Negotiating Tactics:

August 6, 1998
by Pat McClellan

Letting the other guy have your way

Every transaction in life involves negotiation. From deciding where to dine with a friend to renting an apartment, from buying a car to convincing a child to eat her veggies, we are constantly faced with the opportunity to negotiate. Since it is such a common encounter, why do most of us get into such a panic when it comes time to negotiate the purchase of a house, or the cost of producing a project, or a starting salary for a new job? Probably because nobody ever explicitly taught us how to negotiate effectively. As with most things, we tend to avoid or dislike activities in which we are not confident. Let me suggest that this is a topic well worth your investment of effort and time.

Many books on the subject have been written, which approach the topic from viewpoints as diverse as Ghandi and Attila the Hun. The most well-received book on the subject in recent years is a very readable paperback called "Getting to Yes: Negotiating Agreement Without Giving In" by Roger Fisher & William Ury. (Widely available for around $13.)

One of the best classes I ever took (in business school) was a 10-week course on negotiating. The class was a mandatory part of the core curriculum, and after taking it I certainly understand why. The class was largely a role-play workshop where, each week, we were assigned roles in ever more complicated negotiations and left to our own devices to work things out. Then, we'd come back together and see how others with the same role managed in their negotiations. Very enlightening. I can't begin to encapsulate that experience into this article, but I can share some insights that I gained.

A Dollar Auction

I am going to auction off a dollar. I have 2 bidders, you and one other person. Here are the terms:

I will accept bids in increments of 5 cents, starting with 5 cents.
I will gladly give the dollar to the winning bidder, no matter what the price.
There is no collusion between bidders.
Both the winner and the loser must pay me their last bid.

I must be an idiot, right? So you open the bidding for 5. If you win, then you have made an instant profit of 95 cents! Quickly, the other bidder (Bob) bids 10. If you stop bidding now, you have not profitted 95 cents, rather, you will have paid 5 cents for the privelege of bidding in the auction. So you bid 15 cents, and Bob bids 20. Hmmm. Time to reassess the strategy. You realize that you've gotten yourself into some quicksand, but there is an obvious way out. Bingo! You bid $1, thinking that surely nobody would bid more than a dollar to get a dollar. That just wouldn't be rational.

But, Bob, obviously a moron, just bid $1.05. So what do you do now? You can let Bob "win" by paying $1.05 for the dollar, but that means that you'll also have to pay a dollar and you won't get anything back. Reassessment time again. If you bid $1.10, then you could win the dollar and offset the cost for a net loss of ten cents instead of a loss of $1 you currently face. So, you join Bob in the Twilight Zone and bid $1.10.

Well, you can see where this is going... and going... and going. The lesson is that even when dealing with nothing but money, it's never just money. When other parties are involved -- or more complicated issues, previously irrational options become your best (and rational) alternative. Luckily, you'll rarely have to bid for a dollar.

Loss Aversion

Auctions are interesting to watch. When I was a kid, my great-uncle was an auctioneer and I used to love to go with him to watch estate sales by auction. All that fast-talking patter kept people engaged in the competition to buy. And competition it was. People watched intently as interested bidders would subtly nod or gesture as the price went up. As the price rose, bidders would drop from the pack leaving just a few or a couple to jockey for position as the winner. And frequently, all too frequently, the winner won the right to claim the "winner's curse". Paying more than they wanted for the item. Why? Because they didn't want to "lose". (Some would suggest that auctions came into existence because of historic male control of economics. If women had been in charge, there wouldn't be enough testosterone to drive the price up. The lesson: if you're a man, take a woman with you to the auction.)

Competition

Power in a negotiation often comes from having several parties competing for what you have to offer. Examples:

A "sellers' market" is a real estate term to describe the situation of more buyers than available properties. In this situation, one could expect the sellers to benefit from rising prices, driven by competition for the available houses.
A client with a program to produce asks for bids from several production companies. To get the best (lowest) price, it is imperative that the bidding companies know that others are bidding.
A company interviews many candidates for a position, and narrows the selection down to no fewer than 3 candidates before making an offer to the first choice. Why? If you are offered the job, the fact that they have other people on deck reduces your negotiating power. If you are looking for a job, you're best to maintain as many options for as long as possible into the negotiating process. Make them compete for you, rather than the other way around.

Non Zero-Sum Game

What? A zero-sum game is a negotiation in which whatever you win, your opponent loses. And whatever your opponent wins, you lose. An example is when you haggle on price of a table at a flea market. If you pay $20, the other guy gets $20. If you can negotiate down to $15, then you're better off by $5, and the other guy is worse off by $5.

A non zero-sum game is a negotiation in which you can settle on terms that make you both better off. Example: you're at that same flea market. Instead of paying $15, you settle on $18, but the guy will deliver the table to your house on his way home from the flea market. You're better off because you don't have to pay for a truck rental. The seller is better off because he gets $3 more for making an easy detour on his way home.

If you can position your negotiation as a non zero-sum transaction, then both (or all) parties have the potential to improve their position. If auctions are "male" in nature, this approach is clearly "female" in that it relies on more communications, more patience, and is far less competitive. Potentially beneficial in so many ways.

Get Everything on the Table

Remember when I said "it's never just money"? Let's talk about those other things: terms of payment, timing, emotional hassle, risk, etc.

Perhaps the item most closely related to price is terms of payment. In a contract situation, this can be as simple as "50% now, 50% on delivery". In a job setting, it's more likely to be something like "base salary of $60,000, with a potential bonus of up to $20,000 for reaching performance goals." The basic rule here is that any amount you are willing to defer til later or put at risk should exceed what you would expect to receive now. Inversely, sooner, more certain payment should command a lower price.

In addition to the schedule of payments, the timing of the deal can have a huge role in the negotiation. Example: when my wife and I were selling our condo in Chicago, after receiving an offer contract for the property, we made a very fair counter offer. The buyer (a first-time buyer) responded with a verbal counter to our counter. Now, we could have accepted it, rejected it, or countered again. What would you do? We did none of these.

I knew that the buyer was a first time buyer, and therefore, this purchase could be a very emotionally stressful transaction. She was moving to Chicago from another city and needed to move by a certain date, so time was important to her. She had previously made an offer on another property that was rejected, so she had "lost" once already. So, when we received her counter-offer, we simply asked that the offer be written up in an offer letter (contract), with a stipulation that we had 48 hours to consider it. Within an hour, the agent called back agreeing to our terms and price. By being aware of the fears of the buyer (and to a lesser extent, the agent's aversion to the hassle of writing a new contract), we attained our goal.

It's quite an art to perceive all of the factors which are playing into a negotiation. Aside from price, there are frequently such factors as sales quotas, company politics, personal interests, fulfilling management goals, fear of failure, public recognition, etc. Try to communicate effectively and make yourself aware of the other party's full interests.

To see the extent that these factors can play on a deal, go car shopping on the last day of the month, when dealers are trying to improve their monthly sales statistics. At this time of the month, sales volume is a higher priority than gross profit. Lesson, never buy a car (from a dealer) in the first three weeks of the month. End of the calendar year is even better, because the tax implications of inventory work to your advantage.

Drop Anchor

In negotiating terms, an "anchor" is a first impression. For example, back at that flea market, the $20 price tag on that table was the seller's attempt to anchor the price near $20. Of course, he didn't expect to really get $20 for it... it was just an anchor. Typically, you'd want to immediately drop your own anchor: "I saw a table like this for only $10 last week." Now, you can expect the price to drift between the two anchors.

In terms of negotiating a project budget, you can say things like "I produced a similar program last year for just over $90,000." Your client counters with "We only budgeted $65,000 for this one." Now, you can expect the price to drift somewhere in between. Be aware that the first time the other party mentions a number, they're dropping anchor.

Who's Making the Decision?

Let's go back to our car buying scenario. The sales guy comes up with a price. You don't bite. Then, he says to you confidentially, "Let me go talk to the sales manager and see if I can get him to come down any." Then he disappears for a few minutes while you wait, patiently thumbing through the glitzy product accessories catalog. Meanwhile, the sales guy is in back munching doughnuts and watching Rikki Lake. He reappears with a "rock-bottom" price that the manager gave him "as a favor." Now, mysteriously, you feel somewhat obligated to accept the price that the sales guy has negotiated from the manager on your behalf. What just happened?

The sales guy has taken himself out of the picture as your adversary in the negotiation. It's a good cop/bad cop ploy, and he's just made himself the good cop. The scary part is that most times, it works. So how can you make it work for you? Easy: divert the (apparent) decision making from yourself to another party. For example, let's say you're shopping for that car alone. So you say to the sales guy, "Listen, $19,500 seems like a good deal, but I didn't really didn't expect to buy today. I feel like I should talk this over with my wife/husband before I decide. She/he wasn't expecting us to spend more than $18,000."

Or if your spouse is with you, plan the roles you will play in the negotiation. At some point, take the sales guy aside confidentially. "Danny," you say, "you've got me sold, but I don't think Jim is really happy. He's always been like this when trying to commit to a big purchase. Just last month, he almost bought a new truck and then changed his mind at the last minute." Now, you've turned the tables on the sales guy by putting yourself in the middle, supposedly working as his advocate to make the sale happen. The sales guy then feels obligated to "help you" convince your spouse by coming up with yet a better price -- or perhaps some better options.

In many cases, it is vital for you to negotiate directly with the decision maker. The decision maker is often the only person with the power to make certain concessions. For example, I recently had a reservation to stay at a hotel during the 4th of July weekend. Since this hotel is adjacent to a popular amusement park, I had to reserve the room with a credit card and the charge was not refundable within 24 hours. When my plans changed at the last minute, I needed to get out of 1 night's stay and I didn't want to pay the $190 charge. When dealing with the reservation clerk, there was no negotiating on this issue. However, when I discussed the issue with the manager and pointed out that I was staying for 6 nights total, the penalty fee was dropped. It was not difficult to negotiate, once I had identified the empowered decision maker.

Summary

There's so much more to discuss, but this gives you a good start. Again, I strongly recommend that you read "Getting to Yes." It will get you on the road to negotiating the best life has to offer. And finally, if you want to pull that dollar auction on your friends, don't forget to specify that winners and losers have to pay! Otherwise, they'll have the last laugh.

Patrick McClellan is Director Online's co-founder. Pat is Vice President, Managing Director for Jack Morton Worldwide, a global experiential marketing company. He is responsible for the San Francisco office, which helps major technology clients to develop marketing communications programs to reach enterprise and consumer audiences.