Bargaining for Advantage

by G Richard Shell

  A Word of Warning on Optimistic Openings

  Does an optimistic opening always work in a Transaction situation? No—but you can anticipate the occasions when it will not.

  WHEN YOU LACK LEVERAGE

  The first exception concerns leverage: Don’t open optimistically if you lack leverage and the other side knows it.

  If you are a new college graduate applying for an entry-level position in cities such as San Francisco or Boston, which have a lot of colleges and universities, don’t ask for the moon when an employer inquires about your salary expectations. An overly optimistic opening will make you look unreasonable and scare the employer away.

  WHEN THE OTHER SIDE WON’T BARGAIN

  The second exception concerns special markets in which there is, for one reason or another, no expectation of bargaining. A friend in the management consulting business pointed this out to me.

  When someone calls and asks him to do an engagement, he quotes a price and, nine times out of ten, either gets the job or does not. Haggling is not part of the normal engagement process. His asking price conveys a message to his customers about his reputation and sophistication. His prospective customer, meanwhile, is shopping for the right level of sophistication by assembling price quotes. My friend has learned to name a price that is high enough to carry a “premium services” message, but not so high that prospective clients think he is out of their league.

  WHEN IT’S MORE THAN JUST A TRANSACTION

  As you move from Transactions toward Balanced Concerns situations, in which relationships take on more importance, highly optimistic openings do not work well.

  For example, when Wayne Huizenga, the deal maker who built Waste Management, Blockbuster Video, and Republic Industries, makes business acquisitions, his strategy is not to start with lowball offers and move up into a reasonable range after a lot of haggling. Instead, he starts within 5 to 10 percent of the final price he is willing to pay—and negotiates mainly on nonprice issues. Huizenga has firm, fair, high expectations for all his deals—he is an excellent negotiator—but he is not a “haggler.”

  Why? Because he does his homework. He knows as much or more about the value of the firms he buys as the sellers do. He is also mindful that he is buying from people who have invested their lives in building their businesses. A lowball offer insults their pride. He wants the owners to stay and run their companies as part of his megaenterprises. Relationships matter. “No matter what he does, he’s fair about it,” says one associate. “He leaves you with the feeling that . . . ‘I got, I guess, what I really deserved.’ ”

  In other words, an aggressive highball or lowball opening is usually a bad idea in a Balanced Concerns situation, but an opening offer that reflects legitimately high expectations (see Chapter 2) is still appropriate. Try to find a favorable proposal supported by good, solid arguments (not just “presentable” ones) that still leaves you some room to negotiate.

  Question 3: What Sort of Concession Strategy Works Best?

  Even if you are inclined to be reasonable in your opening, it pays to leave yourself bargaining room to make concessions during the course of negotiations. When I was a lawyer negotiating lawsuit settlements, I used to think that the haggling aspect of negotiation was a silly, pointless ritual. Both sides knew they were going to end up somewhere between the plaintiff’s and defendant’s initial numbers. Why not just name an objectively fair figure, stick to it, and settle the case?

  The answer to this question can be found in a story and some research. The story involves the automobile dealers of America. In the early 1990s, sensing that Americans did not like to haggle about price at car dealerships, roughly two thousand dealers across the United States instituted “no haggle,” one-low-price selling policies for new cars. It was a big deal. Corporate America was finally listening to consumers who wanted a fair price for cars just as they wanted a fair price for soap. The dealers were going to transform car buying from an anxiety-provoking, pressured ritual into a simple event like going to the shopping mall.

  Within a few years, about half of these dealerships—more than one thousand of them—had dropped the policy, and more were dropping it every day. Why? For one thing, the group of people who genuinely hated haggling turned out to be much smaller than anticipated (only about 15 percent of Americans). In addition, many people, armed with abundant information on car pricing from Internet Web sites, wanted to use this newfound bargaining power. Finally, people wanted the satisfaction of telling their friends about the “great deal” they had negotiated. One consumer expert who studied the decline of the “no haggle” policy explained it this way: “Automotive consumers need to feel that they get a good deal when they purchase a vehicle, and, for most, the only way they feel that they get a good deal is through negotiation.”

  Research confirms that people receiving concessions often feel better about the bargaining process than people who get a single firm, “fair” price. In fact, they feel better even when they end up paying more than they otherwise might. One experiment compared three different concession strategies: (1) start high, then refuse to move, (2) start moderately, then refuse to move, and (3) start high, then gradually concede to the moderate point. The last of these strategies was the most successful by far. More agreements were concluded using this strategy. The parties employing the third strategy made more money per transaction than did those using the first two. And the people who faced negotiators using the third strategy reported much higher levels of satisfaction with their agreements than did people who faced those who refused to move.

  Concessions are the language of cooperation. They tell the other negotiator in concrete, believable terms that you accept the legitimacy of his or her demands and recognize the necessity of sacrifice on your own part to secure a joint decision.

  Concession Making in Different Situations

  Now that you know why we need to make concessions, just exactly what is the best way to do so? Once again, it depends on the situation in which you find yourself. Let’s look at each of the four quadrants in the Situational Matrix and see which concession-making strategy works best. I have reprinted the Situational Matrix from Chapter 7 here for your reference.

  TACIT COORDINATION (QUADRANT IV)

  The concession-making practice for Tacit Coordination situations need not detain us. As the driving-at-the-intersection example in Chapter 7 showed, avoiding needless disputes and accommodating when conflict cannot be avoided is the best practice.

  If accommodation is not possible (the other side refuses to go first and you are stuck in a “mutual accommodation” impasse) don’t worry about concession tactics. Just try to solve the problem in a genuine, helpful way. Go first if you must.

  RELATIONSHIPS (QUADRANT II)

  When the relationship counts more than the issue in dispute, the best concession strategy is accommodation. As the example of Albert Einstein’s negotiation with the Institute for Advanced Study showed, the goal is to find out what the other party wants and give it to him or her with interest. Money is not the issue. If accommodation is impractical for some reason (the other party will not tell you what he or she wants), propose some simple and self-sacrificing compromise. Try to make the other party feel appreciated.

  FIGURE 9.1

  The Situational Matrix: A Strategy Guide

  As simple as all this sounds, supercompetitive people have a “tin ear” for this advice. Because they treat most interactions as games and have trouble trusting others, they have no instinct for accommodation. They butt into line to get their seat on the airplane, and they haggle too hard when they should be more concerned with the relationship.

  Some useful advice for competitive people who find themselves in situations calling for diplomacy: Get help from someone with better people skills. For those of us stuck negotiating with competitive people who do not understand that in some situations the stakes don’t matter, keep your sense of humor, accommodate, and consider whether you want to continue
dealing with a person who doesn’t understand the value of relationships.

  TRANSACTIONS (QUADRANT III)

  When the stakes are all that matter, research shows that a firm concession strategy works best. In simple, price-only negotiations (what scholars call “distributive bargaining” situations), classic haggling is the rule: Open optimistically, hold for a bit, show a willingness to bargain, then make a series of progressively smaller concessions as you close in on your expectation level. Cooperative people may not be very good at the haggling game, but they must nevertheless learn to play it in competitive situations.

  Note carefully: Hagglers’ concessions initially converge on their expectation levels—not their absolute bottom lines. Why? Because the declining size of hagglers’ concessions (in either percentage or absolute money terms) sends a powerful signal that they are getting close to a resistance point. They want you to think that their expectation level is their “bottom line.” This is a bluff.

  If you resist at their initial target level, hagglers will reluctantly continue making concessions toward their real bottom line—the point at which they would really rather walk away than do the deal.

  Try this test sometime at a used-furniture store, bazaar, or other place of business where haggling is expected. Identify something you want and make a very low, but not outrageous offer. Let the seller make a concession and make another small move of your own. Then make a display of your cash or checkbook—in other words, identify yourself as a serious buyer. Keep insisting on your price until you hear the storekeeper say, in so many words, “no.”

  When you hear the “no,” politely but firmly head for the door. As often as not, the seller will stop you before you leave the store and make a further concession. At that point it is your choice whether to keep bargaining or close the sale. Do not expect too many more concessions, however. Sellers do have their pride.

  In more important, high-stakes deals, you should also be careful not to make big concessions too early. Start slowly. Why? Because big moves made early in bargaining can confuse the other side.

  Let’s say you are in a negotiation with a big chain to sell your small video store business. You will have no future role in the venture—it is a straight buyout. You have several issues before you: the price, the “currency” (whether you will take the price in cash or the acquiring firm’s stock), and the closing date for the deal. The larger firm opens with an aggressive bid that covers all three issues: a low price, an all-stock deal, and a delayed closing date (which we’ll assume favors the buyer in this deal).

  What happens if, in your response, you move straight to your bottom line, hoping to conclude negotiations quickly and amicably? You propose a medium valuation (which is where you want to end up), accept the all-stock proposal, and ask for closing in two months (a reasonable time). You are surprised when the buyer’s next offer moves just inches off its low valuation and keeps the far-off closing. The buyer does not even mention your agreement to the all-stock aspect of its offer. You begin to feel angry.

  What is the problem here? When you make large concessions early in high-stakes transactional bargaining, you send a set of messages. One message is: I really want this deal. That message has leverage implications, and the other side may develop high expectations regarding the final price. It will want to test that hypothesis. If you suddenly dig in and refuse to move after being extremely flexible at the start, the other side may have trouble adjusting its expectations in light of the first impression you gave. You may even lose the deal.

  The second message you send is: The issues I conceded were not important to me. By agreeing completely to the all-stock idea right away, you signaled your satisfaction with that term. But guess what? The other party may give you zero credit for this concession because you gave it up so easily. You have now told them, in effect, “I did not want cash.”

  Consider the other side’s point of view. The acquiring firm may have been deeply worried that you would demand cash. It might have been willing to raise its price significantly or pay you some cash on the side for a consulting contract to induce you to use its stock as currency. But now you will get nothing for this concession.

  Negotiation teachers call this phenomenon “concession devaluation.” This is a fancy name for the truth contained in an old saying: “What we obtain too cheaply, we esteem too lightly.” Competitive opponents will naturally take advantage of everything you give them, but even accommodating people will alter their expectations in the light of your offhanded concession behavior. If you give up something without even a comment, the other side’s estimate of the value of your concession actually goes down because of your casual treatment of the issue. “I guess we valued this item incorrectly in our planning,” the other side’s negotiators say to themselves. “She didn’t really care about getting cash. If the issue isn’t worth anything to her, it isn’t worth anything to us, either.”

  Issue Trading Versus Haggling in Transactions: Integrative Bargaining

  If many issues are on the table, concession making in high-stakes negotiations often takes the form of “issue trading” and “package bargaining” instead of simple haggling. Negotiation scholars use the term “distributive bargaining” to describe simple haggling (people are “dividing the pie”) and the term “integrative bargaining” to describe the more complex process of trading off between issues (people are “making the pie bigger” by matching or “integrating” their interests, priorities, and differences). Many deals contain elements of both concession-making strategies.

  How do classic hagglers handle a high-stakes negotiation with many different issues? Simple: They attack each issue one at a time and use the distributive procedure I described above to reach their desired expectation level on each issue. They start high, concede slowly, and close on issue 1. Then they repeat the process for issue 2. And so on.

  But this simple strategy carries a higher risk of impasse than does the alternative method of issue trading. There may be some issues on which the other party cannot compromise at all. The haggling procedure also ignores the likelihood that different issues will be worth more to one party than the other. I care more about the closing date; they care more about the cash-or-stock issue. Pure haggling when there are differences to exploit leaves money on the table.

  How does one engage in integrative bargaining? By identifying the issues, fears, and risks that are most important to each side and then “logrolling”—accommodating each other’s most important interests and priorities in exchange for reciprocal accommodations.

  If the concession rule for haggling is “Start high and concede slowly,” the rule of thumb for integrative bargaining is to make big moves on your “little” (less important) issues and little moves on your “big” (most important) issues. But remember the danger of concession devaluation and never give up anything (even a “little” issue) without a demonstration that the concession is meaningful to you.

  When both sides open at their highest defendable position on all their issues—but then show flexibility on the ones that have less urgency for them—they communicate important information about their respective priorities. As the parties observe where they are making headway and where they are encountering strong resistance, they “chart” the other side’s needs and desires. This gives them guidelines on how integrative concession making should proceed.

  After a discussion of all the issues (without making any concrete opening offers on any of them), issue trading often proceeds through package bargaining. One side proposes a total package, including a demand on each issue. The other side responds with a total package of its own, reflecting its aspirations. Up to this point, this procedure looks just like haggling, but it changes after the openings.

  In their next move, the side that opened may make concessions on one or two of its “little” issues, making a display of its sacrifices, but hold firm on its more important priorities. The other side reciprocates, and after several rounds each side
begins to figure out which issues are more important to the other.

  By dealing with entire packages and agreeing that no issue is closed until all issues have been decided, both parties retain a high degree of flexibility. If, later in the process, they find themselves at an impasse over an issue both consider vital (such as price), they have the option of going back to earlier packages and exploring different combinations without being locked in to any particular concession on any particular issue.

  Parties often trade issues in clusters, using a formulation well known to negotiation experts: IF you give us what we want on issues A and B, THEN we might consider concessions on issues X and Y. The “if . . . then” formula ensures that you never make a concession without linking it to a mutual concession from the other party. And of course, issues A and B are the most important ones to the party making the offer while issues X and Y tend to be lesser priorities. The parties may eventually need to haggle and fight over some of the issues that both think are important, but they have “issue-traded” on the ones that each can concede at relatively low cost.

  Let’s go back to the example in which you are selling your video store to a big chain and see how you might proceed using integrative bargaining. First, you would be better off opening with an aggressive demand: a high price for your company, an all-cash deal, and a rapid closing. As the negotiations progress, you might then hold to your high price and use your flexibility on the cash-or-stock issue to trade for more money: “IF you can raise your price to meet my needs, THEN I will consider forgoing cash for part of the price and could agree to a closing within two months.”