March 15th, 2021

Common Negotiation Terminology
Negotiations are common and important for entrepreneurs, as any start-up business will require negotiating financing rounds, board decisions and salary for employees, among many other things. In our last negotiation centered blog post, we discussed interest-based negotiations and how they are effective (link in footnotes).[1] In this negotiation-based post, I will outline many common negotiation tactics and present some useful tips on how to use them.
 
Best Alternative to a Negotiated Agreement (“BATNA”)

• Viewed as your safety net, your BATNA describes what you (and the other party) would do if you fail to reach an agreement. Usually the party that has the best BATNA has more leverage.
• Before the negotiation, have a clear idea of what your BATNA is, and also consider the BATNA of the other party. If it is not clear, then conducting further research is required. If you have a good understanding of each party’s position, you can negotiate more effectively.
• Additionally, having one BATNA is good, but two or more are better.[2] Because a BATNA can fall through, having more options is better and provides better understanding of the party’s different positions.

Zone of Possible Agreement (“ZOPA”)

• Once you have an idea of the BATNA for yourself and the other party, you can determine if a zone of agreement exists. For example, if one party will buy your product for $15-25, and you will agree to sell for $20-30, then a ZOPA of $20-25 exists. However, if a party won’t sell anything for under $19, and the other will not buy for over $18, then no ZOPA exists. [3]
• Since uncovering a party’s BATNA and ZOPA come from knowledge of the other party’s position and interests, conducting research beforehand is essential. If research is impractical, then asking the other party questions during the negotiations to uncover their interests and reservation points is recommended. If a ZOPA is discovered, then negotiations can run smoothly and quickly.

Bottom Line

• The bottom line is the lowest offer a party will accept before they walk away. Any lower and the BATNA is preferred.  If you will accept a price of $15-25, then $15 is your bottom line.
• It is important to know your bottom line before heading into negotiations. This will prevent you from being pressured into accepting an offer that is too low. Also, it is crucial not to disclose your bottom line too early in negotiations (or at all). If the other party knows you will accept a weaker offer, it could be difficult to move past that. Do your research, know your bottom line and negotiate with it in mind.

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Anchoring

• The anchoring bias is the idea that the first number or position given in a negotiation will have a large amount of weight (hence the “anchor”), and there will be little adjustment from that initial position.[4] For example, if you would accept $2000-3000 for something and you get an initial offer of $2100, the anchoring bias tells us that the price you decide to sell for won’t be too far away from $2100.
• It follows that whoever gives the first number or position in a negotiation has a slight edge. There are some considerations when deciding whether or not you should give the first offer. The first is whether you have an idea of your own ZOPA. The second is whether you have a good assessment of the other party’s ZOPA.[5] If you do not have a good idea of the ZOPA, then dropping an effective anchor will be difficult as you risk making a bad offer. In these cases, it is best sitting back and allowing the other party to make the first offer.
• If the other party drops the first anchor, be careful not to quickly counteroffer. If you want to defuse the anchor, first state that their offer was unacceptable and out of the bargaining zone before you give a counteroffer.[6] This will not only defuse their anchor but put you back in the driver’s seat.

 
Midpoint Rule

• The midpoint rule is “that the best predictor of the final outcome of the negotiation is the midpoint between the first semi-reasonable offer and counter”.[7] As all negotiations must come to an end, knowing that the middle ground between each reasonable offer will likely be the final outcome can speed up negotiations.
• However, do not jump to the middle point right away, as large concessions at the beginning might signal to the other party that you're willing to make more. Make smaller and smaller concessions to alert the other party you are coming to final position.[8]

     
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[1] “Interest-Based Negotiation” (23 December 2020), online blog): Business Venture Clinic <http://www.businessventureclinic.ca/blog/december-23rd-2020>.
[2]Katie Shonk, “6 Bargaining Tips and BATNA Essentials” (19 January 2021), online (blog): Program on Negotiation Harvard Law School < https://www.pon.harvard.edu/daily/batna/bargaining-tips-batna-essentials/>.
[3] Katie Shonk, “How to Find the ZOPA in Business Negotiations” (10 August 2020), online (blog): Program on Negotiation Harvard Law School < https://www.pon.harvard.edu/daily/business-negotiations/how-to-find-the-zopa-in-business-negotiations/>.
[4] Katie Shonk, “What is Anchoring in Negotiation?” (19 May 2020), online (blog): Program on Negotiation Harvard Law School https://www.pon.harvard.edu/daily/negotiation-skills-daily/what-is-anchoring-in-negotiation/.
[5] Ibid.
[6] Ibid.
[7] David Wright, Law 508 – Negotiation (Faculty of Law, University of Calgary, 2020).