Negotiating 101: The Fundamentals

Don't negotiate like this fool.

Hey folks, welcome to part two of our crash course on negotiations just as free agent season is upon us! Part one, which you can read here, illustrated various reasons why most people are bad negotiators. In this part we're going to get into the fundamentals of negotiating, things like reservation points, BATNAs, how to determine each one. If you understand these principles and adhere to them, you will never lose another negotiation again. Seriously.

Lesson two starts after the jump.

Reservation Point

In a negotiation, your reservation point is your bottom line. Put another way, it's the absolute maximum price you'd be willing to pay as a buyer, or the absolute minimum that you'd be willing to accept as a seller. Any more (buyer) or any less (seller) and you'd be better off without an agreement at all. Understanding your reservation point, as well as the reservation point for each other party in the negotiation, is key to succeeding in a negotiation. If you know your bottom line and adhere to it you will NEVER lose a negotiation. Seriously, never. And if you know the other party's bottom line, you can more easily push them towards it to reach a more favourable deal for yourself. Your reservation point is determined based on your alternatives if you fail to reach an agreement, and particularly by comparing your very best alternative to your current situation, which brings us to...

BATNA

BATNA = Best Alternative To a Negotiated Agreement. As the name indicates, your BATNA in a negotiation is your best alternative if the negotiation fails. To be successful in a negotiation, you should not only understand your own BATNA, but also the BATNA of the other party (or parties) in the negotiation. Understanding your BATNA, as well as the other parties' BATNA, is where your power comes from in a negotiation.

  • You should never accept an offer that is worse than your BATNA. Never.
  • If possible, you should always try to improve your BATNA.
  • The stronger your BATNA is compared to the other party's BATNA, the stronger your negotiating position is.
  • Make adjustments to your BATNA to find your reservation point.

Examples, Examples, Examples

Example #1 - Ondrej Pavelec's bottom line and BATNA (a very, very simplified version)

You have the following information:

Ondrej Pavelec is a restricted free agent. His BATNA = KHL offer for one year, $5 million. However, that's not all there is to it. Adjustments need to be made for all of the other things that are important to Pavelec. Suppose that:

  • Pavelec really wants to play in the NHL and the KHL offer is not his ideal job
  • He loves Winnipeg and would like to stay
  • Would get to play at home and in front of family in the Czech Republic; he'd like that very much
  • His girlfriend lives in Winnipeg and he'd be far away from her
  • The KHL team would not provide the same facilities or coaching as his current NHL team
  • He is slightly worried about his safety in the KHL due to the KHL's historically poor health/safety record
  • He is also slightly worried about not being paid on time (as has been known to happen).
What's Pavelec's reservation point?

Pavelec's reservation point = BATNA +/- Adjustments for Important Considerations

Pavelec's reservation point = $5 million - $1 million (NHL is his ideal job) - $200,000 (loves Winnipeg) + $500,000 (getting to play at home/in front of family in the Czech Republic) - $500,000 (would be leaving behind a girlfriend) - $200,000 (inferior facilities) - $500,000 (safety concerns) - $250,000 (payment concerns).

Pavelec's reservation point = $2,850,000 per season. This is the minimum salary Pavelec would accept.

While I completely made up the factors Pavelec considers important as well as the assigned values, this example should give you a decent idea of how to go about determining a reservation point. You start with your BATNA, assign a value to every other important factor in the decision, and make adjustments to your BATNA for every important factor in the decision.

(This example can also be useful for negotiating your own salary and benefits. In addition to just salary, you can negotiate for anything you consider important, such as a starting bonus, stock options, a savings plan, a pension plan, rapid review, vacation time, your direct supervisor, the number of subordinates you have, an assistant, your job assignment/rotations, flextime, continuing education, insurance, maternity/paternity leave, day care, parking fees, a fitness membership, severance pay, travel expenses, a clothing allowance, a computer, moving expenses, housing, etc.)

On the flip side, each NHL team should be doing the exact same thing. Take the Winnipeg Jets' other high profile restricted free agent, Evander Kane:

Example #2 - BATNA and reservation point from a team's perspective

Evander Kane is a restricted free agent. Ideally, the Jets would like to sign Kane to a five year contract. The Jets' best alternative to signing Kane is signing unrestricted free agent Alexander Semin to a five year contract, likely with an average annual salary (cap hit) of $5 million - $6 million dollars per season. Suppose that:

  • Using this year's record and goals for, 2.67 goals = 1 point in standings.
  • Using this season's record and team salary, ($51.7 million / 84 points), each point in the standings is worth approximately $615,000. Substituting, 2.67 goals ~ $615,000.
  • The Jets expect Evander Kane to average 38 goals per season for the next 5 years.
  • The Jets expect Alexander Semin to average 30 goals per season for the next 5 years.
  • The Jets value Kane's toughness and grit more than Semin.
  • The Jets would prefer a younger goal scorer to build the team around. For every year younger that Kane is than his replacement, the Jets would be willing to pay an additional $50,000 per season.
  • The Jets would like Kane to represent the team positively in the community but Kane is hesitant to do so.
  • The compensation for losing Kane to an offer sheet from another team is four 1st-round draft choices. Assume that a first round draft choice is worth an average value of $500,000.
What is the Jets' reservation point for signing Evander Kane?

Reservation Point = BATNA +/- Adjustments for other Important Considerations

Reservation Point = $5.5 million (midpoint of Semin's expected cost) + $1.845 million (approximate value of 8 additional goals, calculated as 8 / 2.67 x $615,000) + $250,000 (grit/toughness premium) + $350,000 (Kane is 7 years younger than Semin) - $100,000 (the annual cost of PR spin portraying Kane in a positive light) - $2 million (value of four 1st round draft picks)

Reservation Point = $5.845 million per season.

Again, I have completely made up a lot of the important factors and the values used here. However, this once again demonstrates the general strategy behind valuing a player. The team should start with its BATNA, think of every other important issue, assign a value to each important factor as best they can, and make adjustments to the BATNA based on the value of each important factor in the decision.

Bargaining Zone

The bargaining zone is the area of possible agreement between parties in a negotiation. In other words, it's the area between each parties' reservation points.

Bargaining_zone_medium

While there is some wiggle room within the bargaining zone, since any agreement inside of the bargaining zone is preferable to both parties' BATNAs, any agreement in the bargaining zone is a "win-win" situation. This is one area where individuals often approach negotiations incorrectly. The wiggle room within the bargaining zone simply allows for more of a "more win" vs. "less win" situation, but since any agreement between the two reservation points will still be preferable to each party's BATNA, it's still a "win-win" situation. Both parties do better than their alternative.

Targets and Goals

While many people enter negotiations with only a bottom line in mind, it's important to have a target or goal heading into a negotiation because your target keeps you motivated to continue negotiating for a better deal even after you have an acceptable offer. Rather than satisficing (a common error explained in part one), your target helps you to get more than the bare minimum even after you have an offer that's better than your reservation point.

What sort of target price/salary should you choose?

  • High but reasonable
  • Challenging to reach so that if you reach it (or come close) you'll be getting a good deal
  • Attainable in order to motivate you to continue negotiating for a better deal

Targets are important to have, but can also be dangerous if they're not utilized properly. By "excessively optimizing" - in other words, trying too hard to reach your target - you can potentially jeopardize a deal altogether. Having a challenging target is a great motivator but you also need to know when to give up your target. Even if you fail to reach your target, you should never fail to reach an agreement as long as you've received a better offer than your reservation point.

Since the final result in a negotiation is often close to the halfway point between each party's opening offer, a reasonable target would be approximately halfway between your bottom line and opening offer, although I personally like to set my target a little more than halfway. Call me ambitious, I guess.

Opening Offers and Anchoring

One question people often have is whether or not they should make the opening offer or wait for the other party to make the first offer. If you have at least some reasonable idea about the value of something, it's often best to make the first offer in order to utilize the "Anchoring Effect", which is the common human tendency to rely too heavily, or "anchor" oneself, to one particular trait or piece of information when making decisions. For example, suppose you went to an antiques shop looking to buy a rare bowl for $200-$250 and that you have an absolute maximum budget of $300. Now suppose that as the salesman, my opening offer for the bowl is $600, double your maximum budget and what you thought the bowl was worth. Do you hold firm at $300? Or do you think you might have undervalued the bowl a bit and re-think your budget? In a lot of cases, people will do the latter and we'll agree on a price above your $300 budget, despite $300 being your bottom line. That's the anchoring effect. By making the first offer, I anchored the worth of the bowl to a higher dollar value, you were subconsciously swayed to believing the bowl was worth more than its true value. The anchoring effect is also why there is always a price tag at car dealerships or flea markets even though the final price is negotiable. The price tag acts as an opening offer, anchoring buyers to a higher price than the item is worth.

As a general rule, if you have at least some reasonable idea about the value of something, it's often best to make the first offer in order to take advantage of the anchoring effect. If you have no idea what something is worth, or very bad information, it's usually best to not make the first offer in order to gather information, but don't let the other party's first offer pull you past your bottom line. As for how high (or low, depending which side you're on) )your opening offer should be, it should be high, but not unreasonable. The higher/lower that you can get away with the better.

Example #3

Ondrej Pavelec is a restricted free agent. You have all of Pavelec's NHL statistics with which to judge his play, as well as every other goaltending contract in the league. Pavelec's save percentage last season ranked 35th in the NHL among goaltenders with 25+ starts. His even strength save percentage ranked 29th among the same group. The previous season, his overall save percentage ranked 26th among goaltenders with 25+ starts.

These numbers place Pavelec as one of the 25-30th best goaltenders in the NHL. From other goaltending contracts, you know that the 25th highest cap hit among goaltenders under contract for next season is $2.25M and the 30th highest cap hit is $1.8M. Rumour has it Pavelec is seeking $4M/year.

Should you make the opening offer?

In this situation, it would be wise to make the opening offer in order to "anchor" Pavelec and his agent to a lower number. Should Pavelec's agent beat you to the punch, you should still come in with a low but reasonable offer to try anchoring the other party to a lower number.

Responding to an Offer

One of the most effective methods to respond to an offer is called the "crunch" technique. Essentially, this is some indication that you have heard the other party's offer and it is not good enough. The idea is that rather than making a counter-offer, you get the other party to make a concession before making one yourself, and improve their offer. Ideally, you should "crunch" early and often. Some examples:

  • "That's too much/not enough for me, can you give me a better number"
  • "I like your ____ but it is out of my league, is there anything we can do about it?"
  • "I can't take that to my client/boss, I'll lose my job."
  • "Do you also want my wife? Work with me a little bit"

The Strategy Behind Concessions

The general idea behind concessions is to make fewer concessions than the other party and to make your concessions smaller than the other party's concessions. If you can though, you want your concessions to seem larger than they are. If you make a concession, emphasize it. You should keep track of all of your concessions as well as your opponent's concessions during a negotiation.

It is often wise to make a larger concession near the beginning of a negotiation and then make smaller and smaller concessions as you come closer to reaching your target. This strategy signals to the other party that you are getting close to your limit (but don't let them consciously notice a pattern!). If you need to drop below your target, you should keep your concessions small.

I think that's all for lesson two. Hopefully you've learned a thing or two. Feel free to share the knowledge. Or keep it to yourself and school your opponent the next time you negotiate. Next up, some more advanced techniques and how to deal with them.

Special thanks again to Dr. Stephen W. Nason for teaching me about most of the information provided in this post and allowing me to use his materials.

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