.
Decide who will make the first offer (usually you)
If you are a moderately experienced negotiator with an information advantage in a one-off interaction, then you should make the first offer. Moreover, your offer should be as aggressive and extreme as possible, just shy of being offensive. That guidance applies to most situations that you will encounter. If you lack either the experience or the information advantage, then you can be safe allowing the other party to make the first offer, as long as you develop some defense against a powerful psychological weapon.
To understand the logic behind who should make the first offer, you need to understand the tradeoff between the psychological impact of anchoring and the information benefit of receiving the first offer.
In virtually any context, people become powerfully psychologically anchored to the first number they hear, no matter how arbitrary. If I were to ask a group of one hundred reasonably educated people in what year America gained its independence from the British, the average group response would be close to 1776, since most people know this fact. If I then asked the group when the Magna Carta was signed, the average answer for the group would be a lot closer to 1776 than the true answer even though the events have little to do with each other. (In case you forgot, the Magna Carta was originally issued in 1215 by English barons determined to protect their rights by limiting the powers of King John.) Anchoring is so powerful that even subject matter experts aware of the bias cannot, on average, protect themselves against its influence. (If you think you can, then you are guilty of overconfidence bias – but that is a horse of a different sort.)
To drive the point home, consider an experiment conducted by Michael Cotter of Grand Valley State University and James Henley of The University of Tennessee over a seven year period between 1999 and 2006. During the study, which involved 1621 total sessions, students were paired up and then asked to conduct ten separate negotiations with at least one day elapsing between each session. The researchers found that during the initial negotiation, the individual making the first offer captured on average 55% of the pie. Because most of us conduct a single negotiation with a person and then move on, it clearly pays to make the first offer.
There are, however, times when you will negotiate with a person repeatedly and the advice for that scenario is slightly different. In their experiment, Cotter and Henley found that in subsequent negotiations between the same parties, the person that waits to be the one that makes the counter offer actually does a little bit better – claiming 52% of the pie on average. What is going on? The short answer is that the counterparty in the initial negotiation has learned to defend against the anchor and actually benefits from the information contained in the first offer.
The best way to defend against an anchor is to consider disconfirming information. Such disconfirming information might be reasons why the anchor is wrong, assumptions about the other party’s best alternative to a negotiated agreement, and considerations of other issues up for negotiation that are unrelated to the anchor.
Given the power of anchoring, it is easy to see why you would want to make the first offer in a negotiation in a one-off negotiation when you have an information advantage. In doing so, you will gain the benefit of anchoring the other person and prevent them from doing the same to you. Moreover, your information advantage will allow you to make an opening offer that is extreme, but just short of obscene. That way, you set yourself up to gain the largest possible value relative to your reservation price.
By making the initial proposal, you gain the anchoring advantage, but give up the information benefit of waiting for your counterparty to make the first offer. For example, you might think that $420,000 is an extreme first offer for the house you want to buy. However, there is always the chance that the seller will lead off with an even lower price.
Nevertheless, despite the information lost from not hearing your counterparty’s initial offer, the anchoring effect on both you and your counterparty is so incredibly powerful that you should make the first offer in a one-off negotiation whenever you have an information advantage gleaned from other sources. The information advantage will give you confidence that your initial proposal is extreme but not crass. Hence, there will be little benefit from waiting to receive the first offer. If, however, you do not have the confidence in your information, then let the other party make the first move, do your best to ignore the anchor, and come in with an even more extreme counter-offer.
Be reticent and patient
Extremely adept negotiators are masters at using silence and patience to their advantage. Most people are uncomfortable with quiet in any social situation, including negotiations. At the very least, limiting your own chatter will prevent you from divulging information that you meant to keep to yourself. However, the most important reason to be reticent is to allow the other party to ‘talk themselves’ into the deal.
In my own experience, I will make a crisp and clear offer or counter-offer and then settle into a relaxed and patient silence. Nine times out of ten the person with whom I am negotiating will ultimately say “O.K., we can do that.” Being patient allows you to be silent, thus downplaying any sense of urgency. In general, the person that has the most time fares best.
Read their body language, control your own
As in all forms of interaction, body language during negotiations reveals far more than words. Though not a lie detector, a non-verbal signal can be a powerful stress detector. If you spot signs of stress during a negotiation, then you have reliable evidence that your counterparty may lack full confidence in his or her last position and there is still ample room to negotiate.
To negotiate expertly, you must, at a minimum, be mindful of your own body language. Strive to control unwanted revelatory ‘tells’ that will benefit the other party, rather than attempting to consciously display specific physical patterns that you think may give you the upper hand.
Identify opportunities for mutual value creation
When I enrolled in a negotiation class during business school, I fancied myself a brilliant negotiator merely looking to sharpen the point on my skills. And indeed, during the first few sessions, I excelled at winner-take-all, zero-sum negotiations where the sole issue on the table was price. In the fourth class, I fell flat on my face.
In that fateful negotiation, I failed to notice that I was in a win-win scenario with multiple issues on the table that could be optimized for mutual value creation. Adept negotiators seek out issues to trade before and during the negotiation. For this to work, you need to identify factors to negotiate that have asymmetric value to you and to your counterparty. For example, a home seller might be willing to take a lower price if you commit to a faster close.
The best negotiation levers are those issues which you know are important to the other party but not important to you. Very specifically, concentrate on the factors that are important to the other party. In general, it is best to maintain the perception that factors that are essential to them are also significant to you. This allows you to make greater gains as you trade concessions. Of course, if an issue is obviously of little value to you, then full transparency is the best course of action to maintain your credibility.
Here are the concepts you can immediately apply to be a great negotiator:
- Know that everything is negotiable
- Gain an information advantage before you start negotiating
- Determine your reservation price and know your best alternative to a negotiated agreement
- Shape the game
- Decide who will make the first offer (usually you)
- Be reticent and patient
- Read the other party’s body language, control your own
- Identify opportunities for mutual value creation