One of our tools for helping clients prepare a winning negotiations strategy is the Negotiation Success Range (NSR)™, which identifies the conditions under which both parties will be satisfied. And if those conditions satisfy both sides, but our side likes them more than theirs? That’s OK: A winning deal is never perfectly even. In business, especially when forging long-term relationships, the NSR is critical because the deal should work for both sides, and both sides need to feel like they have won.
This is easier said than done. As an example, during negotiation planning the seller’s price and the buyer’s cost are often crucial factors in the deal. In fact, price is often a deal maker or a deal breaker. (The impact of price considerations on your deal can be ameliorated with value articulation.)
While the NSR example we’ll discuss relates to price, the tool works with any negotiation term that has a range. Other examples might include completion dates, resource levels, or royalties based on percentages. The list of relevant uses is quite large.
We designed the NSR to help you understand the relationship between three key factors:
- Your initial offer
- Your walkaway position
- Your estimate of the other side’s walkaway position
Let’s explore this using price as an example.
Your initial offer is the first position you take with the other side. That will occur either if you make the first offer or if you counter-offer to their initial offer. (This assumes that “credible offers” are being made, which we will explore in more detail in a later post.) If you are the seller, your walkaway position is your lowest price. If you are the buyer, it’s the highest price you are willing to pay, above which you will walk away.
Your team should be in agreement before negotiations begin on what your walkaway number is—based on a thorough analysis of your costs and value to be gained in the deal. We are not saying that this position cannot evolve, as it often does if either side makes strong value arguments, or if you learn new information during the negotiation.
Your Best Estimate
As a seller, your estimate of the buyer’s walkaway position is based on information you gather about the other side and the marketplace, considering important factors such as:
- Customer’s cost structure
- How they perceive alternatives to accomplishing their goals
- What their opportunity costs are
- Their industry position
- Your competition
In estimating their walkaway position, you must have a sense of how their business case supports (or doesn’t support) your deal. Your goal in making your estimate is to get as close to the highest price they can afford if they “buy” your value argument. Beware, however, of the risk of estimating too high a number. This could lead you to hold out for a deal that they cannot afford.
What is the relationship between your estimate of their walkaway and your initial offer? In our view, you usually want to make your initial offer somewhat higher than your estimate of their walkaway. This allows you to test your estimates without leaving money on the table. Of course, if you make your initial offer way outside your estimate of their walkaway price, they may walk away without any discussion!
As a buyer, you make the same estimates, but from the opposite perspective. You’re estimating the seller’s costs and competitive position against the value you can gain. But there are a couple of key differences:
- Your initial offer will usually be somewhat lower than your estimate of the seller’s lowest sales price.
- You have the option of making a lowball offer in order to move the discussion toward your end of the NSR spectrum. Why can you do this? Because in a normal supply/demand environment, sellers are not likely to walk away from business. There are exceptions in cases where there are a limited number of providers or supply constraints, which can give the supplier more leverage.
- Whether you are a buyer or a seller, by understanding your three price (or terms) points—initial offer, walkaway, and estimate of the other side’s walkaway — and the reasoning behind them, you can begin formulating a negotiations strategy that moves the other side closer to their walkaway position and closer to your ideal price and terms. The final position should satisfy both sides within the NSR, but our negotiation skill can help us achieve better outcomes within that range, or expand the range (more on that in a future post).