I have taught many classes on collective bargaining and negotiations over the years. I always explain that someone who engages in collective bargaining needs to know the laws, rules and processes for bargaining a collective bargaining agreement and must know how to negotiate.
We spend a lot of time on understanding the collective bargaining laws and processes which in the federal sector are quite complicated. I have written a couple of books on this complicated subject to help bargainers understand the federal sector approach to bargaining. However, sometimes what gets lost in all the legal complications is the very basis of all bargaining which is that it’s a negotiation.
At a certain point in the class we pivot from the law and the legal processes to knowing how to negotiate. Yes, you have to know the law but you also have to know how to negotiate.
My first question to all classes is: “How many of you like to negotiate when buying a car?” Interestingly enough, out of a class of 30, maybe 2 will hold up their hands. The vast majority don’t like to negotiate. I have been in many collective bargaining sessions where it was clear that one side or both sides did not have basic negotiation skills – much to their detriment.
We are not a country of negotiators. We are a fixed price country. Almost everything we buy has a fixed price – be it a TV, a quart of milk or thousands of other items. When you buy a quart of milk at the grocery store and it has a price affixed to it, you go to the checkout counter and pay that price. You don’t go to the checkout person and say I’ll give you $1.25 for something marked $2.00. If you do, the checker will think you are crazy and not know what to do and the people behind you waiting in line will be irate with you for taking too long and wasting their time. They are not prepared for someone who wants to negotiate. It’s not the American way.
We so dislike negotiating in the United States that we call it “haggling”. We don’t dignify it by calling it negotiation.
During the “Great Recession” of 2008 I was asked to appear on a local TV program to explain how to negotiate. The thought was that since many people were hurting financially, learning to negotiate might stretch their money a little further. Kind of a lame idea, but hey I was going to be on TV.
A local news anchor came to my house, and as we engaged in a mock negotiation, I explained some very rudimentary concepts of how to negotiate.
You can’t do much in a little over 3 minutes. At the end she was triumphant because, as she explained to the audience, she was able to “haggle” me down to a lower price (which by the way was pre-agreed upon before the show) for what she wanted – a wooden elephant I had picked up in Thailand. I made pains to point out the value of negotiating which she turned into the pejorative haggling very quickly. She really liked that elephant but didn’t get to keep it. She wasn’t that good a haggler.
Because people are not used to negotiating, some have a fear of it. They are not used to doing it and they really don’t know how to do it.
Although there are many things we could negotiate over, most Americans only have experience negotiating over two things – buying a car and buying a house. Anything with a high markup such as jewelry or furniture leaves room for a potential negotiation if you have the nerve to ask.
My wife is retired from United Airlines. Consequently, we are able to easily engage in our passion for world travel. When you can fly virtually for free it’s amazing how many places you can go.
In many countries negotiating is a way of life. If you pay full price for something in Asia or Africa, you undoubtedly are paying not just too much but sometimes way too much.
Tourist bargaining is usually over local crafts and other tourist items. The rule of thumb in many countries is you start your first offer at 10% of what they are asking. In other countries 10% is too low. To an American this feels like you are stealing. The reality is the person will not sell something to you if they are going to lose money.
I am a firm believer that not everyone can be a great negotiator but almost everyone can be a good negotiator. There are some basic rules of negotiation, which, if you are willing to follow, can make you a good negotiator.
The following are my basic rules for negotiation:
1. Don’t be Afraid to Negotiate
As mentioned, fear of negotiation is one of the biggest problems people have. The worst that happens to you, if you do negotiate, is that you end up paying what the offeror is asking which in many cases is more than you should. Remember that the person you are negotiating with is going to make a profit on what they are selling you, it’s just a question of how much of a profit. There is nothing that says they should make all the profit they want.
When we first started traveling, my wife was often embarrassed by “my antics” when bargaining over items we wanted. However, over time she came around.
We had a system. I would bargain as far as I thought I could go and if my last offer wasn’t taken, I would walk away. More often than not the seller would come running after me and then take the offer. However, when they didn’t, and we thought the seller’s last offer was a good offer, my wife would then go to the seller and offer what was last offered to me. It worked well, but to be successful she had to get over her fear of negotiating, a fear the vast majority of Americans have.
Last year, while in South Africa, I bargained for a beautiful wall hanging which was a shadow box with carvings of the big five African animals you try to see on safari (lion, Cape buffalo, rhinoceros, leopard and elephant). The seller refused to budge on his last offer. We walked away. We really liked this item. As we were walking, I noticed someone coming up behind us. My wife, Gayle, said, “don’t look back he will know you are interested.” I got my price. In the beginning, she never was the bargainer; now she has gotten very good at it, once she lost her fear of bargaining.
2. Do Your Homework
Before traveling, I always research whether negotiating is an accepted and expected practice in the country we are visiting.
In Istanbul, rarely are you going to negotiate with the Hilton hotel gift shop, but you will definitely be able to put your skills to use in the Bazaar. However, you may be able to bargain in stores in certain cities and not just marketplaces. Ask the hotel about locations to bargain. The hotel staff usually can point you to places to go if you were not successful with your internet research.
I will give you one hint about negotiating in a foreign country; you will be dealing in a foreign currency.
It can be very confusing negotiating while trying to convert foreign currency into dollars. Make sure you know what the exchange rate is. Be sure to have a handheld calculator or use the one on your smartphone to calculate what the item you want to buy will cost in dollars.
There will be times when the person you are bargaining with doesn’t speak English. In these cases, your bargaining may take place on a calculator. You will ask how much and they will understand that much and possibly a lot more. They will then show you a price on a calculator. You will then counter on the calculator. However, if things are not going well in the negotiation you can always tell when someone is swearing at you, even if you don’t understand the language.
Don’t feel rushed. Use the time you need to calculate what it really is costing you. Remember you can quite often get an additional discount on the price by paying in dollars versus the local currency.
Once you’ve agreed on a price in local currency then ask for a discount for the use of dollars. Sometimes you will be asked if you are paying in local currency or dollars. Always start with local currency and then ask for the dollar discount. They will give you a much better conversion rate for dollars than you can get from an airport ATM or hotel exchange desk.
If you are buying a car in the United States, you should always research what is the current market value of the car you are looking to buy. There are a number of market research tools for cars such as Edmunds.com and the Kelley Blue Book. If you don’t have access to these services or comparable services at home, you can go to the library in most towns. The half hour you spend researching the car may save you thousands of dollars later on.
If you are going to a dealership, you need to find out where their cars come from. It used to be they all came from the factory; not anymore. Dealers trade cars with other dealers giving you a wide range of cars and not just those on the dealership’s lot. You are not just negotiating against your hometown dealer; you are potentially negotiating with all the dealerships in the region.
Likewise, when buying a house look, for the comparable sales in your proposed new neighborhood. Are houses selling for $110/square foot, $90/square foot or more or less? There are definitely differences between houses, but when all is said and done, the comparable square footage rate is a very good indication of what the house’s price should be. If it’s more than that then what are you getting for your money? What’s the seller asking per square foot? Look then at the add-ons to the house.
There is a lot more homework to be done, but this gives you an idea of the value of spending some time doing your research before entering into a negotiation.
3. What’s Your First Offer?
The first offer is key. It anchors what the seller understands to be your minimum offer.
Rarely, if ever, are you going to be able to go below your first offer absent unusual circumstances. If you first offer $10,000, your next offer can’t be $9,000. That’s what is called regressive bargaining and rarely works. You are anchored at $10,000. By the same token, a first offer by the seller of $15,000 anchors the seller at that amount.
Because of this concept of anchoring, sometimes the seller will not give you a price but instead will ask how much you want to offer. This makes it hard on the buyer because oftentimes you have no idea what the item is worth. It also avoids making the seller give an anchoring offer. When this happens, you are in effect bargaining against yourself. You have two choices: either walk away or make a ridiculously low offer. You will find out how ridiculous the offer is when the seller either accepts it and therefore it really wasn’t ridiculous or the seller starts yelling at you. It also forces them to give you an anchoring offer.
My favorite was when I was at a market in Beijing at a stall we had visited before, we knew we were getting close to a deal when the woman we were bargaining with started hysterically yelling: “Meester, Meester you are killing me”. Whether we got the very best price or not, the performance was worth paying a little extra for.
Cars have a sticker price. This is theoretically the seller’s first offer. The car sales person expects you to counter that offer. You should consider the sticker price a mere suggestion and not an offer.
What are also in play are manufacturer’s incentives, end of year incentives, change in model incentives, local dealership incentives and the list can go on. These incentives can lower the sticker price without you knowing it. Also, they increase the salesperson’s commission which allows for a lower price to you because the sales person can agree to a price and still make a good commission.
So, what should your offer be? It should be below the sales price for the similar vehicles you found while doing your research.
Why is a house offered for $299,000 and not $300,000? Realtors know people set price targets in their minds. When they look for houses that cost less than $300,000, a house for $299,000 shows up but not a house for $300,000. They will look at the $299,000 house but may not look at one over $300,000. They want to make an initial offer that will attract the greatest number of potential buyers. If they make it too high, they may lose prospective buyers who have predetermined the price they are willing to pay.
Like cars, houses have a sticker price. It may be on a sign outside the house or on an online listing of houses. The price on that sign is the seller’s initial offer. You are then expected to accept the seller’s price or make a new offer.
The question is, what should the initial offer be? That depends on the market and how motivated the seller is to sell. Determining the seller’s motivation is an important part of your research. Has there been a divorce? Are the sellers moving to another state? Was there a death in the family?
We sold a house we owned in the Washington, DC area a number of years ago. The house went on the market on Saturday morning and by Saturday afternoon we had 3 offers, two of which were above what we were asking.
A year before we sold the house, we were hoping to make enough on the sale to pay the broker’s commission and not go into the hole on the sale. What a difference a year made! We were lucky to sell in a seller’s market; the outcome could have been very different had it been a buyer’s market.
Once again, your offer should be made based on your research. What’s the average square footage price in the neighborhood? What are the comparable sales prices for other houses sold near this house?
Never, ever be afraid of making an offer less than the asking price based on your research. Some negotiators use a rule of thumb that an initial offer on a house should be 10% below asking price. However, this can backfire.
One of my sons asked for my advice on making an offer on his first house; I looked at the house and suggested he make a lowball offer of 20% below asking price. The sellers accepted right on the spot. To this day he never asks for more advice because he thinks he paid too much. If the seller had only countered for a few thousand more I would have been a hero.
Another son asked for advice on buying his first house. I told him the house was way overpriced and he should at least offer 10% less than asking. The seller took it personally that he countered and was insulted that they would offer less. My son caved and paid the asking price. He has had a hard time selling this house because he paid too much when he bought it.
Some sellers are stuck on a certain price. When we bought our house in Virginia, the sellers would not go below a certain price. As it turned out, that was the price agreed upon their divorce settlement; the house had to be sold for that amount.
Based on that, I restructured our offer. At closing we would pay the agreed upon price, but the seller would pay all closing costs and pay 3 percentage points towards a buy down on our house loan. They got the price they needed and we got financial benefits which were worth far more than the difference in our original offer and what we ended up paying. Because they were hung up on price, we did very well overall on the transaction.
The basic rule of first offers is never be afraid of going low. Don’t go so low that the seller will not respond but go low enough to give you room to negotiate something closer to what you really want to pay. If you are the seller, always put your price at a point where you can go lower but not so high that people will not be interested in making an offer.
4. Making a Counteroffer
Very few negotiations end on the first offers by both sides. You have to be ready to make counter offers.
The biggest mistake made with counter offers is to fall into the “split the difference syndrome”. You are $10,000 dollars apart. The seller wants $250,000 and you have offered $240,000. The seller will not lower the offering price. So, your next offer as the buyer, using the split the difference syndrome, is $245,000. You are now bargaining against yourself. The buyer comes back with $249,000. You then split the difference again and offer $247,000. The seller next offers $248,000. You offer $247,500. The buyer graciously accepts your offer which is only $2,500 off the original offering price. You gave up $7,500. Who was the better negotiator?
If you want to be a good negotiator, banish split the difference from your bag of tricks. As with initial offers, initial counter offers anchor future changes in offers. By counter offering an additional $5,000, you provided the other side the opportunity to counter with something closer to its original offer with the expectation you would counter this offer. You should never believe because you were willing to split the difference that the other side is of the same mind.
When you make a counteroffer, think in terms of where you eventually want to end up. Give yourself room to make further small concessions which will get you there but will also give the other side the impression that they are getting something.
If you are the seller, always set your price higher than what you want to get in the end. This gives you room to make concessions to the buyer. Concessions give negotiators the impression they are getting a good deal.
The following is my favorite representation of what’s called distributive bargaining. Distributive bargaining is an adversarial type of negotiation where it is assumed any gain to a competitor is a loss to the other party. It’s basically what all bargaining is about. To get what you want the other side has to give up something.
Let’s look at this chart on negotiating:
In this model, the seller’s asking price is always higher than the target price. The target price is what price the seller actually would like to end up with. Obviously, the seller would be delighted to have the original offer but can’t bet on someone agreeing to it.
The seller also set the resistance point where the seller will not go below. Likewise, the buyer sets his initial offer lower than his target price. The buyer will also have a resistance point beyond which he will not go. These determinations on initial offers, targets and resistance points are made before negotiations begin. This is the sum total of most negotiations.
5. Making Concessions
After the first round of offers, the next step is to decide what movement or concessions are to be made. Some rules on concessions:
- Buyers who start with low offers do better than those who do not. Niceness does not count!
- Sellers who are willing to take less, get less.
- People who give a little at a time do better.
- When you sense concessions are getting smaller, the opponent’s resistance point may be near.
- Never accept the first offer.
- Never give a concession without getting one in return.
- Never lose track of how many concessions you have made.
- Do not be reluctant to ask that an initial demand that you feel is too high be lowered BEFORE you make a counteroffer.
6. Knowing When to Hold Them and When to Fold Them
One of the most important rules of negotiating is knowing when to walk away.
The other night, my wife and I watched a movie on Netflix. It started with an FBI instructor giving a class on hostage negotiation. As the movie starts, she is telling the class that in every negotiation you need to know your BATNA. I almost fell out of my chair. I started yelling “Did you hear that?” My wife thought I was crazy.
BATNA – Best Alternative To a Negotiated Agreement – is one of the cardinal rules of negotiation. Every time you go into a negotiation you have to determine what is the worst thing that happens if you don’t get an agreement. Do you have a good alternative to reaching agreement? If you have a good alternative to an agreement and you don’t get what you want then you should walk away.
Too often in a negotiation a participant can get emotionally attached to what is being negotiated. Once emotion takes over, you have given the other side a big advantage.
There are other cars in the world that you will like if you don’t get the right price on this one. If you don’t drive this car home today, will the world come to an end? I know you believe you love this car, but if you are looking for love from a car, you are looking for love in all the wrong places. The same goes for houses. There are other houses that will be perfect for you if you don’t buy this one.
Not infrequently you may find yourself subject to high pressure sales tactics.
A number of years ago when our sons were getting ready for college, we found a way to get free lodging while visiting different universities – timeshares. At that time timeshares were very actively marketed by offering a free stay at their facility with NO obligation other than listening to a 30-minute presentation on the glories of buying a timeshare from them.
We did this three times. We enjoyed the facilities while touring colleges. However, there was a price to pay – the so-called 30-minute NO obligation presentation. Each time was different because you had different sales people, but the approach was the same high-pressure sales pitch. They alternated between selling you on the facility to you owe us something because we gave you two free days to sometimes almost insinuating they were not letting us leave until we bought. It could be very intimidating. We saw people in the next cubicles succumbing to the high pressure, many of whom, by first appearances, could not afford a timeshare. At the 30-minute point we got up and left. One sales person even yelled at us. It’s amazing the things we did when we were faced with sending five sons to college.
The first rule of thumb is that if you feel you are being pressured to buy, there is something wrong with what you are buying. If they have to pressure you so hard to buy, you probably don’t need what they are selling. If the party who is selling you something, such as the owners of the time share, approves of such tactics you may have further problems down the road after you actually buy.
The second rule is, when you believe you are going to be subject to this type of pressure, don’t go into the negotiation alone. Take someone with you. Then, at a prearranged time tell the salesperson you have to go. One of the two of you will usually have the nerve to get up and leave.
You may never be a great negotiator, but you can be a good negotiator. Once you get over the fear of negotiating you may find you actually enjoy the process. You may make mistakes in the beginning, but over time you can hone your approach.
If you are a veteran negotiator, these rules are things to keep in mind as a tune up on your skills.
Even if you never travel to a foreign country where negotiating is a way of life, learning how to negotiate can be a valuable skill which can help you save money even in this country.