How to negotiate (part one)
The following is a series I'll be doing based off of the course 'Successful Negotiation: Essential Strategies & Skills'
Recently, I started taking a course in negotiation from University of Michigan Business School’s George Siedel called: Successful Negotiation: Essential Strategies & Skills. You can find the link on Coursera here. His book titled Negotiating for success : essential strategies and skills essentially covers the same material as the course and can be ‘checked out’ for free with a login at internet archive here.
The next series of posts will be about what I learn in this course and I give all credit in this post to the book and course material. If you are interested, I would suggest reading the book and/or taking the course too. In my view, being able to negotiate well and improve one’s negotiation skills is an important part of being successful financially and otherwise.
Siedel always gives his students an assignment at the beginning of his course:
"I ask them to try to purchase a personal product or service at the store, hotel or restaurant for less than the listed price. There are two rules. They cannot negotiate for something that is usually bargained for, such as a car or an item at a flea market. And they cannot tell the person with whom they are negotiating that this is a course assignment.
Before they complete the assignment I ask the students to estimate how many of them will be successful. A large percentage of them predict that most students will fail.
The actual results are surprising. In a typical year, two-thirds of the students are successful. The discounts range from 1% to 100% and the students save thousands of dollars."
Amazing numbers no? Just think of what might be possible if you could even slightly improve your negotiating ability!
However, before you negotiate it’s important to ask yourself the question: Should I negotiate or not? There can be important consequences to choosing to negotiate. It takes time, effort, and your time may be better spent elsewhere relative to the value you could hope to receive. There may also be negative consequences for negotiating (such as the probability of an offer being rescinded).
Deciding whether to negotiate is a binary question: It’s either yes or no based on the logical (IE not emotional) probability of various risks and rewards.
For example: If you spend 12 hours preparing and researching for a negotiation, and as a result save $120, is that worth it? Well let’s use a decision tree:
^ Is receiving $120 a good outcome? Well… it depends. 12 hours * $10 = $120. So your hourly rate here in what you earned for the time you spent prepping is $10 an hour. Let’s look at it again:
Another thing to consider if your hourly rate is < $10 / hr is, could you spend those 12 hours doing things that would increase your hourly rate beyond $10 / hr?:
But what if we don’t know the probability of success with certainty? Does that change things? Yes, it would. Let’s say there’s a 100% chance you would get $120 if you spent 12 hours prepping for the negotiation, doing research, etc. Now let’s say there’s only a 60% chance that you could increase your hourly rate beyond $10 / hr by spending 12 hours on those activities:
^ To get the weighted average of the “yes, negotiate track” the math would be:
(120 * .40) - (120/2 * .60) = 12
In this case, it still would make logical sense (purely based on logic and probability alone) to negotiate. What about if the % changed?:
^ To get the weighted average of the “yes, negotiate track” the math would be:
(120 * .30) - (120/2 * .70) = - 6 ← (that’s negative six)
In this case, it would not make logical sense (purely based on logic and probability alone) to negotiate.
Now you may not know with certainty what the probabilities are, but you can give your best possible guess based on your intuition or studies, or the data, or some combination. Setting up the question whether to negotiate ahead of time by using decision trees and probabilities helps with rational decision making. This is a skill that is applied by very successful people outside of negotiating too.
In the book, Siedel mentions a key attribute of extremely wealthy people as it pertains to negotiation: They firmly define what success looks like for a negotiation ahead of time, and if they don’t get EXACTLY everything that they want, they walk away. Furthermore, the most successful negotiators have a “stretch goal” in mind. One that is data driven/evidence based, and not wildly out of touch with reality. On that point: If you set a stretch goal that is wildly out of touch with reality, you risk losing credibility in a negotiation, and vastly increase the chances you will fail even if you step away from that goal.
For negotiators that have a well thought out stretch goal: though they sometimes lose out on individual negotiations, over time they are more successful on average. We’ll return to the concept of stretch goals later in another post…
So a quick recap: An initial question is: Should I negotiate yes or no
If we decide yes, any negotiation has essentially 4 steps:
1. Prepare: Plan Your Negotiation Strategy
2. Negotiate: Use Key Tactics for Success
3. Close: Create a Contract
4. Perform and Evaluate: The End Game
As a part of the preparation step, Siedel has folks assess their negotiating style, and also try to assess (or guess as best as possible) the negotiating style of the person they will be negotiating with. Without giving too much away, Siedel lays out the process along with measurements on a spectrum with several questions for this part of the preparation. If you would like to do this for yourself, please refer to the course linked at the top of this article or the book for more information. The questions are also present here.
Another thing to consider that’s important when entering a negotiation are legal and ethical considerations. The following are present under United States law as of this writing. Siedel lays out the following in that sense, and I quote:
Required by Law:
No Fraud. (Do not lie.)
Uphold your fiduciary duty. (If there is a fiduciary relationship with the other side, you owe the highest duty of trust and loyalty.)
Don’t act in an unconscionable manner. (When you are in a dominant position of power, try to reach an agreement that is fair to the other side.)
Voluntary Ethical Standards and Guidelines:
Organizational standards. (If your employer has a Code of Conduct, does it provide standards for your negotiations?)
Someone you admire. (What would someone you admire do in your situation?)
Family test. (How would you feel when describing to your family what you did during a negotiation?)
Newspaper test. (How would you feel if a newspaper article in the local paper described what you did during a negotiation?)
Golden Rule. (Treat others as you want to be treated. Keep in mind that fairness is very important to the other side.)
This is all I will cover for today. In the next post I will discuss position-based vs interest-based negotiating as well as other concepts.