How to Create a Negotiation Strategy

Great negotiation strategy and its successful execution relies on 3 factors: reducing information asymmetry, claiming value, and controlling the communication.

In this second article of the three-part How to Negotiate series, we’ll be covering negotiation strategy and its execution. If you missed last week’s article on preparing for a negotiation, I highly recommend you read it first. It covers the fundamentals of negotiation and the basics you’ll need in order to understand this article. Next week we’ll be covering cross-cultural negotiation so make sure you are subscribed to be notified when it’s released.

Creating & Executing a Negotiation Strategy:

As I wrote last week, negotiation is 70% preparation, 20% strategy and 10% execution. This week, we’re covering the remaining 30% — the strategy behind successful negotiations & its execution.

Negotiation strategies need to be flexible. It is useless to follow an extremely rigid strategy as the other party could say something that you were not at all expecting, throwing your entire strategy off.

As such, the objective of a negotiation strategy is to develop a flexible plan, tailored to your counterpart, that will allow you to fulfil three objectives:

1. Reduce information asymmetries
2. Claim value through the first offer
3. Control the communication

It’s important that a negotiation strategy remains flexible as you must be reactive to any new information presented by your counterpart — you cannot be fixed on your original plan. With that in mind, let’s dive into each of these objectives of a negotiation strategy to better understand how we can build a strategy that fulfils them all.

Objective 1: Reduce Information Asymmetries

As mentioned last week, negotiation is about gathering information from the other party so that you can align interests and create mutual value. However, at the beginning of every negotiation there is information asymmetry that prevents both parties from aligning on their interests.

This information asymmetry may be deliberate, like when the other party does not want to reveal their true interests, or may simply be due to a lack of preparation or transparency.

As such, the first question you need to ask yourself in creating a negotiation strategy is:

How do you find out what the other side knows?

Generally speaking, this is done by building trust. Your counterpart will not reveal information that is important to them unless they trust you. As such, you need to figure out a way to gain their trust. Building trust is different across cultures (more on that next week), but all cultures recognise the value of being honest.

However, being honest does not mean being transparent with your information. It is much better to be honest about the fact that do not want to reveal some information rather than make an excuse — or worse, lie.

In addition to this, it is important that in your quest for information you do not make assumptions. Always test your assumptions by asking questions. An example of an assumption is if you’re negotiating the sale of your car, you may make the assumption that the buyer is not open to a trade. If that is something that interests you, should ask the buyer if they are open to a trade rather than make the assumption that they are not.

Lastly, always remember that what you learn depends on what you are willing to learn. Whenever you are asking questions, always make sure to dig deep so that you can get a fuller understanding of the person’s objectives. In the example of a car, they could be selling it for a specific reason, like to afford a trip abroad. This can be valuable information for you to revise your estimation of their RP.

Objective 2: Claim Value Through First Offers

First offers are one of the most important tools in negotiation. A first offer is an anchoring device that will allow the person who made it to always sway the conversation in their camp. That is, when you make the first offer, you set the stage for the discussion. Even if the other party categorically refuses it — you set the stage and therefore any significant increase from the first offer will seem “generous”. The other party may even think they’re getting a good deal from it.

If you have all of the information, you should always try to make the first offer.

However, do not rush into making the first offer just for the sake of it. Ensure you have asked enough questions and have gathered all of the information you need in before making the first offer. As soon as you bring up numbers, people tend to fixate on them and will be reluctant to switch back to a qualitative conversation. Only let the other party make the first offer if you have no information.

You first offer should be as high (or low) as you can go without embarrassing yourself in front of a respected third party. Factor in the ZOPA, the justification you learned and the importance of your relationship with the other party prior to settling on a first offer. That being said, you should have an internal idea of a range for a first offer prior to going into a negotiation.

What should you do if the other party opens aggressively?

Put the case that the other party beat you to the first offer and opens with a very aggressive price (a very unattractive price). Do not spend time on the other side’s offer. Every moment spent considering/thinking about the other side’s offer legitimises it. Instead, you should immediately do one of two things:

• Reframe & re-anchor (propose your own first offer)
• Ignore their anchor (“Too early to start talking numbers”)

What should you do if you love the first offer of the other party?

Do not accept it immediately. If you do, the other side will feel that they underperformed. Put yourself in their shoes: they made a first offer that is likely far above their RP. If you accept it immediately, they will feel as though they could have gotten away with more — and will therefore believe they have underperformed.

Additionally, if you find yourself surprised by the first offer of the other party, it is likely because you don’t have all the information. Your gut reaction needs to be to ask questions such that you can discover more of their ZOPA. Let me take an example to illustrate this.

Let’s say you own a large house in a medium-sized city. You put it on the market for 1.2M€. Someone comes in with a first offer of 1.5M€. Naturally, you love the offer. However, you are surprised. Intuitively, you must ask yourself why they are making such a first offer. You need to ask questions to determine what the ZOPA is. For example, by asking what they intend to do with the house, you may realise that your house will be converted into a hotel. By asking why they chose your house, they may tell you that it is because your house is in an ideal location. Since you know that no other large houses are for sale in the area, you can expect that they are willing to pay a pretty penny for your house. Thus, you can safely counter-offer above their 1.5M€.

Objective 3: Control the Communication

Controlling the communication is crucial in achieving what you want from negotiation. As such, it’s important to think about how you are going to control the communication. Are you going to be the first person to speak? Are you going to let them explain themselves and then take over? Again, it’s important to remain flexible but do your research and keep in mind that you need to try to be in control of the communication.

While controlling the overall communication is important, it’s also important for you to control your own communication. That is, how you reveal information.

Revealing Information

You may be asking yourself what you should and should not say. While the answer is specific to the negotiation in question, there are some general rules you can follow:

• Do not reveal your RP. If it becomes known to the other party, they will never never concede above your RP.
• Do not reveal your BATNA unless it’s strong. If you reveal your BATNA, the other party may be able to compute your RP. If your BATNA is strong, then you can explain the alternative — but never give specific numbers.
• Do not state ranges. Ranges are traps in negotiation. If you state a range, then the person will always pick the end of the range that is best to them. By stating a range you give them free information and give them the opportunity to choose what suits them most.

Concessions

Concessions from both sides are a great tool to align interests and fall within the ZOPA. However, how often you make concessions depends on your RP, BATNA and the negotiation in question. Nonetheless there are again some general rules you can follow around concessions:

• Allow yourself room to make concessions. Do not go in with a “first and final offer”. First and final offers are an incredibly powerful tool, however they shut all potential discussions for additional concessions. As such, it is a tool to avoid: you’re better off allowing yourself to remain open to discussion.
• Make bi-lateral concessions. If you find yourself making uni-lateral concessions, you are losing the advantage. Always push for bi-lateral concessions, if only to elongate the process (people value process).
• Make smaller concessions as you approach your target. Additionally, avoid falling for the ‘split the difference’ approach.

Contingency Clauses

Being in control of the communication means that you can add contingency clauses. Remember that contracts can be whatever you want them to be! They are not exclusively limited to an agreement on price. You can, at any point, add a contingency clause.

Contingency Clause: A contract provision that requires a specific event or action to take place in order for the contract to be considered valid.

Contingency clauses are an extremely powerful tool to probe for truth. Whenever you are unsure if what the other party is saying is true, then you can impose a contingency clause. Let me take an example to illustrate.

Going back to our large house example, let’s say that the buyer asserts they will not use your house for commercial purposes — but you suspect that they will build a hotel. You can probe for this by adding a contingency clause that if the land is, at any point in the next 50 years, zoned for commercial activity, then the buyer must pay you a fine of 100M€. While this may seem outrageous, the reality is that if the buyer has truly no intention of using your house as a hotel (which would require the land to be zoned as commercial activity), they would easily accept.

If however, the buyer seems reluctant to accept (or mumbles some excuse) — you’ve just caught them in a lie. You now know with more certainty that the land is going to be used for a hotel, allowing you to increase your price (or end the negotiation if you care about what happens with your house afterwards).

Conclusion

To conclude, creating & executing a negotiation strategy is about coming up with a plan that will satisfy the following three objectives, all while remaining flexible.

1. Reduce information asymmetries (“how are you going to find out what the other side knows”)
2. Claim value through first offer (“how can I anchor the discussion at a price that is favorable to me? What is that price?”)
3. Control the communication (“How can I ensure I am in control of the discussion?”)

After preparing your negotiation, answering these questions and developing a strategy, you are ready to negotiate. There is, however, just one more factor that you need to be aware of: cross-cultural negotiations. People from different cultures negotiate in very different manners and it is your responsibility as a good negotiator to recognise and adapt to those differences. We’ll be covering exactly what those differences are in next week’s article on cross-cultural negotiation.