What’s value creation in negotiation? Why is value important for both parties?
When negotiating, your goal should be to get the best possible deal for yourself while strengthening your relationship with the other party. To achieve a good deal and a stronger relationship, you must not only claim but create value.
Keep reading to learn more about value creation in negotiation, according to Deepak Malhotra and Max H. Bazerman’s book Negotiation Genius.
Create and Seize Value During Your Negotiation
According to Malhotra and Bazerman, value is anything that people consider desirable or useful. Others may not value the same things that you value. Because value depends on perception, you must find ways to make more value available and apparent during the negotiation. We’ll explore the authors’ tips for value creation in negotiation.
(Shortform note: We not only value different things than other people, but we often have irrational or arbitrary reasons for valuing them. In The Art of Thinking Clearly, Rolf Dobelli notes several errors in the way we think that affect our perception of value, such as the endowment effect (our tendency to see anything we own as more valuable) and the liking bias (our tendency to value something more if we like the person associated with it). Perhaps, then, you can make value more apparent by giving your counterpart a sense of ownership, such as by having them imagine owning your product, or simply focusing on being more likable.)
1. Gather Information About Your Counterpart
At the start of a negotiation, you only have assumptions and estimates to work from. To create value, you must gather information about the other side’s needs and interests, verify or correct your assumptions, and fill gaps in your understanding. Here are some tips on how you can do that.
Tip #1: Build trust. Use vocabulary that your counterpart understands and consider spending time with them outside of the negotiation setting. This will make them more cooperative and open to sharing information with you.
Tip #2: Ask indirect questions. Most likely, your counterpart will be unwilling to directly share their RV, so you must use indirect questions to tease out information that could help you identify their true RV. For example, if you’re negotiating a salary for a job, you might ask questions about the company’s outlook and financial health.
Tip #3: Share some information. When you share information, your counterpart will feel inclined to reciprocate. The authors suggest you tell them what your priorities are but don’t give away anything pivotal, like your RV.
|Use Tactical Empathy to Gather Information|
In Never Split the Difference, Chris Voss argues that the success of a negotiation depends on how well you gather information from your counterpart. To get them to share useful information with you, you must practice tactical empathy—understanding the other side’s feelings to get what you want from them. Let’s look at how you can incorporate tactical empathy into Malhotra and Bazerman’s advice for gathering information.
According to Voss, people have two basic emotional needs you must meet for them to feel comfortable and share information with you: security and control. Your goal in practicing tactical empathy is to fulfill these two emotional needs during your negotiation.
Malhotra and Bazerman’s first tip about building trust focuses on the first need. Beyond sharing your counterpart’s vocabulary and spending time with them, you should also practice active listening and adopt a welcoming tone. You can also signal that you’re similar to them by starting your next sentence with the last three words that they say.
Like Malhotra and Bazerman, Voss recommends you avoid straight requests for information by asking open-ended questions—specifically those that start with “how” or “what”—instead of direct yes-or-no questions. Direct questions lead your counterpart to expect you to give information in return. Open-ended questions, on the other hand, sound more conversational, and may also encourage the other side to more openly share information.
2. Create Value Through Logrolling
After you’ve shared and gathered information, consider what you’ve learned about their needs and interests to create value through logrolling—trading negotiation items that your counterpart cares about more for things that you care about more. Recognize how your priorities differ and use those differences to make deals that are agreeable for both sides. For example, if you hate driving in traffic, and your partner dislikes cooking, you might agree to cook dinner while your partner agrees to pick up the kids from school.
Malhotra and Bazerman give tips for creating value through logrolling:
Step #1: Identify your interests. Since logrolling requires trading between multiple items, you should first make a list of everything you value that the other side may be able to provide (when negotiating the purchase of a home, this could be price, move-in date, inclusion of furniture, and so on). Then, create a scoring system using a common metric, like a number of points out of 100 or a dollar value based on how important each item is to you. This method allows you to compare items more easily and decide whether to accept or reject their offer.
For example, if the person you’re trying to buy a home from offers to include some furniture in the price of the house (30 points) and lets you move in early (10 points), you might be OK if they don’t renovate their basement ahead of the purchase because you only value that renovation at 20 points.
Step #2: Identify your counterpart’s underlying interests. Discover their underlying interests by asking yourself why your counterpart is making their demands. This can clue you in to what they really want and help you find other ways to satisfy their needs, especially if you find their demands hard to meet. For example, if your counterpart demands a lower price, you might discover that they’re mostly concerned with wasting money on a faulty product. Instead of lowering your price, you might then offer a warranty.
Step #3: Discuss multiple issues at a time. To create more opportunities for logrolling, the authors suggest you introduce as many issues as you can into the negotiation. These might include timing, quality, price, contract length, warranties, and so on. Discussing multiple issues at a time helps you identify different priorities you and your counterpart have and allows you to make package offers. For example, if you care more about price and your counterpart cares more about timing, you could ask for a higher price for your product but offer to deliver it sooner.
3. Decide Whether to Make the First Offer
At some point during your negotiation, you must decide whether to make the first offer or allow the other party to make it. According to Malhotra and Bazerman, if you’re confident you know what your counterpart’s RV is, you should make the first offer. Having an accurate estimate of their RV allows you to make a good first offer that’s sufficiently aggressive and allows you to capture the most value (as opposed to making an offer that’s too weak or too aggressive).
The authors argue that the first offer largely impacts the outcome of a negotiation because of the anchoring effect. The anchoring effect is the tendency for people to be swayed by the first piece of information presented. By making the first offer, you set a reference point that the other side must adapt to. For example, if you ask for a high salary in a job negotiation, you signal to the recruiter that you have a lot of value. This makes it challenging for the recruiter to justify a much lower offer.
Conversely, if you’re uncertain about your counterpart’s RV, you should let the other side make the first offer. This way, you avoid making an offer that’s too soft or too aggressive.
However, if you let your counterpart make the first offer, you must resist being influenced by the anchor by shifting the focus of the conversation away from it. The more you talk about the anchor, the more it affects the negotiation. To pivot the conversation, you can reply that you view things differently than they do and shift the conversation to a different topic as a way to find common ground. Another way you can respond is by making an aggressive counteroffer and then suggesting both sides moderate their offers. You can then take control of the conversation by explaining why you made your counteroffer.
4. Make and Invite Fair Concessions
After voicing your initial offers, you and your counterpart will begin haggling—taking turns making concessions until you reach an agreement.
To ensure both parties take turns making concessions, you must invite reciprocation: Clearly communicate when you’re making a concession and state that you expect reciprocation. Practice being comfortable with silence and resist making further concessions if your counterpart doesn’t reciprocate.
When concessions progressively get smaller, it may mean that you’re approaching your counterpart’s RV and they’re less flexible about how much they can concede. However, be wary of the other side using this as a tactic to confuse you about their real limits.
(Shortform note: In Never Split the Difference, Chris Voss points out another technique negotiators use to signal that they’re at their limit: throwing in a non-monetary item. This method seems to primarily work when you’re haggling over price.)
|What Concessions Should You Make?|
Malhotra and Bazerman provide a broad framework for how you should approach concessions, but how do you start making concessions and what kind of concessions should you make?
Ideally, you should make a list of concessions before your negotiation, sorting them according to what’s important to you and recording your estimate of how valuable each might be to your counterpart. However, avoid making it obvious that you prepared your concessions ahead of time or else your counterpart will feel like they’re not genuine sacrifices and therefore less valuable to them.
Like Malhotra and Bazerman, other negotiation experts write that it’s crucial to make it clear that your counterpart must concede something in return. If, early in the negotiation, you concede without communicating that you expect something in return, you signal to your counterpart that they can get free value from you.
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Here's what you'll find in our full Negotiation Genius summary:
- 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