Monday, March 22, 2010

Zero-sum negotiations

Classic examples of zero-sum negotiations include

  • the sale of a house, where the buyer and the seller do not know one another
  • the commodities market, in which the vendor and purchaser negotiate over price—of, say, silver, or hog bellies.
In a zero-sum negotiation, you are competing to "claim" value for yourself—to take it away from the other party. Cooperation and disclosure of information can make you less effective.

Often, there is only one issue in a zero-sum negotiation: money. The seller’s goal is to negotiate as high a price as possible; the buyer’s goal is to negotiate as low a price as possible. A dollar more to one side is a dollar less to the other. Thus, the seller and the buyer compete to claim the best deal possible for themselves, and bottom lines define what is possible.

A "tug of war" is the underlying negotiation dynamic (whether the parties have friendly or difficult styles). The goal of each negotiator is to "pull" the final deal point as close to the other side’s reservation price as possible (or even beyond it). They are competing to claim as much of the value in the ZOPA as possible.

In such a situation, it is impossible to make tradeoffs based on differing preferences. Because there is only one issue, you can’t trade more of what is highly valued by one party against a different item or issue highly valued by the other party. Thus, the deal is confined: there are no opportunities for creativity, or for enlarging the scope of the negotiation.

Similarly, relationship and reputation are completely irrelevant: the negotiators are not willing to trade value in the deal for value in their relationship with the other negotiator.

To achieve success in a zero-sum negotiation, remember the following:

  • Harness the power of anchoring. The first offer can become a strong psychological anchor, one that sets the bargaining range. Studies show that negotiation outcomes often correlate to the first offer. So start at the right place.
  • Do not disclose any significant information about your circumstances—including why you want to make a deal, what your real interests or business constraints are, what your preferences among issues or options are, and what your BATNA and reservation price are.
  • Learn as much as possible about the other side’s circumstances and preferencesincluding why they want to make a deal, what their real interests and business constraints are, what their preferences among issues or options are. To learn about the other side’s interests and concerns, you should
    • do preparatory research
    • contact sources within the industry
    • check potentially relevant business publications
    • review annual reports (or public filings)
    • ask questions informally of the negotiator or others within the company
    • imagine what your interests, preferences, and needs would be if you were in their position
    • ask questions during the formal negotiation session.
  • Exploit what you learn about the other side in setting your first offer or demand. Based on what you learned about the other side’s BATNA and what value you believe the deal would hold for them,
    • set your first dollar offer somewhat above what you believe to be their reservation price
    • attach a high price to what they value most (even if it costs you little)
    • use time to your advantage if you know that they face an external deadline.
  • Don’t overshoot. If you claim aggressively or greedily, the other side may walk away. You will have lost the opportunity to make a deal that would have been better than both sides’ BATNAs. If you claim aggressively or greedily, the other side may walk away. You will have lost the opportunity to make a deal that would have been better than both sides’ BATNAs.

    For example, assume that you have been approached by a prospective buyer interested in a piece of commercial real estate owned by your company. Your reservation price is $250,000; you think the property is worth $250,000 to $300,000, based upon the general market price per square foot in that area. You also know that the property is unique and may have great value for a particular buyer. This buyer told you that he has not found any other property suitable for his business in the town and that he desperately needs to relocate. In your initial round of negotiations, you decide to demand $400,000 for the property. The buyer looks disappointed, gets up and walks out the door, saying "there is no use wasting our time." In fact, the buyer would have been willing to pay up to $275,000 for the property. Unfortunately, your high initial demand drove the buyer away. You have missed the opportunity to make a favorable deal.

No comments: