Tuesday, September 17, 2013

How We Negotiate, Part II

In a previous post on negotiation, we covered the idea that a plan should be established, research performed, interests identified, & a BATNA established, all before you start talking to the other party. But at some point, we have to actually negotiate, and we have to begin the prickly process of talking about price. And this is where we typically get uncomfortable, because we spend most of our lives simply looking for good prices via sales & coupons rather than trying to actually generate better prices via a negotiation.

But how do we do that? I’ll try to cover what we do in our household with negotiations in the post below. For the most part, I am writing from the perspective of a buyer because, as consumers, we are more often buying things than we are selling them. And rather than trying to cover the entire subject of negotiation holistically in the span of 1500 words, this post instead gives some quick and dirty tips that should improve your results.

One Last Piece of Planning: Three Prices

Before starting talks with the other party, establish three different prices and write them down. In this example, let's assume you are the buyer.
  • The lowest price you believe could conceivably get the deal done. Try to think as the seller here: what is the very lowest price he or she will accept? My advice here is to be more aggressive than you think is initially reasonable. We Americans are often uncomfortable with this process of imagining the lowest price you think the seller will accept for two reasons: we do not want to offend anyone with an unreasonably low offer, and we are trained to believe that published prices are firm, so how could there be some much lower price? First, don't think of a low offer as offensive: the seller can say simply say, "No," (and often will). Any offer is better than no offer, so you are not offending him or her by making a low offer. You are providing an opportunity for a sale. As for prices being firm, that is almost always false. The myth of a firm price is a strategy used by sellers to help them avoid negotiations.
  • Your initial offer. This is not necessarily the answer in the bullet above. It is likely lower. (How much lower depends on what you are buying, & how much variance there might reasonably be for such an item or service.) Lean on your research here, as you should not simply make a low offer for the sake of starting low. Have a reason for the price.
  • The highest price you would accept a deal under. This is related to your BATNA - a price above this amount could trigger a walk away, since you have a viable alternative.
Make Your Initial Offer, and Justify It
After making your initial offer, cite your reasons for why it is justified. You might cite some other similar items you've seen advertised, some sort of defect or damage in the item, your individual circumstances that makes the seller's item or services less than ideal (e.g. – wrong color, you live on the other side of town and you’ll need to transport it farther now, etc.), trends in the market, etc. The key here is add legitimacy to the initial price you’ve offered.

When you get a Counter Offer, Act Surprised

Act a little offended, or shocked, at the other party's counter offer: give the impression that it's unreasonable. Scoff. Say, "Whoa!” Whatever you’re comfortable with. The goal is to lower the other party's expectations: to make him or her doubt the price they think they can sell (or buy) the item for.

After acting surprised, don't say anything for a while. Do not be quick to counter back with another price. What will often happen with a less experienced negotiator is that he will react to your scoff, assume his counter wasn’t reasonable, and then counter himself (i.e. - negotiating against himself). You’ll sometimes get the other party to make two concessions without having to make one yourself.

Fight the Urge to Meet in the Middle

Most of us have an urge to meet in the middle. It's amazing how often in a negotiation that phrase enters the conversation. If a seller prices an item at $100 and the buyer offers $80, you can bet that someone is going to suggest they split the difference and meet at $90. It seems fair, right?

My advice is to fight the urge to meet in the middle. For one, there is no logical reason to meet in the middle of two prices. It's an arbitrarily chosen number, and it is emotionally driven (conjuring up memories of mom splitting a cookie between you and your sibling.) Second, by meeting in the middle, each party is completely subject to the seller’s & buyer’s offers. What if the seller set an artificially high price? What if the buyer low-balled his initial offer? In each case, the middle price between those figures is now artificially skewed. The middle is not necessarily a fair price; it's just the easiest one to arrive at.

If the other party suggests meeting in the middle, try stating you can’t go that far: you could only go 10% or 25% towards the middle price. In effect, when the other party says he wants to meet in the middle (in the example above, that would be $90 if the seller is offering $100 and the buyer is offering $80), it is materially the same as if he or she had just offered $90. It is simply a counter of $90, being framed as a fair but final offer. You are still allowed to counter it.

Don't Match Their Concessions

Additionally, when a seller makes a concession (say, coming down $100 from a price of $1800), do not feel that you have to make a similarly sized concession: you don't have to now come up $100 from your offer. Try only coming up $10, or $15, or not at all.

As you are reading a personal finance blog, I can assume you are frugal; be very frugal with your concessions. This is one of my favorite tactics: make a small concession in response to a large one. You'll often be surprised that the other party may continue this pattern of making large concessions, while you continue to make small ones. Additionally, by making small concessions on price, you are leaving yourself much more room to negotiate later on if it seems like you're heading towards a deadlock.

(One note here: expect that the other party may show genuine surprise or outrage at your small concession. This may evoke an emotional response on your part. Fight it. Justify your last offer and be sure not to negotiate against yourself simply because you want to seem fair, or do not want to offend.

This might make us feel better about the strategy: there is evidence that making the other party work harder for concessions actually increases their satisfaction with the deal. For example, if a buyer sees a boat for sale for $1000, makes a counter of $800 which is immediately accepted by the seller, he will actually feel worse about that scenario than if the seller negotiates hard and only comes down to $900. The $900 price is hard fought and gives the impression that there wasn’t much more room to come down on price; the immediately accepted $800 gives the impression that the boat could have been had for much less.)

When You Hear an Offer You Want to Accept, Don't...Hold Out a Bit Longer

As you’re getting close to finalizing a deal, it’s common that the other party will make an offer and then ask, “Do we have a deal?” She might put out her hand, looking for the shake that will end this uncomfortable conversation.

Dave Ramsey uses a phrase I like a lot, and it’s especially helpful if you're almost ready to close a deal: "That's not good enough." It's a nice way of putting things, because it implicitly states the other party still has to improve their offer, but it does so in a concise and almost polite way. A simple, “No, I can’t pay that,” works well, too. The basic idea here is that you shouldn’t be in any hurry to get to, “Yes.” When you feel ready to close the deal, say, “No,” in whatever fashion you like, at least once. Sure, you’re probably not loving the interaction and just want it get it over with. But the other party is probably feeling that same pressure, too. Being able to stew in that awkward moment a bit longer can reap big rewards.

In general, it’s helpful to just assume that the other party is feeling more pressure to get the deal done than you are. Since you’ve actually bothered to perform research, create a negotiation plan, and establish a BATNA, it’s a safe bet that the other party is truly under more pressure than you. Use that to your advantage, and get another bite of the apple before closing the deal.

A Mock Negotiation, Anyone?

As always, there is more to type but I’m running long. I have faith that if you try the items above in your next negotiation, even a few of them, you’ll get better results.

I’d also like to offer an opportunity to try out some of these techniques in a mock negotiation, which are always my favorite parts of the negotiation trainings I’ve attended. If you’re interested in playing out a negotiation with a friend or significant other, email me at donebyforty@gmail.com, with your email address and the email address of the person you’ll negotiate with, and I’ll send out a scenario you two can act out by the end of this week. One of you will act as the buyer and will get instructions & information unique to you; one will act as the seller and will get a different set of instructions. If there’s enough interest and people are willing to share their results, maybe I can report them here in a future blog post, so we can see how everyone did.

As always, thank you sincerely for reading and have a great week.

*Photo from CeBIT Australia at Flickr Creative Commons.


  1. I never would have thought about your point that the more effort the negotiation requires, the more satisfied the parties will be. It makes sense. I also agree that it's easier to "meet in the middle" sometimes, if you want to get the deal over with, but that it's important to still keep the prices you were willing/hoping to pay in mind in relation to the middle price. It sure does give off the illusion of being fair. Yet another great post on negotiating! I would love to see something about salary negotiations.

    1. Thanks, EM. It's funny how some of our natural tendencies, like wanting to meet in the middle or make it easy on the other party re: concessions, can hurt us in a negotiation. And thanks for the idea on salary negotiations. I had a good experience when negotiating the initial salary for my current position that might make for a decent post; but I'll have to think of a way to tell the story without sharing the salary figures.

  2. My mom always taught me price higher but reasonable. Overpricing a little helps you get closer to your target but always have a low price you would accept just in case you really need to sell. There have been times I lowball thinking there is no way a person is going to sell but cash makes a person think. I have even walked away and gotten calls back and even I thought I was being crazy. Sometimes just having a strategy in places helps you think rationally. Mock negotiations are good especially if you really need to sell or want to buy something.

    1. All good points, Thomas. I think I'll use your tip of overpricing as I'm selling some more junk on Craigslist now.

      I really should've written about walking away, too, but the post got really long all of a sudden.

  3. Timely post for us, DB40. We are in the process of finding someone to install our wood-burning stove. Initial offer from them was $800. I'll let you know the final outcome now that we've learned how to negotiate! :-)

    1. Thanks, Laurie. If this post saves anyone money, I'll be over the moon. :)

  4. Good stuff. With our recent car purchase I did most of the negotiation through email, but I wish I had done some more at the point of sale. I kind of fell into the category of negotiating against myself by being nervous that the good deal I had already been offered would be taken away. Looking back that was a pretty silly sentiment. Oh well. Lesson learned.

    1. Hi Matt,

      I end up kicking myself over some point of just about every negotiation I do. It's very rare that I ever look back and say I did everything right: there's usually always something I could've done better, usually much better.

      I like your idea of handling a lot of negotiation via email, too, if only because you have the space & time to plan out each response carefully, instead of responding on the spot.

  5. Great tutorial! I will be needing this as I'm not a great negotiator. I definitely do a lot of the no nos that you mentioned...meeting in the middle/being too quick with a counter offer. I like the tip about acting shocked. And since we're thinking about buying a place, this might come in handy. Thanks again for the tips.

    1. Hi Andrew,
      Thanks for the kind words. In our home buying experience, our realtor wanted to do the negotiating and mentioned that was the standard. But there's always a part of me that wish I'd handled it myself. As we've only purchased one home, I'm not sure exactly whether this is a standard practice of if buyers regularly negotiate with a home owner directly.

  6. Another great post! I would love to hear about any experiences you have had with some creative negotiations. I read a book a couple years back (can't remember the title unfortunately), but the premise was preparing for a negotiation by profiling your target, when possible, and coming up with some creative win-win scenarios.

    Win-win negotiation sounds so fluffy and unlikely, but they had some interesting examples, such as a non-financial bartering chip that would personally benefit them or identifying that the car salesperson benefits from selling two cars more than selling at a higher price on one. My father used this once when purchasing natural gas Chevy cavaliers for his company. He negotiated hard for the first and then at deadlock, offered to buy 2 in exchange for X price on both.

    1. Hi Emily!

      I was considering writing about non-competitive, both-win negotiations as well but that might be a subject for another post. I personally have found them to be rare but that is mostly because of my own tendencies & those of my negotiation partners. A creative mindset aiming at increasing the 'pie' can usually broker a better deal. I really like the example of your father: the salesman probably never anticipated being able to sell two, and a deeper discount was made possible by creative thinking.

  7. I hope someone takes you up on the mock offer. I'd love to see your commentary in action.

    I've stated in the past that I can't stand negotiation, yet when I'm armed with facts and feel like I'm playing a fair price, I feel fine. It's when negotiation gets emotional that I have a hard time, even if I'm "winning."

    1. Thanks, Joe! So far we have no takers on the mock negotiation, but there's still time. There haven't been the usual number of readers or comments yet, so I'm holding out hope.

      Emotions play a negative role for me, too, and there's a big difference in overall satisfaction with the process when I'm armed with the right info. If I'm shooting in the dark, it's hard to know whether I'm proceeding in the right way or not.

  8. I might have to hit you up for a mock negotiation sometime soon! The halfway mark is generally my weakness. I did that when I was negotiating our rent. I met him half way because it was "reasonable." But could have saved us a lot more if I had just stuck to my guns.

    1. Anytime! Just shoot me an email with your address & that of the person you'll want to practice negotiating with.

      Meeting in the middle is probably the most common tactic and, on the plus side, it does make both parties feel pretty good about the deal, usually.