By Scott Van Soye
Negotiating price (or a settlement amount) can be a long and frustrating process.
Think about the last time you bought a car. Exhausting, wasn’t it? And yet research has shown that the outcome is often predictable. Professor Peter Robinson of Pepperdine University reports that such negotiations usually end with an agreement about halfway between the first two reasonable offers. Doesn’t this mean that we can skip all the bargaining rigamarole, figure out what the most reasonable midpoint number is, offer that, stick to it as our “bottom line,” and be confident of settlement?
The short answer is an emphatic no, the following are five reasons why~
- First, Professor Robinson points out that the drive toward the midpoint is caused by social pressure on the bargainers to share the burden of conceding. Without a pattern of concessions, sometimes called the “negotiation dance,” this mutual pressure is gone.
- Second, because negotiating is the social norm, failing to negotiate leaves your counterpart frustrated, angry that you are being “stubborn”or “unfair,” and doubtful that you are really at your bottom line. These feelings can cause your opponent to refuse even the best deal.
- Third, the “take it or leave it” gambit puts you in a very limited negotiating position. If you say “this is my bottom line” and then change your mind, you lose credibility and seem weak. The author presided over a mediation in which five “final offers,” ranging from $5,000 (first offer) to $225,000 (settlement amount) were presented in the course of four hours. Had the “final offer” tactic been saved until late in the negotiation, it might have been believed, and the defendant could have settled for far less.
- Fourth, the pattern of offer and demand can have significant impacts on how much you recover or pay. Studies show that the first move in a negotiation strongly influences the other party’s estimate of value. If you demand $1,000,000, your opponent will value the claim more highly than if you demand $100,000. This phenomenon is called anchoring. So if you start with a reasonable offer, your counterpart will expect to do better than if you started higher.
- Fifth, research confirms the value of aspirations, or optimistic goals. Those with high hopes routinely do better than those with more “realistic” ones. Of course, this assumes that the demands are within the realm of possibility. Ridiculous demands will be ignored. Professor Charles Craver recommends determining your reservation point – the price at which you’d rather walk away than settle – and your target price – the most you can reasonably expect to get. Then do the same for the other side. Consider the value of similar claims, and your opponent’s resources. Pick an aggressive, but not outrageous, number with these facts in mind.
Not negotiating can put you at a serious disadvantage, and even anger your business associates. If you need coaching through the “dance,” a good mediator or negotiation consultant can help. Whether you use a coach or not, take the time to think through your situation. And enhance your chances of success by setting lofty goals – after doing your homework.