The second hand 🚗 dealership, where the veteran sales person meets the newbie trying to make one of his most expensive purchases. Basically, an NBA team 🏀 versus a mid-tier high school team — how is this even fair?!! And yet, we are involved in negotiations days after day, with friends, partners and business associates. So what is it that makes us fail, and what should we be really caring about? And how should we maximize the size of our piece of the cake? Can we make the cake bigger?…
The nature of the transaction
Every relationship has a different timespan associated to it. By definition, you would expect your marriage to last longer than the one with your Barista ☕ at Starbucks (even though we know that is not always the case!). As people pleasers though, we have a hard time distinguishing the two…especially if you’re married to the barista. The relative negotiating power and investment should differ.
Let’s start from a mattress seller 🛏️. They will welcome you in their shop and really make you believe that they have your best interest at heart. They really care about how the quality of your sleep will lead to a lifestyle improvement. The reality…? You only buy a mattress every 5/6 years and the technology has not really improved in decades. By the time you need a new mattress, the sales person has either moved to another job, state or county and probably so have you! The transaction therefore is a one-off and has very small chances it is going to get repeated, unless you have an ongoing need for mattresses for your new hotel chain. Therefore, on both sides there is literally no value in giving anything up or being nice to each other. Both parties should try to extract the maximum from that limited, springy mattress cake. As a consumer, you should try to pay the lowest price possible without falling for any tricks or feeling any sympathy in the negotiation.
The size of the cake
By the way, this analogy is really making us hungry😋. So why should you not try to maximize your utility from any other negotiation? Isn’t that basically Econ 101?! In our example of the mattress sales person, the size of the cake was fixed. In whatever way you tried cutting it, his gain was your loss and vice versa. What the Latins elegantly called “mors tua, vita mea” (your death, my life!) 😲. However, in many negotiations, parties will assign different utility to distinct things. This is especially true when the relationship last longer than the single transaction. Friendship, where we are always on that negotiation of “how/where/when” should we meet up, is a great example (at least pre-Covid). Many times you find yourself travelling across town or going to some less than respectable dive bar to meet up with a lifelong friend 😒. While that experience might feel like you have lost (big time!!!) the negotiation, you are in it for the long run. You know that they will be there for you (or at least should be!) and there will be occasions when they will be giving something up or diverging from their less than ideal plan, to maximize yours. This mutual relationship helps expand the total utility and therefore the cake. There is more for everyone to eat! Obviously, we are not talking about toxic one-sided relationships, stay very far from those!
Research
Probably the most important part of any negotiation is understanding what the value of what you are trying to buy is actually worth. While financial models try to predict the value of multi-billion dollar companies by assuming what the world will look like for the next 10 years (and we all saw how that went!!! 😷), in your daily life you are more likely to gauge the market value by looking at a market comparable. What that means, is that when you buy a house, you should look for what houses are worth in that area with similar sizes. In that way, you have pretty good guesstimate of how much you should be paying. This deep dive 🤿 should apply to any other big ticket purchases (for the small ones, the time you would require is probably not worth it!). When you purchase a mattress, you should already have a rough idea (thank you Internet!) of how much it should cost. If the sales person initiates the negotiation with double of your estimate, you already know from the onset, that the price is way off! Especially when trying to negotiate where you have no previous experience, building enough knowledge is key.
You need to learn how big that cake is! Or pie. Or mattress 🛏️?
Ever been part of a negotiation that went well? One that ended up in a car crash (not literally we hope)? Let us know!