Monday, May 19, 2014

The art of negotiation and tips to becoming a better negotiator

Parasailing in Cancun, Mexico
Negotiating the price of para-sailing in Mexico made for a very reasonably priced adventure
Throughout your life, you’ll likely be involved in thousands of negotiations.  In fact, you probably negotiate at least a few times each day of your life.  Whether you’re negotiating with your significant other about what movie to watch, deciding what restaurant to eat at with your friends, or haggling over a good price to pay for a used car, you’re negotiating whether you know it or not.

There are certain techniques that you can use that can make you a more effective negotiator.  The goal of using these techniques is not to somehow gain the upper hand in a negotiation, but rather to find out what you value and what the other party values, and to find a solution or deal that satisfies both parties. 

Understand the values of both parties in the negotiation
Before entering a negotiation, it’s a good practice to run through what you value and what you think the other party values.  During the negotiation, it’s OK to even ask the party what they value so you can more effectively negotiate.  The more information you have, the better the negotiation will proceed. 

For example, let’s say you’re a recruiter at a company and you’re seeking to hire a very strong candidate for the job.  There are many things the candidate might value, including salary, vacation length, medical benefits, the project they’ll be working on, the manager, teammates, etc.  If the candidate values working on high profile projects the most, the discussion should focus on how you''ll align their position with a high profile and exciting project.  The other values are not as important and shouldn’t be the focus of the negotiation.

Information is valuable
The more information you have in a negotiation, the better prepared you’ll be to negotiate effectively.  For example, if you’re heading to a used car dealership to buy a car, knowing the value of a similar car in Kelly Blue Book gives you a ballpark of what a similar make and model car costs.  Regardless of how much the salesperson attempts to talk up the value of the car, you’ll have a firm grasp of the fair market value.

Another example is if you’re buying a wedding ring.  With wedding rings, jewelers typically markup rings by over 100%.  If you research similar carat, color, cut, and clarity at other jewelers and online jewelers, you’ll be in a better position to demand a lower price.
Determine your opening offer, your maximum offer, and your target
Before entering into a negotiation, it’s valuable to write down an opening offer, a maximum offer, and your target price.  This allows you to determine the value rationally without letting emotions interfere with your negotiating.  For instance, if you’re in the market for a new house that is selling for $300,000, you might place an opening offer at $270,000, a maximum offer at $310,000, and a target of $290,000.  This provides a rule set that allows you to negotiate rationally without letting emotions drive up the price on a house you love.

Be willing to walk away
The ability to walk away in a negotiation is extremely powerful.  Recently when I was in Cancun, Mexico, I negotiated the price for para-sailing.  The para-sailing salesperson originally called out a price of $180 for two people for a short ride.  Other para-sailing outfits had offered significantly less, so I knew this price was completely unreasonable.  At that point, I said I wanted to para-sail but I considered the price completely unreasonable, and I started to walk away.  The salesperson ran back and offered a significantly lower price.  With that, he brought the price down to a more reasonable level, kicking off our negotiations.

Framing the offer
Being able to frame an offer is extremely powerful.  In 1994, Stella Liebeck sued McDonald’s for spilling hot coffee on her lap and burning herself.  Ultimately, she won $2.7 million in punitive damages and the case became one of the most famous examples of frivolous lawsuits.  The award seems completely unreasonable considering that Stella spilled her own coffee on her lap. However, the lawyers framed the award like this:
  • McDonald’s served coffee at 170-180 degrees Fahrenheit, which is excessively hot.  This temperature burns skin after 2 to 7 seconds of exposure.
  • Stella spent 8 days hospitalized to undergo skin grafting and experienced two years of medical treatment, costing her over $20,000.
  • $2.7 million is the revenue for only one day of coffee sales at McDonald’s.

With this framing, the award suddenly seems a lot more reasonable.

Seal the deal
Once you successfully understand the values of the other negotiating party and you’re satisfied that you have both exchanged fair value, it’s time to seal the deal.  Do you have any great negotiating experiences?  Share them in the comments below.