Who would have thought that the most pleasantly surprising book I've read recently would be titled "Bargaining for Advantage?" Not to say that it's better than 2666 or more fun than Bartheleme, but what I'd expected to be something I "should" read turned out to be really interesting, useful, and thought-provoking.
I picked this book up as part of my self-education series for home acquisition. As I've mentioned on my companion blog, I've identified negotiation as one personal aspect that I'll need to focus on improving. It will be critically important as I look for a good value, but it is an activity that I very rarely practice.
The previous book I read, "Tips and Traps when Negotiating Real Estate," was very focused on this area. It had a lot of personality, some very pointed ideas and arguments, and could be very specific about the sorts of arguments one should expect. In contrast, "Bargaining" casts a broad net, talking about all of the various ways that we and others negotiate in our daily lives and in big events.
One cool side-effect of this was that I gradually realized that I have more experience with negotiation than I had thought. The single biggest example, which should have occurred to me before, is with a new job offer. Thinking back over specific offers in the past, which did or didn't work out, gave me some really concrete personal experiences to reflect on, and allowed me to readily identify my own tendencies and style... and, as a bonus, anticipate ways that I can improve myself in the future.
Back to the book: Unlike "Tips and Traps," this book's style is less aggressive, more thoughtfully academic. Richard Shell is a professor at the Wharton School of Business and knows his stuff. He uses some great anecdotes, but relies more on authoritative studies than those anecdotes when arguing why certain approaches are more effective than others. There's less personality in there, but I found myself liking the author more. The subtitle for the book is "Negotiation Strategies for Reasonable People," which is exactly what I wanted. Not a glowing praise of Donald Trump-style brinkmanship, but concrete advice that ordinary people can follow while remaining true to themselves.
Like a true academic, he breaks the book down into several sections, each of which in turn is sub-divided into particular ideas. I'll briefly recount them here, mainly to help myself remember them... this seems like really useful stuff.
First of all, there are the Four Foundations of effective bargaining. Sort of a, "even if you don't learn anything else, by keeping these in mind, you'll drastically improve your outcome." Again, these aren't things that he just made up, but are derived from various studies in Britain and America that measured negotiators' effectiveness and tracked what the successful ones did differently.
The first is a "willingness to prepare." Needless to say, this delights me: preparation is what I'm great at. It makes perfect sense, too. You'll be a more effective negotiator the more you understand the situation, your position, the other position, your alternatives, and so on. Beyond just gathering information, as he later mentions, you'll want to prepare your own strategy. I can see myself, say, writing a script or flowchart before entering a really high-stakes negotiation.
Second comes "high expectations." People who ask for more get more. If one person wants to buy a radio for $50, and another wants to pay $100, the first person will almost invariably pay less than the second person. It's extremely rare to come in with low expectations in a negotiation and have the other side exceed them.
Third is "patience to listen." Again, I think I should do pretty well here. You should try to hear more than you speak - gather information about the other side's wants, strategy, alternatives, and so on. Not only does this inform you what you're up against, but even more importantly, it can lead the way to creative solutions that "expand the pie" and lead to a better deal for BOTH of you.
Finally comes "commitment to personal integrity." Know what your standards are, and stick with them. I do this regardless, but as he points out, it's also good business, as trust is critically important.
With those out of the way, next come... the Six Foundations! These are things that roughly fall under the "prepare" category, and are ways to help ensure the best possible deal, even before negotiations start.
The first is to recognize the different personal bargaining styles. He identifies five broad personality types here: avoiders (prefer to avoid bargaining or confrontation altogether, even when it means a worse personal situation), compromisers (people who instinctively want to "split the difference," and readily work to balance their own desires against the other party's), competitors (people who try as hard as they can to get the most advantage for themselves and the smallest advantage for the other side), accommodators (people who will do almost anything to please the other side, even when it means a worse deal for themselves), and problem-solvers (people who try to think "outside the box" and develop creative solutions).
I'm a sucker for these sorts of personality-related things.... I've been a happy Abstract Sequential thinker since seventh grade, and an INTP since my freshman year in college, for example. So I'm always happy to see another system that I can try and plug myself into. In the particular example he gave to try and identify your type, I emerged as a "problem solver". I think that's fairly accurate, although it does depend on the situation. Specifically, I think I tend to be a problem-solver when I'm working with another problem-solver (a very creative feeling) or with a compromiser. On the other hand, when faced with a competitor, I become an avoider. This is one of those cases where I thought back to an employment situation and a light bulb went off in my head. There have been a couple of times when I've gotten really great-sounding job offers - higher than positions I ended up taking - but got extremely turned off by the hardball style of the potential employer ("You have 24 hours to accept," "I want you to convince the CEO to hire you") that I not only turned down the offer, but cut out the other side altogether - not answering emails or phone calls after I made my decision. This is really irrational behavior - if I cared most about maximizing my economic gain, I should have responded by asking for more, or at least listening to them if they increased their offer still further after I turned them down - but as this section helped me see, negotiations are not always about maximizing economic gain. There's a huge difference between the various types of personalities, and it's critical that you identify your own style so you know in advance how you will respond to various situations and can develop a plan.
Anyways! Back to the types... I think I rotate between the various styles in different situations, which isn't at all unusual - we often use one style when "negotiating" with our family, another with an employer, another with a salesman. As the author points out, at various times, all of the five types are most appropriate in certain circumstances. Even "problem solver", which at first sounds like the "right answer," isn't the best solution when you roll up to a stop sign at the same time as another driver. That situation doesn't call for creative solutions: the best success is if you wave the other driver through (i.e., accommodate) so you can both be on your way. While we switch between the various styles, we do have higher comfort levels with some than others. A highly competitive person might actually try to run through the stop sign in that situation, not because it's logically the best solution, but because it feels more natural than "letting the other guy win." In my case, I'd say that I feel most comfort with problem-solving, then avoidance, then compromise, then accommodation, and finally competition. Again, it's highly situational. I'm much more likely to accommodate family members - "Do you want the last piece of cake?" - than I am with co-workers - "Want to split this last piece of cake?"
In transactional situations, I guess I'm fundamentally an avoider. I far prefer shopping online to shopping in stores. I was shocked when reading this book to learn that many people actually do negotiate in upscale department stores - apparently, floor clerks are authorized to give 5%-15% discounts in order to keep customers satisfied. Personally, I'd rather hunt online for the best price than try my luck at the store.
That said, when I have the chance to problem-solve or compromise, I go for it. Sometimes (again, generally online) I can figure out a way to save money by consolidating purchases, or following a certain timing, or doing something else interesting. And when I go out to eat with a group, I'm happy to suggest splitting the check if that feels like a fair thing to do - though even there, if someone else suggests another strategy first, I'm likely to follow it.
The second foundation is applicable norms and standards. These are sort of the understood baseline rules by which a certain type of negotiation operates and is judged on, and are highly situational. If you're negotiating with a child over bedtime, you'll want to know what the normal bedtime is; under what circumstances in the past exemptions have been made; whether trade-offs are generally used as concessions; etc. In real estate, it's important to know, for example, whether the buyer or the seller typically pays closing costs. You still might end up doing something different, but you should know that the standard is so you can gain others' respect and not seem uneducated.
The third foundation is attending to your relationships. Relationships are critical, and in some circumstances you may want to protect those relationships even when it means getting a worse deal. The book contains a touching story of someone recruiting Albert Einstein to join a think tank in America, who asked Einstein what his salary requirements were. Einstein named a modest figure, then hedged it by saying, "Unless you think I can live on less." The man came back and offered Einstein THREE TIMES as much. The important thing to note here is that the man "won:" his goal wasn't just to make Einstein come, but to invest in their relationship so he would be happy and stay with the think tank. He passed with flying colors.
The big point here is to see how the type of relationship you have with the other side influences your strategy. There's a handy grid included that displays the importance of the relationship on one side and the stakes on the other side. Looking at it this way helps explain my behavior really well. I have a strong relationship with my family, and want to keep those ties, and in the big scheme of things I don't REALLY need a piece of cake that badly. Being nice to them costs almost nothing, and maintains the relationship. Another illustrative example is employment. I feel like I now have the key that unlocks the critical difference between various types of negotiation: whether I'm receiving an offer from the manager/CEO directly, or whether it's from HR or a recruiter. In the former case, I'm negotiating with the person I'll be working for, and they're negotiating with a future employee. Both of us are invested in the stakes - I want a high salary, they want to keep costs down - but both of us are also invested in the relationship. I don't want to work for a tight-fisted jerk, and they don't want a greedy ingrate for an employee. So even though there can be some give-and-take, I can generally expect that the employer will try to keep things as positive as they can.
On the flip side, if I'm working with an in-house recruiter, then there's virtually no expectation of future contact. They get compensated based on certain criteria (getting me to say "yes" for the lowest amount), and so long as I end up taking the job, they don't really care how I feel about them. A more competitive person than me would probably love this situation, seeing it as a game - "Let's see how high I can get them to go! Will they go even higher if I threaten to go elsewhere?" They're probably befuddled by what ends up happening - "Why won't this fool return my calls? Doesn't he like money?"
Home purchasing will be much more like the second case than the first. I'll never see the sellers, and almost certainly never see the seller's broker again. Now that I understand that, I can prepare myself, and hopefully start flexing those competitive muscles so I can do well in the game, instead of just saying "Oh, the price is too high" and walking away.
The fourth (er, maybe it's the second? I'm working from memory here and think I may be messing up the order...) is your goals and expectations. That was alluded to before in the Four Principles, but for any specific negotiation, it's important to set high goals for yourself. Often times, people will set a "bottom line," the worst deal that they will still accept. Bottom lines are great for gambling in Vegas, but horrible for negotiations. Psychologically, once we accept a bottom line, we shift our focus to hitting that target. We would work much harder and get a better outcome if we set higher goals.
Now, you may not even know ahead of time exactly what your goals ARE... but you should have thought about them. There's an interesting story here about the founder of Sony, who turned down a lucrative partnership deal because he realized during the course of the negotiation that it was more important for Sony to establish an independent brand than it was to make a lot of money. Er, I should rephrase the first sentence in the paragraph: you SHOULD know what your goals are before going into the negotiation. Realistically, you may not be able to achieve everything you strive for. You shouldn't decide ahead of time "I'm going to give up on those goals and stick to these." Decide what's important, write it down, and do the best you can.
The fifth foundation is recognizing the other party's interests. You know what YOU want out of the deal - what do THEY want? You may find a true win-win situation... maybe you only care about getting the best price, while they care mostly about their reputations. This shows you how to position yourself: in this case, you can open high on price, make the public communications a part of the negotiation, and be prepared to give them the recognition they want in exchange for the price you want.
The sixth and final foundation is leverage. Leverage is discovering how badly the other side needs the deal, and then using that to get better terms for yourself. Perhaps you're buying a house, and the seller needs to move out in 10 days. If you know this fact, and you personally don't have any timeline for moving, then you can threaten to pass on the deal - it (theoretically) doesn't hurt you since you can keep looking, but it does hurt them, and as a result they'll be motivated to make concessions so you close the deal.
On the flip side, perhaps they have leverage over you - suppose you're looking at a house in a great school district for your two kids, and that this is the only house in your price range for sale in that district. If the other side learns this fact, then they can use it to stress how badly you need this particular house and argue for getting full price. How to respond? There are some more or less dishonest ways (concealing the importance of a good school district, claiming that you are looking at another house in the area, etc.), but the best solution is to actually have - or create - an alternative. Maybe you can buy a cheaper house and use the savings to put your kids in a private school. Now, you still might prefer this particular house, but by having an alternative you weaken their leverage and improve your own hand.
That was most of the book, and you'll note that it hasn't even covered the actual negotiation yet! Again, that's part of the reason why I like it so much. He focuses on the things that you can actually prepare for ahead of time, regardless of your personality or negotiating style. Sooner or later, though, you'll sit down at a table, and the dance will begin. He identifies four stages to a negotiation.
The first, almost a prelude, is establishing rapport. This happens even with something as simple as ordering fast food: when you walk into McDonald's, the clerk is trained to look you in the eye, smile, and say "Welcome to McDonald's! May I take your order?" We don't even think about this because it's so common, but it's actually significant: they are opening the discussion by establishing rapport and making your comfortable. In any significant negotiation, it can be extremely helpful to develop a non-business relationship with the other person. It could be a shared favorite movie, the same college, religion, politics, whatever. The actual content doesn't directly bear on the negotiation, but as human beings, we prefer to deal with people we like, and who are like us. (I can't say that I took my current job BECAUSE the CEO is a Battlestar Galactica fan, but that show gave us a fun topic to talk about, and certainly it helped me think about how much fun it would be to work for him.)
At the same time, you should be on the watch-out for people who are faking rapport in order to take advantage of you. ("I can't believe you would treat another Christian like this! You should pay full price.") And remember that people don't like phonies - don't fake enthusiasm for things you don't like, or otherwise be obvious about trying to establish a connection. Sometimes it just isn't there, in which case you're far better off being just being pleasant than by faking it.
After the social niceties are out of the way comes the information gathering phase. This is sort of a dance where both sides probe one another to learn more: What are they looking for? Which issues are most important to them? Do they have other alternatives? What is their time frame like?
Sharing information is critical in negotiation, but there is a cost: the more one side learns about the other, the more power it gains. And so information sharing can become a tit-for-tat, with both sides asking questions, and often being as forthcoming as the other party.
The advice here is simple: Listen. Ask questions. Respond to the other party, but remember that the more they talk, the better off you are. As they speak, you should be gaining a clearer picture of what is motivating them, and adjusting your own position accordingly. Respond to the other party, but most people enjoy having others pay attention to them, and so you often will not need to do anything tricky to listen more than you speak.
Only now, after you have prepared for the negotiation, established a connection with the other side, and exchanged information, do you enter into the phase that most of us think of as synonymous with negotiation: opening and concessions. Eventually, one party or the other will put a concrete offer on the table: "I will pay you $x, with y% up front and the remainder in one year. The offer is contingent upon approval from my shareholders. I get to keep the corner office, and my name will be first on the masthead." So, who should make the opening offer? Usually it's better for the other party to do so - if they open higher than you were planning on doing, wonderful! Your job is done. Everyone knows this, though, and so in most situations with substantial stakes, there is yet another dance: "After you." "No, after you, I insist."
If you do need to open, how should you do so? Again, it all depends on the nature of the negotiation and the relationship you have (or hope to have) with the other side. If you highly value the other side, and the stakes don't matter very much, you might make a very generous opening, signaling how much you value that relationship. If you want to maintain good relationships, but the stakes are also very important, then you should make an opening that is at the highest edge of what you expect to receive. On the other hand, if the stakes are important and you DON'T value the relationship, then you should bid with the highest (or lowest) amount that is supportable by fact.
Here's an example (my own and inferior to what's in the book): Suppose you're selling your personal PC. The other person asks how much you want.
... if the other person is your brother-in-law, and you don't really need the money, then you might say "$300." That's a cheaper price than he'd be able to get for a PC of that caliber, anywhere. You aren't giving it away for free - this is still a transaction - but by letting him have it for that cheap, you're showing that you value your in-law more than money. This assumes, of course, that he does know the value of the computer - if not, then he won't appreciate what you're doing. There's absolutely nothing wrong with letting him know - you're educating AND rewarding him! Saying something like, "I could probably get $600 for it on Craigslist, but you can have it for $300" is honest and generous.
... if the other person lives in your neighborhood, and you need the money to pay a bill, then you might say "$800." You've been watching Craigslist and Ebay for a while, and computers of this general sort have been selling in the $500-$800 range. You don't (necessarily) expect your neighbor to pay $800, and you'd probably sell it for as low as $600, but by bidding high you are giving you both room to negotiate. If he argues you down to $700, he will be happy with the price and feel psychologically like he got a deal. If you say $600 and he wants to pay less, then you look like more of a jerk because you don't have any room to negotiate. By naming a high value, you can make concessions and reward the other party, actually enhancing the relationship.
... if the other person is a stranger from Craigslist, and you need the money and are willing to hold out for the best deal, you might say "$1500". If the other person knows computers, he won't pay that much, but - and this is important - you can back up that price: it's how much the computer cost when you bought it brand new. Now, he'll probably come back and argue that he should get it for less because of its age, but what's important is that you've now established the parameters for the negotiation: you are now arguing down from $1500 instead of, say, up from $300. If you end up settling on a price of $1000, then he feels like he got a 33% discount, and you ended up with $200-$400 more than you expected. And, even if you do end up settling in the $600-$800 range, you are no worse off for having started off high. Sure, he may think that you're unreasonable, but who cares - you'll never see him again!
After the opening comes the meat and potatoes of bargaining: concessions. You make your initial offer - "Give me $1500!" The other party makes a counter-offer: "I could buy a much better, new computer for that much! I'll give you $600." You make a concession - "I've taken great care of this PC, it has excellent quality components, no problem with it at all - but if the age thing bothers you that much, I'll knock off $200." Then comes a concession in the other direction: "I'm glad you're being reasonable, but that's still way too high. If you do have good OEM parts, though, then I can go up to $700." And so on, back and forth.
So how should you know what concessions to make? You're not just arguing for an outcome here, you're also signaling what's important to you. The most important issues should be things that you stick firm on. Less important ones, you let slide a bit more. For example, maybe the buyer insists that he pay you with a personal check. You say that you want cash. If, in the next round, he's still asking to use a check, then you know that this is an important issue for him. If he wants to pay with a check, then he should make more concessions elsewhere by paying a higher price - or, if he pays cash, you should give him a lower price.
As for the amounts to move, you're advised to make your biggest adjustments in the first round, and make them progressively smaller as negotiations continue. This simulates your increasing reluctance and inability to move as you get closer to your "bottom line." The secret in negotiation, though, is that your bottom line is really a bluff. What you're actually arguing towards is your goal - the outcome you WANT - not the worst deal that you're willing to take.
Sooner or later, concessions end or reach a stalemate. In either case, we move to the fourth and final stage, closing and commitment. If the sides can't agree, then hardball tactics might be used to try and force a resolution. The most common form here is a deadline - saying that the other party has a certain amount of time to accept your offer, or you'll leave. If they accept the offer, great! Otherwise, you have a choice to make: do you actually carry out your threat or not? If you walk, then you might be giving up what would still be a very good (if not perfect) deal. If you don't walk, though, then you lose face. The other party now has leverage over you - they know that you need the deal. You can still get the deal, but are expected to make more concessions, since you've shown that you're willing to accept a worse price.
Other forms of closing are less confrontational. In some cases, if the two parties agree that they must make a deal but can't agree how, they may call for an independent, trusted arbitrator to mediate between them. They agree that whatever the mediator decides, they'll honor.
Eventually, the deal will be done. The point isn't "winning" and "losing" - any deal should make both parties better off than they would be otherwise, even if not as good as they could conceivably be. The final aspect to attend to is commitment, which is just making sure that the other party follow through on the agreement. In some situations, just shaking hands is considered binding enough that you don't need any more. In other cases, you might sign a contract, make a public announcement, agree to pay penalties for backing out of the deal, etc. You don't want all your hard work to go to waste, so don't let the final step slide.
And, that's how to negotiate!
As you can probably tell, I found myself seriously nerding out on this topic... who would have thought it? Now, I'm not about to go down to Tijuana and start bargaining with rug merchants, but I do think that I've learned some extremely valuable tools from this book, and look forward to using them.