Know thy enemy

In my experience the most common mistake people make in a negotiation (besides not doing any homework at all) is not trying to figure out how the other party or parties sees things.  What are their priorities?  How badly do they need a deal?

Today we did a brief negotiation that illustrated this quite well.  It was a very simple negotiation with only one variable to discuss: price.  Students were broken off into pairs with one person given the role of buyer and one of seller.  (The actual deal had much more context, but I don't want to reveal details that could ruin the negotiation for other HBS students.)  Each had a private set of instructions that gave information relevant to their role.

The ZOPA on this deal was from $50,000 to $350,000.  Any price lower than $50,000 and the seller walks away.  Anything higher than $350,000 is higher than the value to the buyer.

This was a straight price negotiation with no other terms at play.  Unsurprisingly, with such a large ZOPA almost every pair made a deal.  What might surprise you is that the people in the buyer role got much less than half of the pie.  The mid-point of the ZOPA was $200,000 and at least 80% of the deals were for more than $200,000, with many in the $300,000 range.  Only four were for less than $100,000.

What happened?  I can't be sure, but I think most of the buyers made a fundamental mistake -- they looked at the deal only from their own perspective.

Part of the background of the case is that the item for sale looked hot and the agent had arranged an auction with "multiple" buyers since interest was high.  You tried for one-on-one negotiations and were told "no".  In preparation for the auction it was decided in your company that you'd make an aggressive initial offer of $100,000 but that the bidding was likely to reach $300,000.  Your maximum bid would be $350,000.

Then, one week before the auction, the seller contacted you and said that since the he liked your team and firm so much (and thus there would be value to partering with you) she'd like to meet with you to see if a good enough deal could be reached that no auction would be necessary.  You were glad for the opportunity to avoid an auction and your boss reiterated that you could go as high as $350,000.

If you look at the situation from the buyer's perspective you have an initial number of $100,000 in mind and you were expecting to pay $300,000 and possibly a bit more.  Anything better than $300,000 is an improvement on the auction and you're probably still thinking in terms of an initial offer of $100,000.  That's what happened with most of my fellow students.

I was also given the buyer role; we made a deal at $75,000.  (Two other buyers beat me with deals at $70K and $60K.)

The main difference is that I focused my preparation on figuring out what the deal looked like to the seller.  No one voluntarily moves from a bidding war to one-on-one negotiations.  I could think of only two explanations.  Most likely the other bidders had dropped out.  Another slight possibility was that the "real" seller (the person in the seller role was acting as an agent) had decided for non-financial reasons that we were the best partner and had instructed the agent to make a deal with us.  Either way, the seller wasn't in a good position.

My initial offer was $37,000 which led to an counter-offer of $100,000.  As a result, I was working the seller down from a price that in most other negotiations the buyer had put out as an initial offer for the seller to work up from.

This wasn't any brilliance on my part -- just an awareness of the importance of understanding the deal not just from your perspective but from the perspectives of the other parties involved.  When we look at other deals we'll see how this effort is important not just for value capture but also for value creation -- being able to find win-win opportunities that increase the pile of money on the table.

And as the week goes on we'll see if I end up on the worse side of the scoreboard on the exercises yet to come!