Want to know how to get the best deal every time?
Know your BATNA.
BATNA stands for “best alternative to a negotiated agreement.”
The term was coined by Roger Fisher and William Ury in their 1981 bestseller, Getting to Yes: Negotiating Without Giving In.
BATNA is simply the best you can do if the other person refuses to negotiate with you – if they tell you to “go jump in a lake!” or “Get lost!” So it’s not necessarily your ideal outcome.
But understanding this concept is important if you want to save money since a lot of times the bulk of money made or lost is in the initial agreement.
Buying a car, negotiating a real estate deal, pushing for a raise all require a basic understanding of BATNA if you want to get the highest return.
Another way of looking at BATNA is you can think about it like your limits.
What is your BATNA if you don’t purchase or sell?
What is their BATNA if they don’t purchase or sell?
Once you know both parties limits, or at least have a rough estimate, it makes negotiating easier.
Having a good BATNA increases your negotiating power because you don’t need to concede as much if you know you have a better alternative. This puts you in a position where you can push the other side harder.
However if your options are slim or non-existent, the other person can make increasing demands, and you’ll likely have to accept them – because you don’t have a better option.
Therefore, it’s important to improve your BATNA whenever you can. If you have a strong one, it’s worth showing your opponent. If you have a weak one, you’re likely better off hiding it.
Negotiating is a lot like playing poker: sometimes you make the other players at the table think you have a good hand in order to back off, other times you lure them into thinking you don’t have a great hand so they overcommit and expose themselves.
Selling a Car
Let’s look at a common example, selling a car:
Jack needs a car and is negotiating with Cindy to purchase her car. Cindy offers to sell her car to Jack for $12,000.
Jack searches on Craigslist and finds a similar make and model which he believes he could pick up for $10,000. Jack’s BATNA is $10,000 – if Cindy doesn’t offer a price lower than $10,000, Jack will consider his best alternative to a negotiated agreement.
Jack is willing to pay up to $10,000 for the car but would really like to only pay $9,000. If Cindy offers a price higher than $10,000, Jack will walk.
What we don’t know yet is Cindy’s BATNA. If we assume Cindy can sell her car to someone else for $11,000, $11,000 is Cindy’s BATNA. If this was the case then an agreement likely wouldn’t be met.
But if Cindy’s best alternative to the deal is selling her car to a dealership, which would offer her $8,000, both parties can come to an agreement.
In this case, there is a zone of potential agreement (ZOPA) – $8,000 to $10,000. In this range, both parties can come to an agreement.
How to Find Your BATNA
As you can see from our example, knowing what your BATNA is makes negotiating a lot easier. If Jack didn’t have a BATNA, Cindy would have had more bargaining power. Knowing Jack’s BATNA was at $10,000, the highest price Cindy would be able to sell her car to Jack for is $10,000.
Harvard Law School actually created a process to find your BATNA:
- Step 1: List all alternatives to the current negotiation – what could you do if negotiations fall through?
- Step 2: Evaluate the value of each alternative – how much is each alternative worth to me?
- Step 3: Select the alternative that would provide the highest value to you (this is your best alternative to a negotiated agreement).
- Step 4: After determining your BATNA, calculate the lowest-valued deal that you’re willing to accept.
What Can Skew Your BATNA
Determining your BATNA is not too complicated but it can become difficult knowing exactly what another party’s BATNA is because you’re often relying on whatever information is available to you.
For instance, imagine you’re trying to sell your home. A buyer says they’re interested but mentions they’ve viewed another property that has bigger washrooms.
The buyer could hint that they’re more interested in the property with larger washrooms but they would consider buying your house with smaller washrooms if the price is right.
There are a few things you can do here. First, you can press the buyer more about the “other” property to find out if in fact it actually exists, and if the washrooms are bigger.
Second, and this is a bit trickier, you need to figure out if washroom size is really a key sticking point for this buyer or if it’s just a red herring to get you to lower your price.
Negotiations are never black and white and there’s a lot of mind games people like to play so be aware. The constant theme in almost all negotiations is you need to be able to walk away from a deal.
The person who can walk usually always comes out on top.
Understand the upper and lower limits of the person you’re negotiating with so you can get to as low a limit as possible without risking they will walk away from the deal.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap
Source: Daily Reckoning