Saturday, November 24, 2012

Negotiations: BATNA and your walkaway or reservation price

Image from sph.umn.edu
In this post I'll explain a fundamental negotiating concept, BATNA.  Specifically, I'll define the term, explain how to calculate it, how it should inform your negotiating approach, and discuss the challenges of non-financial components of BATNA.

The examples that follow will be about buying/selling cars and job offers, but you can apply these concepts to any negotiations you encounter, including dealing with your customers, suppliers, employees, and employers.

WHAT IS BATNA?

Your Best Alternative To a Negotiated Agreement (BATNA) is your back-up plan should your current negotiations fail.  The better your BATNA, the more aggressive you can be in your negotiations, since you have an attractive alternative should your talks break down.

If you're negotiating price, your BATNA is the next-best offer you've received.  If you're interviewing jobs, your BATNA is the best job offer you've received so far.



DETERMINING YOUR BATNA

Cash is the easiest way to compare alternatives and determine your BATNA.  If you're selling your car, all you really care about is the price each potential buyer is offering.  If the highest amount you've been offered so far is $10,000, then that is your BATNA.  If a new buyer stops by and offers you $10,500, that is clearly a better offer and becomes your new BATNA.  You would ignore any offers worse than your BATNA - below $10,500 - since you already have a better alternative.


HOW BATNA INFORMS YOUR WALKAWAY OR RESERVATION PRICE

Your walkaway or reservation price is least attractive deal you would accept before ceasing negotiations and walking away from the bargaining table.  If you're the buyer, your reservation price is the maximum you would pay - any higher than that and you would walk away from the deal.  If you're the seller, your reservation price is the minimum you will accept - any lower and you would walk away.  Also remember that you should be practicing integrative bargaining, in which case your BATNA would not be a single number, but an offer including multiple elements.

The better your BATNA, the more aggressively you can negotiate.  If you already have an attractive offer in your back pocket, you walkaway price would always move beyond your BATNA.  In addition, you might negotiate harder with less fear of pushing your counterpart past their reservation price and losing the deal.  After all, even if they walk away, you still have an attractive offer you can accept elsewhere. 

NON-FINANCIAL ELEMENTS OF BATNA

If we reverse the earlier example and suppose that you're buying a car, cash might not be the sole determinant of BATNA.  Suppose you've decided what make, model, year, and options of automobile you want to purchase.  You shop around and the best price you've been able to negotiate is $10,000, so that is your BATNA.  As you continue to look, you find the same car from another seller who you're able to negotiate down to $10,500.  If you were strictly judging by price, your BATNA is better so you should walk away from this other deal.

But, let's suppose you really like the color of the second car and don't really care for the color of the first.  Now you've introduced a subjective element to valuing your options. The more non-financial aspects there are to your alternatives, the harder it is to compare them to one another.  You might decide that your favorite color is worth $700 to you so the second car trumps your BATNA and you should accept the deal.  Furthermore, you might have arrived at that $700 value on the color after learning that's what it would cost to get the first car re-painted.  Therefore, the more you can quantify aspects of the alternatives you're comparing, the easier to calculate your BATNA and reservation prices.

JOB INTERVIEW EXAMPLE

Evaluating job interviews is a good example of  how difficult it can be to compare non-financial and/or non-qualitative elements of alternatives.  Compensation is the easiest component to compare across offers.  Beyond that, it gets tricky.  What is the relative value of one title vs. another?  How much value do you attach to additional vacation days?  How do you factor company culture or potential career path into your BATNA?  The more self-aware you are about your preferences and priorities and the more honest you can be with yourself, the better you can evaluate your options and determine your BATNA and negotiating plan accordingly.

2 comments:

  1. Tks very much for your post.

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