Know Your BATNA Before Bargaining

Last week we talked about how to effectively use concessions in bargaining. I realized from questions and comments I received that I may have put the cart before the horse. Because while the art of concession is undoubtedly an important part of the process, it’s important first to know your BATNA before going into any negotiation. And no, that’s not a typo for the shoe museum. BATNA is the acronym for Best Alternative to a Negotiated Agreement. In other words, before you start to bargain, try to have a clear sense of what your options are if you don’t get a deal in that particular negotiation.

What do I mean by that? Let’s take the example of making a purchase (whether it’s for a car, major appliance, house or pair of shoes that you’ve fallen in love with). If you see an identical pair of shoes at two different stores and the price is lower at one, then, assuming they both have your size in stock, your BATNA is the store with the lower price. In other words, if you know store A has the shoes for $50 cheaper and store B won’t budge on price, you can walk away because you have a better option – a strong BATNA. But if store A didn’t have your size in stock, you can still use the price at store A as a BATNA when bargaining for a better price at store B but you may or may not want to walk away if you know you can’t actually get the shoes that day from store A. Or, what if store A was across town and it was an hour drive to get there, or $50 taxi ride to get there, or it was your last day in town and you didn’t have time to get back to store A? You get the idea. Store A may not actually be a better BATNA, so you may not want to walk away even if you can’t get the price dropped at store B. Make sense?

When you’re making a purchase, you’ll typically be looking at a number of factors. Price is the obvious usual suspect. So, if the item you’re looking to purchase has an offered price that’s above the price you know you can get elsewhere, then you have a strong BATNA (best alternative potentially available). I say potentially because there are other factors to consider in most cases (as demonstrated in the example above). People often get stuck on comparing only price and end up walking away when in fact their BATNA is not as strong as they initially thought.

Purchase of a car is an obvious example but it’s been overdone in the literature on this issue, so let’s consider another option to further explore this concept. If you’re bargaining for a washing machine (and yes, shopping for a car or washing machine is – or should be – a negotiation) you may find a machine for a price that looks attractive. For easy numbers (to show the concept) let’s say you saw machine A for $1000. You’re now looking at another machine (B) at a competitor for $1200. On its face, it looks like machine A is a better deal. Most articles talking about BATNA advise that if you’re negotiating for machine B, you know that machine A is your BATNA so if you can’t get the price for B below $1000 then you would walk away because your best alternative is better. This is helpful at its basic level to demonstrate the concept of BATNA but it does a disservice in terms of making you a better, more effective negotiator.

Focusing only on price is too narrow a view and will almost certainly bite you at some point. In fact, one of the problems in our society today is that we’ve all become so conditioned to look for best price above all else that production quality is dropping and it’s becoming more challenging to find long-lasting quality items at all (as manufacturers/suppliers/retailers who maintain quality get squeezed out, unable to compete with what I call the ‘Walmart’ mentality). But that’s a rant for another day.

On the issue of the BATNA for our current washing machine saga, however, price likely shouldn’t be your only consideration in determining your BATNA. Machine A may be $200 cheaper and seem like the better deal on its face, but machine B may have a better warranty, be a better, longer-lasting supplier, or have a special delicate cycle that’s missing in machine A which means you won’t have to hand-wash your intimates ever again. Surely that’s worth $200! And there’s the point. For me, not hand-washing my delicates would be worth $200, but for you maybe not.

BATNA is often personal. What constitutes a best alternative for you will depend on how you weigh the various factors at play. There’s no one right or wrong answer. Having said that, be sure to do your homework. What may seem like a great glittering BATNA at first glance may not be gold when you dig. Insurance is a great example of this. How many times have people been lured away from their current insurance provider on the promise of better premiums (BATNA) only to find that the quote they got was subject to a whack of conditions and the premium ends up being the same or worse at the end of day. Or maybe it turns out that the key coverage you need isn’t actually covered under the so-called better alternative.

Similarly, make sure your BATNA is real. If you have a job offer in hand and you’re trying to decide whether to accept it, or whether to negotiate for something more, you should ensure you’ve done your homework in advance where possible so you’re making decisions based on concrete, real alternatives – not vague hopes, dreams or expectations. Be careful not to give up a firm deal in hand for a potential BATNA in the proverbial bush.

BATNA’s can provide significant bargaining power when used effectively. Knowing you have alternatives available if the negotiation falls through gives leverage. It can help determine your reservation price (your bottom line). Because BATNA’s mean power in bargaining make sure you know (or at least consider and factor in) the other side’s BATNA as well.

How do you determine what your BATNA is? Ideally before any negotiation, contemplate, explore, and list all the alternatives available to you if the negotiation failed. Evaluate these options – consider and weigh the value of each to you. Pick the best of those options i.e. the one that would provide the best overall value to you. This is your best alternative to a negotiated agreement (BATNA). Now you can meaningfully set your bottom line. The more complicated the issue(s) you’re bargaining, the more layered your BATNA may become, but don’t panic as the principle stays the same.

Many a large, successful corporation has gone belly up because they over-estimated the strength of their BATNA and/or under-estimated the strength of the other side’s BATNA. Forewarned is forearmed. Now you’re forewarned. Make sure this doesn’t happen to you.