This article is by staff writer Sam. Sam spent 13 years working in Equities on Wall Street and discusses financial independence strategies on Financial Samurai. Sam is also the founder of the Yakezie Network, the largest personal finance blog network on the web.
If you want to know how to get the best deal possible, learn this simple acronym: BATNA. “BATNA” stands for “Best Alternative To a Negotiated Agreement.” Often times the bulk of money made or lost is in the initial agreement. Negotiating a real estate sale, buying a car, and fighting for a raise or a promotion all require the proper usage of BATNA to get you the highest return.
The Best Alternative To a Negotiated Agreement is broken down as follows:
* What is your best alternative to a negotiated agreement if you do not purchase or sell?
* What is their best alternative to a negotiated agreement if they do not purchase or sell?
You become the best negotiator when you not only know your own limits but also the limits of others. Knowing the limits of others takes patience and understanding. Those who like to rip on others because of the way they look, where they work, how much they make, and so forth won’t ever become good negotiators because they are less likely to move from their own pre-conceived notions. It’s the person who can see different perspectives who wins the most in the end.
3 negotiation examples
1) Marriage. You and your wife have a nice life in beautiful Honolulu, but you can’t pass up a job promotion in Chicago despite the freezing weather six months a year. The job promotion comes with a pay raise to $100,000 from $60,000 and the title of director, offering an accelerated career track. Your goal is to convince your now potentially unhappy wife to give up her comfortable $60,000 a year job in exchange for the potential of finding a similar job in Chicago. What do you do? Set up the BATNA framework, of course!
Your wife’s BATNA is that she goes with you to Chicago, has no job, but doesn’t have to work given Chicago is cheaper and you are earning more. Perhaps your wife can now pursue other interests since she has more time on her hands. But this circumstance alone won’t appease your wife because she is a career-minded woman who needs to work just like you.
Your BATNA is that you decline the job offer and continue living in your $2,500 a month rented one bedroom apartment in Honolulu. With a combined income of $120,000 a year, it will take another 10 years, saving 20 percent of your gross income, to come up with a 20 percent down payment and 10 percent buffer to buy a median-priced Honolulu home.
Separating is out of the question. So how do you convince your wife to make the move and be happy with the decision? You don’t want to feel guilty every day you are in Chicago if she isn’t happy. The solution is to offer up a nicer property in Chicago than the rented one-bedroom apartment in Honolulu. If you can’t bring Hawaii’s weather to Chicago, then at least you guys can come home to a much more spacious and luxurious home.
You propose to your wife that with your combined current savings and income, you can buy a lovely four-bedroom, three-bathroom home for $400,000 in the suburbs of Chicago. Furthermore, she can have all the freedom she wants to pursue other interests while you pursue your career. Finally, there’s a high chance she will also be able to find another job for similar pay. You can’t live without each other, so an optimal solution is created and you guys make the move.
2) Automobiles. Your 10-year-old Jeep Grand Cherokee is really giving you problems and you rely on it heavily during the winter because you are a ski instructor who commutes back and forth from your home to one of the resorts in Lake Tahoe. You assess that you are willing to spend up to $15,000 cash for a secondhand SUV with up to 50,000 miles, and no older than six years old. You need to buy a car within a month since the mountains open up soon. Ideally, you would like to spend just $10,000, and would be willing to buy an eight-year-old SUV with up to 80,000 miles. You have identified your upper limit and lower limit and are ready to start negotiating.
You stumble across the sweet 2011 Jeep Grand Cherokee Limited for $44,000 and lament at your lack of funds. The dealer offers you $5,000 trade-in for your car for the low price of only $39,000! Drat, you’re too poor to afford that kind of money, and know you shouldn’t borrow money to buy a depreciating asset, so you pass. The 1/10th rule for car buying keeps you anchored in not overspending.
The dealer then presents to you a seven-year-old Jeep with 80,000 miles for $11,500. The criteria fits and you know that sales have been slow recently due to the economy. Your goal is to find out more about the business and ask the salesman how old he is, whether he has a family to feed, and what he plans to do with his life. You discover the salesman is 26 with a newborn and a stay-at-home mom. He doesn’t live in the city, but commutes 30 minutes from the suburbs. He just joined the dealership three months ago and is still in rookie mode.
The salesman’s BATNA is no sale or a sale with no profits, and your BATNA is to carry on with your ten-year-old car but risk getting stuck and towed this winter at the cost of hundreds of dollars and the huge inconvenience. Your real BATNA is to lock down the Jeep for $10,000 and drive away today, while letting the salesman make at least $100 from the sale. At this point in his career, moving inventory and breaking even is probably good enough because he needs transactions under his belt. You know this, he knows this, and a sale is made.
3) Business. At the age of 40, you run a reasonably popular personal finance site on the side. After a couple years of operation, you make roughly $30,000 a year and have a goal to make $50,000 a year in five years when you plan on retiring from your day job. You decide that $50,000 a year is a good amount of money to sustain your lifestyle given you no longer have to save for retirement. Although it does take more in entrepreneurial income to replace a day job income equivalent.
An online advertiser pings you to run their banner for $250 a month. The banner is a product you know and like, but you average $400 a month with your other banners. Your range is $300 to $500 for banner ads based on your existing traffic, so the advertiser’s $250 proposal isn’t that out of the ballpark. Your mission is to figure out how much the advertiser can pay you, and still make money and feel comfortable doing business with you in the future. You realize that every single advertiser is a potential client, and you don’t want to burn bridges.
You spend several e-mails getting to know more about the advertiser, his experience, and his goals. You call him on the phone to develop a more personal relationship. You learn that he is a five-year veteran of the online advertising space and is a partner at his firm. His client pool is deep and you realize he could be an invaluable resource for future deals for you and your friends. Suddenly, $250 doesn’t sound too bad at all, and you are willing to accept something less.
Your BATNA is that you fill your advertising space with another advertiser that may pay more, but you don’t know when that opportunity will come. Your decision is to take the lower deal now in hopes for future recurring deals. Building your income stream takes time, but $250 a month equals $3,000 more a year. Seven more of these deals and you’ll have reached your $50,000-a-year income target.
One constant theme in negotiations
In all three scenarios, there is one constant theme: You must have the ability to walk away from a transaction. He or she who cares least, usually always wins. However, realistically, we have upper and lower limits to everything. The key is to really understand the upper and lower limits of the other party so you can get to as low a limit as possible without risking that they will walk away from the deal.
Readers, any negotiation tips you’d like to share? Have you ever used BATNA to your advantage? Share some situations where you succeeded in getting the best deal possible.