What’s a best alternative to a negotiated agreement? Why should you calculate your and your counterpart’s BATNA and reservation value?
Negotiation Genius by Deepak Malhotra and Max H. Bazerman suggests you prepare two main things before entering a negotiation. These are your and your counterpart’s best alternative to a negotiated agreement (BATNA) and reservation value (RV).
Check out how to easily calculate both below.
How to Calculate Your BATNA and RV
In every negotiation, you want to make a deal that leaves you better off than if you hadn’t negotiated. To ensure this outcome, you must determine when you should walk away. You can do this by calculating your best alternative to a negotiated agreement (BATNA) and your reservation value (RV).
(Shortform note: Identifying your BATNA and RV is not the only way to determine when you should walk away from a deal. You can proactively create a breakpoint list: a list of potential offers from the other party that would prevent you from achieving your goals for the negotiation. This way, if any offer proposed by your counterpart matches something in your list, you can consider walking away from the negotiation. This method may help safeguard you from sinking more time into a negotiation or settling for an unsatisfactory deal than if you relied on your BATNA and RV alone.)
Your BATNA is the course of action you’ll take if your current negotiation fails and ends without a deal. For example, if you’re selling a boat, your BATNA is what you’ll do if you can’t agree on a price with a potential buyer—for example, you might take a lower offer from another buyer.
To determine what your BATNA is, identify all available options should your current negotiation fail. Then, select the option that has the highest value as your BATNA. For example, if your alternative options are to sell your boat to another buyer for less money, keep the boat for yourself, or give it away to a relative, you might decide that accepting the lower offer gives you the most value out of the three and should therefore be your BATNA.
(Shortform note: Although Malhotra and Bazerman suggest you choose the most valuable alternative option as your BATNA, some experts encourage you to maintain two or three BATNAs. Throughout your negotiation, circumstances might change and your strongest BATNA could fall through—for example, a potential buyer might withdraw their offer. If you only have one BATNA, consider ways to expand your options.)
Next, define your RV, the worst deal you’re willing to accept in your current negotiation. For example, this might be the highest price you’re willing to pay or the lowest price you’re willing to sell. You need to know your BATNA before you can accurately calculate your RV. Let’s continue the example to illustrate this.
You have two potential buyers for your boat. Buyer #1 has already offered you $9,000, but you think you can persuade them to increase their offer to $10,000. Now you’re negotiating with Buyer #2.
In your negotiation with Buyer #2, what is your best alternative option if the deal falls through, and what’s the lowest offer you’ll accept from Buyer #2? Since you know you can definitely get $9,000 from Buyer #1, which gives you more value than keeping the boat, that offer is your BATNA. And since you’re confident you can get Buyer #1 to give you $10,000 for the boat, $10,000 would be your RV in your negotiation with Buyer #2—you can walk away from anything less than $10,000 from Buyer #2 because you believe you can get $10,000 from Buyer #1.
|Should You Measure Offers Against Your BATNA or Your RV?|
According to Malhotra and Bazerman, you should decide whether to accept or reject a deal based on your reservation value (RV). In Getting to Yes, however, Roger Fisher and William Ury give different advice about how to test if an offer brings you more value than you’d get without negotiating.
Fisher and Ury suggest you measure all offers against your BATNA (rather than your RV) and see whether any offers satisfy your interests more than your BATNA will. They refer to your RV as your “bottom line,” or the worst acceptable outcome, and write that while it helps you avoid bad agreements, it can also prevent you from achieving better agreements. Since you decide what your bottom line is before your negotiation, it tends to be too high or low and doesn’t adapt to new information you’ll receive during the negotiation.
How to Calculate Your Counterpart’s BATNA and RV
To get the best possible deal for yourself, you must also calculate your counterpart’s BATNA and RV to assess how much value they’re willing to offer that you can seize.
First, calculate your counterpart’s BATNA by thinking about what they would do if the negotiation ended without a deal. Consider the information you’ve gathered in your research and think through possible alternatives. For example, if you and your counterpart fail to reach an agreement on your boat’s price, their alternatives may include finding another boat to purchase, renting, or waiting until a similar model is available.
|Consider Two Different BATNAs|
Sometimes your counterpart might be negotiating on behalf of an organization. In that case, you should estimate two different BATNAs for the other side: One for the individual you’re negotiating with and one for the organization they represent. You may find that they differ: If a negotiator fails to close the deal and their job performance depends on how many deals they close, their BATNA might be to find another job. On the other hand, the BATNA of the organization they’re representing might be to open negotiations with other interested parties. So, the individual negotiator may have more incentive to close a deal than to get the best deal possible.
To assess how your counterpart’s BATNA differs from the organization they’re representing, consider what their incentives might be, how they’re compensated, or what their long-term goals might be.
Next, calculate your counterpart’s RV by considering why they want to make a deal. Then, think about how much benefit they expect from this desired outcome. For example, if you think your counterpart plans to flip your boat for a profit, you might research how valuable that could be. Then, you could reason that their RV is higher (they’re willing to pay more) than if they were simply using the boat for entertainment purposes.
(Shortform note: Other experts argue that the best way to estimate the other side’s RV is to simply collect as much information as possible, make assumptions based on that information, and then test your assumptions during your negotiation. This approach arguably involves less work and might be better suited when you can’t find out much about your counterpart’s desired outcomes of the negotiation.)
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- Why a good negotiation depends on your ability to create value
- How to avoid common negotiation pitfalls and make attractive deals
- How to decide whether or not to make the first offer