ZOPA Negotiation (the Zone Of Possible Agreement)
Zone of Possible Agreement (ZOPA) is the blue sky range where deals are made which both parties to a negotiation find acceptable.
The intriguing part of the negotiations
ZOPA might almost sound like a foreign word for a cheer of joy, or maybe even a new and exciting soft drink about to splash the marketplace. It’s neither but if you have a wide ZOPA in your negotiation, it’s nearly as sweet.
Negotiation ZOPA stands for Zone of Possible Agreement. It’s the blue sky range where deals are made, that both parties to a negotiation find acceptable. Whether we’re buying something at a bustling yard sale, a country home, or entering into a complex business venture, the Zone Of Possible Agreement is where an agreement is most likely to occur.
The process in finding this zone requires a little bit of detective work in order to make it work. It begins with a proposal by a person, commercial entity or organization known as a ‘Proponent‘. Essentially, this is the person who puts an offer on the table. The receiving end of a proposal is known as a ‘Prospect‘. This is the person or entity who considers the merits of the offer or proposal. The prospect will accept the proposal, make a counter proposal/offer, or outright reject it. This is where the game begins to get seriously fun.
What is ZOPA negotiation about?
The proponent is trying to sell us something. This can be a product, a business idea, services, an organisational concept or a combination of these things. The proponent is more commonly called the ‘seller‘. The prospect, on the other hand, is more commonly called the ‘buyer‘.
The seller wants to get the maximum amount possible for their proposal, but generally may also set a limit for the least amount they will accept. The least amount they are willing to accept, is known as the seller’s ‘Reservation Price‘. This is the amount where they draw the line,also know as the ‘walk away‘ from the deal point.
The buyer, on the other hand, wants to pay the least amount possible, but may consider a higher amount that they might be prepared to pay as well. The maximum amount they are prepared to pay is also known as the buyer’s ‘Reservation Price‘ or ‘walk away‘ from the deal point.
The differences between these respective lows and highs of both the seller and buyer, are their range of expectations. When you have a common ground or overlap between these two different ranges, this is known as ZOPA or the Zone of Possible Agreement.
Of course, common sense dictates that if there is no overlap in the expectation ranges of the seller and buyer, agreement becomes highly unlikely. Similarly, even where ZOPA exists, the agreement might still not materialize,when the parties are unable to agree regardless. The letter ‘P’ in ZOPA meaning a possible agreement, will more probably occur, but it’s not a definite.
An illustration might make this clearer. Fiona intends to sell her business. She advertises her business for 30,000, which is her highest expectation on what she has determined as the optimum value, but will let it go for as low as 25,000,being her reservation price.
Gerald is interested, but he can only afford to pay 27,000 which is his Walk Away or Reservation Price, and so he makes a tentative first negotiation offer of 24,000. Neither of these negotiators know the Reservation Price or Walk Away positions of the other negotiator.
The overlap range or ZOPA lies between 25,000 and 27,000, which is the comfort area where the two parties might be able to come to an agreement. Even if Fiona convinces Gerald to enter her seller’s range, she might still opt to hold out for a better offer from someone else.
The ideal piece of information, would be the other party’s reservation price. It is generally believed, that you should never reveal your own reservation price. The real trick is trying to find that sweet range of ZOPA.
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