The most important starting point for any negotiation is to know your walkaway price. As a seller, what is the least amount you'd be willing to accept before walking away? As a buyer, what's the most you'd be willing to pay before before walking away? There are many names given to this number. In the classic book Getting To Yes, Roger Fisher and Bill Ury call this your BATNA, your best alternative to a negotiated agreement. Economists call this your reservation value. In the examples we used so far, the idea of reservation value has been so natural, we haven't had to point it out. Think back to the first example with Abe and Bea. If Abe and Bea don't reach an agreement, then Abe will go out and get 1 on his own, and Bea will get 2. Thus, Abe's walkaway, his BATNA, his reservation value is 1. There's no reason for him to ever accept anything less than 1. Similarly, Bea should never accept anything less than 2. When we calculate the pie, what we've been doing is subtracting the combined reservation values for the two parties from what they can get from working together. The whole idea of a negotiation is to get something better than your reservation value. Thus, the two most basic points of any negotiation. Point one, know your reservation value, or know your BATNA. Point 2. As a seller, don't accept anything less than that. As a buyer, don't pay more. While these two points might sound obvious, it turns out they're harder to put into practice than you might expect. Unlike Abe and Bea, when you enter negotiation, no one hands you a piece of paper and says here, this is your reservation value. You have to figure it out on your own. Say, for example, you're selling your home. In that case, your reservation value is what you expect to get by selling it to someone other than the current prospective buyer. The problem is, this isn't a known quantity. You don't know when the next buyer will come along, or how much he or she will be willing to pay. Nonetheless, you should make an estimate. Similarly, if you're a buyer, you should consider what the most you're willing to pay for this house is. There's a common misunderstanding of what a reservation value means. It does not mean the price at which you start to have reservations. It means the price at which you literally do not care If your bid is accepted or not. Imagine you considering a studio apartment near Hell's Kitchen in New York city. The seller has listed the apartment at $425,000, you would like to buy the apartment for $380,000, you can think of this as your stretch goal. You might start having some reservations if you need to pay $395,000 but that isn't your reservation value. When the price hits your reservation value, you just don't care anymore if you buy this apartment or not. Where is that number? We can start by finding an upper and lower bound. For example, at 500,000 you know you don't want the apartment, and at 395,000, you do. Thus, your reservation value is somewhere in between. If you think about what else is available for 425,000, you might decide it's worth it to keep looking, but just. On the other side, you might admit to yourself that, if push came to shove, you'd rather pay 415,000 than let the apartment get away, but just. In this case, we could conclude that your reservation value is 420,000. Say you reach an agreement with the seller for 420,000, but then he or she comes back and says, look, I know I agreed to sell you the place, but I'd rather stay put. Is that okay with you? And you'd say yeah. From your perspective, the price is just high enough that you're ambivalent about going ahead and have no problem walking away from the deal. At the same time, it's just low enough that you're also willing to proceed. You might well be saying then, why would I ever pay my reservation value? At that point, I don't care if I win or lose. Exactly! Your whole goal is to pay less than your reservation value if you're a buyer, or to get more of your reservation value as a seller. That's how you get some of the pie. Indeed, I'd like you to move away from thinking about how much you get in absolute terms, and have you think instead about how much you beat your reservation value by. This is what we've been doing all along when we've focused on the pie. Instead of thinking about Abe getting 4 and Bea getting 5, we think about how there's a pie of 6 to split up. When they divide it up evenly, Abe and Bea each beat their reservation value by 3. Who gets the pie depends on how much each side beats their reservation value by. When the other side is at their reservation value, you are getting all the pie. When you are at your reservation value, then the other side is getting all the pie. If you go beyond your reservation value, then the other side is getting more than all the pie, and that makes no sense. You might think it's obvious you shouldn't accept less or pay more then your reservation value, yet again and again, I see students do so in their class negotiations. This is even more remarkable as they are explicitly given a reservation value in the case. So, why does this happen? Well, people like to reach an agreement. It feels good to say yes and shake hands. The pressure is even stronger when the other side is passionately arguing that you should accept their proposal. They don't know or care that their offer may be below, or their ask above your reservation value. They're arguing that this is a fair deal, a good deal, a great deal, or the only deal. And there's no one shouting, or even whispering in your ear, that's worse than you reservation value, don't take it. Your reservation value often comes from what people outside the room, other buyers or sellers, are willing to pay, and those folks aren't there to say hold on and wait for me. The situation is even worse if you haven't thought hard about your reservation value before going into the negotiation. In the heat of the moment, you might well decide to be more flexible, only to regret it later. So, start by figuring out your reservation value. The goal of your negotiation is to beat that number. Getting your reservation value is a zero. It's a wash. If you're getting just a little bit more than your reservation value, then you aren't risking much by asking for more. If the other side says no and the deal falls through, then all you've lost is that little bit. There's little downside and lots of upside. So it's a great opportunity to be ambitious in what you ask for. Let's put this perspective into action. Our next video is a substantial debrief of a negotiation done by one of my former students, Shuang Wang. As you'll see, he does pretty well for himself. One reason is he's willing to ask for more. He does so using principled arguments, but there's another reason for his success. He has thought about reservation values. Not only does he know his own reserve he has worked hard to figure out the other side's reservation value. As you'll see, that gives him a sense of how far he can push things before they'll walk away.
