Where Will You Draw The Line in Negotiation?
Know the point where the smart thing to do is to walk away from the deal because it no longer offers any value.
Probably everyone has seen some version of the tousled haired child, daring anyone to cross a line he has drawn in the sand. We use words to sketch imaginary lines to warn of an imaginary red flag boundary where we will not be pushed any further. Tolerance limits appear and are applied everywhere in our daily lives. From borders to production expectations, from curfews when we were hormone driven teens, to how much we are willing to pay for a used auto. We set limits to add definition to our lives. Sometimes these limits can define and mirror how others perceive us.
On the other side of the coin, there are those who believe that boundaries constrain our endeavours, limiting our aspirations unnecessarily. These folk would cry out, ‘The sky’s the limit.’ Its not only the dreamers and hopeless romantics who believe this rally cry, you and I do too.We follow the rules, both our own and those determined by others. Occasionally, we have to breach the wall that constrains us. It’s human nature to do so.
Unfortunately, there may be a price to pay when these lines are crossed. Sometimes it’s a price we would be unwilling to pay, when we hadn’t bothered to keep our foolish wits about us at the time. But, that’s life, isn’t it?
You would think that in the rationally inclined corporate world, such starry-eyed nonsense would not influence our business decisions or our negotiations. Sadly, this is not always so. There are people who spend a lot more money on things which cost far more than they are worth, simply because they have to have it. If they don’t care about the money, or don’t need to, then little harm is done. However, if we do the same thing with company or constituent funds, then all is clearly not well. It’s bad business, and it happens all too often.
The financial wizards of the megalith corporations have also fallen prey to this folly. Let’s take a trip back in time to 1988, when Robert Campeau sought to purchase one of the most notable department stores in New York city, “Bloomingdale’s”. In late January, Campeau attempted a hostile takeover of Federated Department Stores – Bloomingdale’s parent company. A bidding war erupted between Campeau, and another well known department store, “Macy’s”. By late March, even with the value of Federated in decline, the bidding war had far exceeded Federated Department Store’s worth. Campeau would not be denied and topped Macy’s last offer by an additional five hundred million dollars! Finally, Macy’s relented. In January 1990 Robert Campeau declared bankruptcy.
Robert Campeau won the battle but lost the war. Reason did not prevail that day because human weakness blinded him, and he no longer saw the line in the sand where he should have walked away.
What’s My Line? ‘The Reservation Price‘
The ‘Reservation Price‘ my friends, is the point, place, or line where we will not pass. Here is where the smart negotiator will make a stand and say, ‘No more!’This is the point where the smart thing to do, is to walk away from the deal because it no longer offers any value.
Reservation price often refers to a monetary price where the deal simply makes no sense to pursue. It can also refer to a multiple set of terms in a more complex negotiation. To a buyer,reservation price means the top price he would be willing to pay, for what he has determined as the maximum value of the product being purchased. From a seller’s perspective, the reservation price would be the least amount he would be prepared to accept in terms of what he has determined as the least profitable amount acceptable to him. To go beyond the reservation price, is that precarious line which will result in a financial loss to you, and your company or interested constituents.
From a negotiation perspective, Max Bazerman and Margaret Neale, authors of the book, ‘Negotiating Rationally’, describe the role of the negotiator as;
‘Remember the goal of negotiating is not to reach just any agreement, but to reach an agreement that is better for you than what you would get without one.’
Here, they are referring to the root or foundation of what intelligent negotiation is all about. It’s about knowing when to stop talking, and turn to your BATNA (Best Alternative to a Negotiated Agreement). Sometimes, this means that your best alternative is to simply walk away.
The key is to apply the best intelligence you can muster to establish your reservation price. It is based on market demand,your budget or ability to pay, and being realistic. Keep your emotions and ego separate from your business dealings. If you dont, remember who’s going to have to pay the piper afterwards.
A Few Guidelines
- As a general rule, your reservation price is at least nominally somewhat better than your best alternative.
- Don’t ever reveal your reservation price to the other side. If your counterpart knows your reservation price, they will use it as an anchor. As a result, the negotiations will revolve around the reservation price. If they’re a buyer they will try to pay the least. A seller will try to get the most.
- Do try to get the reservation price from the other side. This game is a two sided game after all, and we all want to get the best deal possible, don’t we?
- In more complex deals, consider what concessions or trade combinations you’re willing to make or receive, before deciding to walk away. In multi-faceted negotiations, don’t become too fixated on those price aspects, or your reservation price of a specific item. In particular, if there is something else of value which you might garner from your counterpart, as an alternative component of the overall deal. In other words, always focus on the big picture.
Nobody goes into business to lose money. To do so is an oxymoron, a notion of contradiction. Beware of human nature where you might be tempted to swim against the current of reason. Have a good alternative to back you where possible, and walk away when the deal simply no longer makes sense to pursue.