Bargaining for Advantage

by G Richard Shell

  Some people try to bluff their way through a weak bargaining position by acting in ways that strongly signal strength regarding a deal. A successful bluff can make a great negotiation story, but it is a high-risk strategy. You may, after all, end up with no deal. In fact, experienced negotiators can usually see through ploys of this sort—especially tricks such as the “keep-them-waiting” move. As Leslie H. Wexner, chairman of The Limited, once put it, “The longer they keep you waiting, the more they want the deal.” Unless you are an experienced gamesman, leave the bluffing to others and emphasize the inherent uncertainty of the stronger party’s future if it passes up your offer.

  If your weakness is obvious and you know that they know, it may help your credibility to personalize the situation as much as possible, arrange for a face-to-face meeting, candidly acknowledge the other side’s power, and proceed on that basis. Jovanovich’s admission to Dick Smith in Chapter 1 that General Cinema was HBJ’s best hope was such a move. It helped create a cooperative atmosphere that facilitated a deal.

  Finally, when all else fails, you can appeal to the other party’s sympathy. Ask the other negotiator what he or she would do in your position. Give the other party a “blank check” question like “What would it take for you to say ‘yes’?” If the other side responds, you may discover you have more leverage than you thought.

  SITUATION 2: YOU HAVE A STRONG HAND

  Suppose you think you have a strong hand—your leverage looks good. What signals should you send to the other side in the information exchange stage? You can either send a firm signal that you have the power to demand a favorable deal and intend to insist on one, or you can show your power, then indicate you intend to be flexible in order to build goodwill for the future.

  Suppose you want to send a strong, firm signal. How should you do so without being either arrogant or overly aggressive? Sheinberg’s negotiation with Morita is a good example of how not to do it. Sheinberg failed to gain any useful leverage from his meeting with Morita because, in the end, he did not convince Morita he would carry out his legal threat. The result was misunderstanding, a ruined business relationship, lost opportunities, and an eleven-year legal battle.

  Instead, Sheinberg should have asked Morita to bring his lawyers to a special meeting about the Betamax. “This is what lies ahead,” Sheinberg could have said after the lawyers had made their legal arguments. “Do we want to settle this in court, or is there a businesslike way to handle it?” In essence, Sheinberg could have taught Morita how Americans handle business relationships that include litigation.

  If you have a lot of leverage, but for one reason or another you are willing to be flexible, how should you go about sending that signal?

  A good example is the way J. P. Morgan handled his negotiation with Andrew Carnegie over the partnership interest, a story told in Chapter 4. Carnegie made a mistake and charged Morgan $10,000 less than he meant to for a partnership interest. When Carnegie showed up to get his check, Morgan gave him two checks, one for the agreed amount and another for the amount of Carnegie’s error. Carnegie tried to give the second check back, but Morgan would not hear of it. Carnegie got his money, and Morgan got credit toward their future relationship.

  It is the same in any negotiation when you have leverage but choose not to use it. Let the other side know what options you have before you show you are not going to exercise those options. You don’t have to be arrogant about it, just matter-of-fact. You view the transaction as part of a relationship, and people in good relationships do not squeeze every nickel they can out of a situation. They treat each other fairly. Someday it will be the other side’s turn.

  Summary

  The information exchange process is the crucial first stage of the interactive phase of negotiations. In general, it accomplishes three purposes. First, the parties establish open communication by setting, if the situation favors this, a friendly and personal tone. Second, they determine the interest and issues to be negotiated and share information about their perceptions on these matters. Finally, they send signals regarding their respective leverage positions.

  Information exchange should be handled differently in different situations. The more the stakes matter relative to the relationship, the more strategic the parties are likely to be. Hard-nosed opening statements and bluffing regarding the issues can be expected in a Transaction situation, whereas the rapport-building effort may be the most important aspect of a Relationship situation. In many cultures of the world, extensive rapport building is a precondition to any negotiation regardless of context.

  The preliminary information exchange stage has ended and the bargaining stage has begun when one side or the other makes a concrete, plausible opening offer that requires a reciprocal response. That is our next step in the negotiation process.

  INFORMATION EXCHANGE: A CHECKLIST

  ✓ Establish rapport.

  ✓ Obtain information on interests, issues, and perceptions. Probe first, then disclose.

  ✓ Signal regarding your leverage.

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  Step 3: Opening and Making Concessions

  Life cannot subsist in society but by reciprocal concessions.

  —SAMUEL JOHNSON

  You have established a degree of rapport, identified the issues you are negotiating, and exchanged signals on your relative leverage position. Now it is time to bargain. This is it: the anxiety-provoking moment that makes accommodating people nervous and starts competitive juices running.

  Should you be the first to make a specific proposal? If so, should you open at a fair and reasonable level or more aggressively? What sort of concessions, if any, should you plan to offer? Should you bargain hard to start with and then become more flexible, or should you start with a soft, amiable approach and then plan to harden your position?

  Scholars have spent more time researching the dickering and trading procedure at the core of negotiation than any other aspect of the process. This chapter will summarize the highlights of what we know about bargaining and, even more important, show how you can put that knowledge to use.

  Tactical Bargaining Questions

  The bargaining stage is dominated by tactics, so let’s look at some. As you might expect, good tactics depend on the situation. The right tactic for one situation may not be right for another. And, of course, the other person’s style can trump any situational analysis. If you are up against a competitive negotiator, you may need to become temporarily competitive yourself even when the situation seems to call for a softer approach.

  Bargaining formally begins when negotiators on one side open with a concrete and, at least in their own mind, plausible offer. It then usually proceeds through a series of reciprocal offers, suggestions, and counteroffers as the parties use various techniques to explore alternatives. Eventually, the process comes down to a distinct “closing and commitment” stage—the subject of the next chapter.

  Question 1: Should I Be the First to Open?

  Let’s start with the issue of whether you should open or try to make the other party go first. Many complex negotiations will have lots of issues to discuss, and you may be able to discuss some of them without opening in the sense I am using the word. But there will inevitably come a time when you will have to decide who is going to make the first concrete offer on allocation issues such as price, power, or control. What will you say when someone looks at you the way J. P. Morgan looked at John D. Rockefeller, Jr., in the Mesabi ore field story (see Chapter 7) and growls, “Well, what’s your price?”

  Many experts say you should never open. The famous film director Billy Wilder once wanted to hire novelist Raymond Chandler (author of many detective books) to help write the screenplay for a 1940s movie called Double Indemnity. Chandler was new to Hollywood but he came ready to negotiate.

  In his first meeting with Wilder and the movie’s producer, Joe Sistrom, Chandler made the first offer on salary. He demanded that he receive $150 per week—and he warned Wilder that it might tak
e him two or three weeks to finish the project.

  Wilder and Sistrom were amused. They had been prepared to pay Chandler $750 per week and knew that movie scripts usually took months to write, not weeks. Had this been a Transaction situation, Chandler would have lost a lot of money.

  But the situation was more like the “Einstein versus the Institute” example discussed in Chapter 7, not the “Rockefeller versus Morgan” case. The two Hollywood moguls valued their future relationship with the talented Chandler, so they took pity on him. They called an agent to represent Chandler in the negotiations and started over. Chandler’s poorly informed opening was forgotten.

  Beatles manager Brian Epstein once made a similar mistake that cost the Beatles considerably more money. He was negotiating for the Beatles’ financial share of their first movie, A Hard Day’s Night. Like Chandler, Epstein knew little about the movie business and opened with what he thought was an aggressive demand: 7.5 percent of the movie’s profits. The producers quickly said “yes.” They had been prepared to give the Beatles up to 25 percent and were delighted with Epstein’s 7.5 percent figure. A Hard Day’s Night turned out to be a hit, and the Beatles made money—but not as much as they could have.

  The Chandler and Beatles stories illustrate the risks you take when you are the first to open. Just keep your mouth shut, the experts counsel, and let the other negotiator name his price. You can always correct him if he is outside the “fair and reasonable” range. And you may be pleasantly surprised to find out that the other side is willing to pay thousands more (or take thousands less) than you expected.

  The “never open” rule is easy to remember—but, like most simplistic approaches to negotiation, it is not always good advice. How can you do better? The answer lies in how much information you have. Let’s look again at the stories we just discussed.

  What was the most important fact common to both Chandler’s and Epstein’s situations? Neither had experience in the movie business. They did not know enough about the standards and valuation systems used in the business to open with confidence. Being newcomers, they should have sat tight and let the other side do the talking. The same is true anytime you don’t know the market value of what you are buying or selling.

  If you are well informed about the bargaining range, then you gain an important advantage from opening. When I first started teaching negotiation, I recommended the “never open” rule to my classes. Then one of my better students introduced me to an entrepreneur who had successfully bought and sold literally hundreds of small and medium-sized companies. This man made it his practice to name the first price in every acquisition he did. Being the first to open let him fix the range, he explained to me.

  I subsequently learned that there is a substantial and persuasive body of research that supports this entrepreneur’s practice. First, by naming the first number, you have a chance to set the zone of realistic expectations for the deal. Your opening often forces the other side to rethink its goals.

  Second, social scientists have discovered a psychological quirk they call the “anchor and adjustment” effect. The term refers to a human tendency to be affected by “first impression” numbers thrown into our field of vision. We tend to make adjustments from these often arbitrary reference points.

  Researchers have found, for example, that most people seeing the string of numbers 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1 for a few seconds estimate that it yields a very high product. Other people, shown the same string in reverse order—1 × 2 × 3 × 4 × 5 × 6 × 7 × 8—think the product is much lower. The two products are identical, so why the different estimates? Because we focus on the first three or four numbers and extrapolate; that is, we anchor and adjust.

  In negotiation, research suggests that people who hear high or low numbers as initial starting points are often affected by these numbers and unconsciously adjust their expectations in the direction of the opening number. Of course, a totally outlandish number may trigger a strong negative reaction that could offset this effect. But there is some power in or draw toward these initial numbers nonetheless.

  My entrepreneur friend was taking advantage of the opportunity to both lower his opponent’s expectations and use the anchor effect. But note well: He did enormous amounts of research before he made a bid to set the range.

  Conclusion? Feel free to open if you think your information about market value is as good as or better than your counterpart’s. Otherwise, guard against the anchor effect, then ask the other party to open. Finally, remember that the best protection against making a mistake at the opening is negotiating with someone who cares about his or her relationship with you.

  Question 2: Should I Open Optimistically or Reasonably?

  Okay, either you have decided to open—or the other side opened and it is your move. Should you open aggressively with an optimistic request or make a manifestly fair and reasonable proposal? If you are in a Relationship situation, the answer is obvious: A fair or even accommodating opening is the right move.

  How about a Transaction? Assuming that you have some leverage, the research suggests you should open optimistically. Indeed, a recent summary of more than thirty-four bargaining experiments performed between 1960 and 1980 concluded that a hard-line bargaining strategy (open high and concede slowly) is the best approach to transactional bargaining, especially if direct communication between the parties is limited (as may be the case in a home sale or any other transaction mediated by a broker).

  That sounds persuasive, you may say, but what exactly is an optimistic opening? I define an optimistic first offer as the highest (or lowest) number for which there is a supporting standard or argument enabling you to make a presentable case. Your opening need not be supported by your best argument, just a presentable one.

  The difference between an optimistic opening and an outrageous one is this: The outrageous opening has no justification whatever to support it. The optimistic opening, by contrast, is a highly favorable interpretation of some standard or reference point. American lawyers are duty-bound when they argue a legal appeal to make every argument on behalf of their client that they can make “with a straight face.” Optimistic openings are like that: You should reach for but not beyond the “straight face” argument.

  And remember that in some cultures such as South America, the Middle East, and Africa, anything other than an optimistic opening is a serious social mistake as well as bargaining blunder. For North Americans and some Europeans, part of acclimating to these cultures is getting used to making optimistic (and in some cultures outrageous) opening offers in carpet stores, jewelry shops, and bazaars. Bargaining is a form of recreation in these places.

  Why Do Optimistic Openings Work in Transactional Bargaining?

  Optimistic openings take advantage of two well-documented psychological tendencies: the contrast principle and the norm of reciprocity. First, let’s examine the contrast principle. If I want you to pay me $50 for something and I open with a demand of $75 (supported by a presentable argument about prices that “others have paid”), my $50 final offer looks reasonable by comparison with my opening. If I had opened at $55 instead of $75, and moved down only five dollars before I stopped, you would be less likely to think you had gotten a bargain. An optimistic (but not outrageous) opening sets the other party up to feel both relief and satisfaction (and thus be more willing to say “yes”) when the realistic settlement range comes into view.

  If you think the contrast principle does not apply to you, think again. It is used successfully against millions of people every day. Why do car dealerships have a special sales force to sell you things after you buy a new car? Because they know that you are more likely to spend a couple of hundred dollars on extended warranties and service plans just after you have spent $20,000 on a new vehicle than you would be if you shopped for these things by themselves. The same is true of furniture dealers who sell $75 fabric treatments for your new $1,000 sofa and travel agents who push $150 trip insurance policies just
after you book a $3,000 vacation. These add-on sales look inexpensive in comparison to the big money you just paid for the thing you really wanted. But they are usually expensive when compared with the alternatives you could find if you shopped for them separately. That is why the dealers don’t want you to leave the store without giving you these strong after-sell pitches.

  Second, the optimistic opening permits the person making it to trigger the norm of reciprocity, discussed in Chapter 4. It works like this: Person A makes an optimistic opening; person B rejects it. Person A then moderates his demand by making a significant concession. Person B then feels pressure imposed by the norm of reciprocity to make a reasonable response, or even to say “yes.”

  Psychologists have found that this “high opening, rejection, then moderation” procedure works for all kinds of requests, not just bargaining demands. In controlled field experiments, scientists have induced people to agree to all manner of things—including volunteering to take underprivileged children on a trip to the zoo, signing petitions, or giving up smoking for short periods of time—simply by asking them for a big favor first, getting a rejection, then presenting the smaller, apparently more reasonable request. The norm of reciprocity induces people to say “yes” much more frequently after they have rejected your first demand than when you open with your modest request.