Monday, March 28, 2011

BATNA and ZOPA -- a quick introduction

I'm not a huge fan of jargon or acronyms but there are two that are so handy and so important that anyone doing negotiations should know them.  I also want to be able to use them freely here, so I'm going to explain them up front.  The terms are BATNA and ZOPA.

BATNA stands for Best Alternative To Negotiated Agreement.  Your BATNA is what you'll do if you don't reach a deal.  It could be "go to court" if you're trying to settle a legal dispute, it could be "invest the money organically" or "buy a different company" if you're negotiating an acquisition or it could be, "stay home and watch TV" if you're negotiating with your parents for permission to go with your friends to a party.

Your BATNA is very important because it defines what deals are worth considering and what deals aren't.  Any offer that isn't better for you than your BATNA is worse than "no deal" and should be refused.

ZOPA stands for Zone of Possible Agreement.  The people you're negotiating with have a BATNA too.  The ZOPA is the set of all deals that are at least as good for each party in a negotiation as their respective BATNAs.

To put it in simple terms, let's assume you're negotiating to buy a used car.  You've thought about what you'll do if you can't reach a deal and there's another car you could buy for $8,000 but the car you're negotiating for now is worth $1,000 more to you.  Your BATNA is "buy the other car for $8,000" and in terms of this deal that's equivalent in value to "buy this car for $9,000".

Unknown to you, the seller is moving overseas and has to sell.  She has an offer for $6,000 and if she can't get a higher price from you, she'll take it.

The ZOPA for this negotiation is $6,000 to $9,000.  Any deal within that range is possible.  The ZOPA reflects how much value is being created in the deal -- you and the seller are better off by a combined $3,000 if you buy the car from her.  Where you end up in the ZOPA (assuming you don't negotiate yourself out of a deal altogether) reflects how much of the value you capture for yourself.


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