Negotiating Deals From a Position of Powerlessness
When you are negotiating a deal it pays to have viable alternatives to fall back on – or at least that’s what most people think. New research suggests that being powerless can be liberating and help you achieve better deals.
Negotiators
are strongly advised to identify viable alternatives that they can
fall back on during a negotiation. After all, alternatives give
negotiators the power to extract more concessions from their
opponent. The better your BATNA (Best Alternative To a Negotiated
Agreement) the less dependent you are on the other negotiator for
finalising a deal. In fact, past research has shown that negotiators
with better alternatives generally end up with superior outcomes
because alternatives offer the luxury to walk away from the
bargaining table.
But
having a fallback option is not always beneficial. In fact, when the
alternative option is weak, it can actually be detrimental for
negotiating outcomes – even more so than having no alternative at
all.
Why
powerlessness can be liberating
Take
Leigh Steinberg, for example, who is one of the most prolific and
successful sports agents in the world and the real-life inspiration
for the title character in the movie Jerry
Maguire.
In his new book “The Agent” Steinberg tells the story of how he
signed his very first football client in 1975, quarterback Steve
Bartkowski. However, negotiating a rookie contract for Bartkowski
seemed like a tremendous challenge because he had virtually no
offers. Despite their powerlessness, Steinberg made the bold move
when he offered Bartkowski’s services to the Atlanta Falcons for an
unheard of amount of US$750,000 for a four-year contract—more than
any football player had ever been paid. Although the Atlanta Falcons
were outraged, they eventually agreed to sign Bartkowski for
US$600,000 over four years, the most lucrative rookie contract in NFL
history at the time.
Steinberg’s negotiation with the Atlanta Falcons illustrates that having no alternatives and being completely powerless can allow negotiators to reach more profitable agreements than having any alternative.
To
explain why this is the case, we relied on the anchoring effect.
Anchoring is a widespread cognitive bias and refers to the human
tendency to rely too heavily on one piece of information (often a
numeric value) when making judgments or decisions. And because
negotiators anchor on the value of their alternatives when making
their first offer, those with weak alternatives are likely to be more
constrained and make lower first offers than those with no
alternative at all. This has important consequences for the
negotiation outcome because negotiators who make higher first offers
generally end up with better deals than those who make lower first
offers, especially so in competitive negotiations involving a single
issue.
So,
if Steinberg had managed to secure a weak alternative offer for
Bartkowski, say US$150,000, he would have relied heavily on this
anchor and may have made a more modest first offer than the
US$750,000 he originally asked for.
Alternatives
not only make you powerful but also weigh down your first offer
We
tested this idea in our article, Anchors
Weigh More than Power: Why Absolute Powerlessness Liberates
Negotiators to Achieve Better Outcomes,
co-authored with Adam Galinsky, Professor of Business at Columbia
Business School.
First,
we wanted to see whether negotiators would follow the recommendation
to always negotiate with an alternative – irrespective of how
unattractive that alternative is. We asked a hundred people whether
they would prefer to negotiate a job offer with a weak alternative or
without any alternative. Strikingly, more than 90 percent indicated
that they would prefer to enter the negotiation with an unattractive
alternative offer. This confirmed our suspicion that people assume
that having any alternative is better than no alternative.
Next,
we wanted to examine whether negotiators with a weak or with no
alternative would make higher first bids. We recruited a group of
participants and told them to imagine that they were selling a
secondhand CD by The Rolling Stones. We then randomly assigned them
to three groups and gave each group different information about their
alternatives. The first group was told that they had no alternative
offers. Thus, if the negotiation failed they would end up with no
money. The second group was told that another buyer had offered just
US$2 for the CD. And the third group was told that another buyer had
offered US$8. In other words, some negotiators had no alternative,
some had a weak alternative, and some had a strong alternative. We
then asked all participants to make a first offer and to indicate how
powerful they felt.
Not
surprisingly, negotiators with the strong alternative felt the most
powerful, followed by those with the weak alternative, and those with
no alternative felt the least powerful. Despite
feeling more powerful,
however, those with a weak alternative made lower first
offers than those without an alternative. Those with strong
alternatives always did the best. This study shows the ironic
influence of negotiation alternatives: although alternatives may make
negotiators feel powerful, they can also constrain negotiators and
reduce the value of their initial bid. In other words, having no
alternative can be psychologically liberating and allow negotiators
to make more aggressive first offers.
Powerlessness
can help negotiators seal the deal
We
then took our research one step further to see whether negotiators
without alternatives would not only make higher first offers but also
achieve better agreements than those with unattractive alternatives.
In the next experiment, participants were put in pairs and took the
role of a buyer and a seller. The seller had a Starbucks mug to sell
and would meet face-to-face with the potential buyer. Before the
meeting, however, the seller got a phone call from another buyer (for
which we used a laboratory confederate). In half the cases, the
caller informed the seller that he was not interested in buying the
mug. In the other half other cases, the caller made a low-ball offer
to the seller. After the phone call, the seller went into another
room and negotiated face-to-face with the buyer.
The
results again backed up our predictions. Sellers without an
alternative offer felt less powerful, but made higher first offers
and negotiated a considerably higher sales price for the mug than
sellers with a weak alternative.
If
your alternative is weak, focus on your target price
Unfortunately,
negotiators often end up with unattractive offers and cannot always
improve their bargaining position before entering a negotiation.
Thus, we wanted to see whether there is a way to reduce the negative
impact of weak alternatives. Because negotiators tend to rely on and
anchor too heavily on their alternatives, we instructed half of the
negotiators to think about and focus on their alternative and the
other half to think about and focus on their target price (i.e. the
ideal price at which they could sell). As expected, negotiators with
unattractive alternatives only negotiated worse deals than those
without alternatives when they focused on their alternative. However,
when negotiators focused on their target price instead, there was no
longer a difference in their performance.
Thus,
negotiators who are unable to obtain strong alternatives should be
wary of low anchors. In contrast, negotiators without any alternative
may not have to worry about their powerlessness and instead should
spend their resources on making the right first offer.
Michael Schaerer, Doctoral Candidate in Organisational Behaviour and Roderick Swaab, Assistant Professor in Organisational Behaviour http://knowledge.insead.edu/organisational-behaviour/negotiating-deals-from-a-position-of-powerlessness-3745#KPqZJuSocL2uPHFP.99
No comments:
Post a Comment