Business Negotiating Tip #1 — Know Your Walk-Away

We are constantly negotiating throughout the day — from our family members, to coworkers, or even to big contracts with business partners. What do you think is the most important thing to keep in mind when negotiating?

This Spring I’m teaching an MBA course on negotiations at the University of Washington Bothell School of Business.

The reading materials comprise about 1300 pages, class meets 3.5 hours every week during which time students practice negotiating, and students write a weekly essay they discuss online with classmates. From all that content, what would be an important highlight?

Reservation Price

Perhaps the most important best practice is accurately calculating one’s “reservation price” (RP). The reservation price, or resistance point, is the point at which you would be indifferent to agreeing to the terms of the present negotiation or walking away from it. If the terms and conditions are less favorable than that, you would be better-served by withdrawing from the negotiation. So how do you accurately calculate your RP?

First, the RP depends mostly on your best alternative to a negotiated agreement (BATNA) – in other words, your next best option if you walk away from this particular negotiation.

Second, you MUST determine your RP before engaging in the negotiation.

  • The other party isn’t going to sit around while you do your homework
  • You will “lose your mind” during the negotiation and won’t be able to accurately determine it
  • If you are not well-prepared for the negotiation, it’s not going to end well for you

Lastly, don’t fool yourself! Many times we lose our objectivity and bite off our nose to spite our face. If your objective analysis says you should be willing to accept X, then that’s what you should accept. Don’t then say, “but I would really LIKE more, so I’m not going to take less than X plus more.” This is one of the biggest mistake we make when calculating the RP!

Conversely, when you’re caught up in the emotion of the negotiation, don’t change your mind and accept less than X. You already determined less than X is a bad deal. Why would you want to go home with a bad deal?

Of the many “tips” scholars and expert negotiators could offer, Tip #1 would likely be to objectively determine the minimum terms and conditions you would accept coming out of the negotiation.

What do you think is the most important consideration when negotiating?

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