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.