The Infrastructure of Negotiations - The Power of Alternatives

A good alternative (or alternatives) can dramatically alter your behavior in a negotiation.

The quality of your alternatives also has an impact on how you behave and how you are perceived by your counterpart. Good alternatives change the intensity of your negotiating behavior. Negotiators with great alternatives often come across as aggressive and competitive, while negotiators with poor alternatives come across as cooperative, warm, and friendly. Thus, analyzing your counterparts’ behavior can help you triangulate their alternatives. For example, if your counterpart behaves more aggressively than you expect, that may indicate that his alternatives are better than you had thought.

Alternatives can also change people’s behavior even when they are irrelevant to the situation at hand. Once you have identified your alternatives, you can set your reservation price. The reservation price is the highest price a rational buyer will pay, or the lowest price a rational seller will accept. It is your true bottom line. At the reservation price, you are indifferent between your accepting counterpart’s offer or walking away and accepting your alternative; the better your alternatives, the more extreme your reservation price.

Naturally, the lower bound of sellers’ reservation prices is set by their alternatives, while the upper bound of buyers’ reservation prices is set by theirs. However, some sellers lower their reservation prices (or buyers raise theirs) as the negotiation drags on, because they factor in the effort that has already gone into the negotiation. This is a mistake known as a sunk-cost fallacy. Alternatives do not change because a negotiation is taking longer than expected, so reservation prices should not change either.

Reservation prices represent the last bastion, your resistance to the siren call of agreement. So think of your reservation price as a red line—a standard that you have the discipline not to violate.

Note that I am not suggesting that you never adjust your reservation price. If, in the course of the negotiation, you discover something that you could not have known when you calculated your reservation price, then there is room for revision. However, exercise caution when you consider revising; be sure to do so only because of new information, and not simply as a way to justify getting an agreement.

The closer you get to the reservation price, the harder it becomes to resist the powerful allure of “yes.” But resist. Having the discipline to honor your reservation price is one of the best ways to insure that the deals you accept meet or exceed your status quo.

Your alternatives and your reservation price are important parameters for any negotiation, but if you focus only on them, you will systematically underperform in your negotiations. Rather than setting your sights on at least meeting your alternatives (your safety net) or using your bottom line as a standard for what is good enough, consider setting your expectations at a higher level. Because expectations drive behavior (see my previous posts), you need to define them clearly at the outset of each and every negotiation.