Originally appeared on: https://www.quickanddirtytips.com/qdtarchive/3-numbers-you-should-know-before-negotiating/
January 5, 2016
How to prepare for a negotiation includes knowing critical numbers: your reserve price, your dream price, and your goal.
It’s an exciting day! Bernice is working on her wedding plans and is choosing a mariachi band. Her friend Alex is in a garage band, The Palmettos, and has offered to play the wedding reception for $100. On principle, however, Bernice wants a professional band. She’s heading out now to negotiate. “What are you going to negotiate?” I asked. “I will know when I get there,” she replied. “The Goddess will guide my negotiations.” “Er… OK.”
An hour later, the shouting has died down, and Bernice emerges, with only a small lock of hair out of place. In the background, I can see what looks like two band members sneaking out the back door, holding crumpled sombreros.
“The Goddess has led me to negotiating success!” Bernice serenely informs me. “Only one hundred and twenty dollars for a professional band.” “Really? Which band.” “The Flying Cucarachas.” “Have you ever listened to them?” “No, why?” “Because, my dear Bernice, the Palmettos are a cover band. They specialize in music by the Flying Cucarachas, only they’re much better musicians.”
Bernice paid an extra $20 for an inferior product, all because she didn’t prepare correctly for the negotiation. While it’s nice to trust the Goddess (just to be on the safe side), you and I are much better served with the right preparation before walking into a negotiation.
What’s the right preparation? There are many pieces, but today, we’ll concentrate on the most important pieces: know your numbers.
Know Your Reserve Number
The first important number is your reserve number. The reserve number is the absolute lowest you will accept in a negotiation before the negotiation doesn’t make sense for you to continue. You find your reserve price by understanding your Best Alternative to a Negotiated Agreement, or BATNA. The BATNA is what you would do if all negotiations failed and you had to walk away from the table empty handed.
If Bernice had actually listened to the bands before hiring one, she would have realized that their music was basically identical. She just prefers the idea of having a professional band.
Knowing that, if Bernice’s Cucaracha negotiation fails, her best alternative is to go with Alex’s band, the Palmetto’s. This means that Bernice’s BATNA is hiring Alex’s band. Since this alternative would cost Bernice $100, her reserve number is $100. This means that she should never pay more than $100, because she can always get a perfectly good band for $100, and paying more is just throwing money away.
Know Your Dream Number
The next number to consider is the best possible outcome you could wish for. This is the highest number to expect, and it’s the number you would pitch, if your strategy is to start the negotiation at the high end. As one lawyer friend of mine put it, “If you’re selling something, your dream number is the highest price you can open with that won’t make them actually laugh you out of the room.”
Bernice’s dream number is $0. She would love to get a band to come play the wedding for free. She knows this isn’t realistic—even though she would be offering the band amazing exposure that they could post on their web page and instagram, and would clearly cause their indie cassette tape sales to skyrocket—so her dream number is a whopping $20. Because musicians.
Know Your Goal Number
The last number to keep in mind is the goal number. This is the number you actually aim for throughout the negotiation, and is a realistic middle-ground between the reserve price and the ideal price.
By knowing all three numbers, you know what to accept, reject, and when to correct course.
Bernice’s goal is $80. She figures she can negotiate the professional band band down to below the garage band price. Bernice is very optimistic.
So let’s recap: Bernice’s BATNA is hiring the Palmettos. That means her reserve price is $100—she should never pay more than that. Her dream payment is $20, and her realistic goal is $80.
In our new, alternate universe, Bernice heads in to negotiate with these numbers in mind. If the Flying Cucarachas want more than $100, Bernice’s reserve price, she’ll do better by leaving the negotiation and hiring the Palmettos. She’s going to keep $80 in mind throughout the negotiation, however, in the hope she can negotiate the Flying Cucarachas down to that number.
Find These Numbers Everywhere
We negotiate all the time in our lives, and in any negotiations, BATNA, reserve price, your dream number, and your realistic goal are worth knowing.
Sam has an extra ticket to Star Wars 19: The Redemption of Jar-Jar in IMAX 3D holovision. Tickets are sold out for the next 13 months, and Sam’s friend Avery is chomping at the bit to buy the ticket from Sam.
If Avery doesn’t buy it, Sam is confident that listing the ticket on Craigslist will fetch at least a $73 price. Sam’s best alternative is selling the ticket on Craigslist, setting the reserve price at $73.
Being an investment banker, Sam’s dream is to sell the ticket to Avery for $1,015. After all, if Avery isn’t smart enough to check Craigslist, that isn’t Sam’s fault. But Sam also realizes that a more realistic goal is $125. After all, this is IMAX 3D holovision.
By going into the negotiation with all three numbers, Sam knows which offers of Avery’s to reject, which to accept, and which to aim for.
Great negotiation is like bullfighting. You need the right attitude to sit down with the bull, understand each other’s interests, and hammer out a joint agreement. But a great attitude only does so much if you don’t know your numbers. Keeping track of your numbers gives you a way to know where you are in the negotiation, when to walk away, when to say an enthusiastic “yes,” and when you might be able to move the agreement a bit more in your favor.
Bernice scheduled a renegotiation with the Flying Cucarachas and I passed her in the hall, wiping the sweat from her brow at the end of the negotiation. “It was hard work, but successful!” she proclaimed. She has her professional band, the Flying Cucarachas for $90—$10 below her reserve price. From the twinkle in her eye and the determined set of her mouth, I can’t wait to her about her negotiations with the florist.
Work Less, Do More, and have a Great Life!
About the Author
Stever Robbins was the host of the Get-it-Done Guy podcast, an iTunes top-10 business podcast, from 2007 to 2020. He is a graduate of W. Edward Deming’s Total Quality Management training program and a Certified Master Trainer Elite of NLP. He holds an MBA from the Harvard Business School and a degree in Computer Science from MIT.
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