Improve your negotiation skills with BATNA

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 ,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.

Regards,

Sam

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Beth
Beth
6 years ago

Psssssst… the term is actually “Best Alternative To a Negotiated Agreement”. I hate to be the syntax police, but the concept makes more sense when you know the T stands for. BATNA isn’t an alternative agreement, it’s what happens if you walk away. The jeep example hits home for me because I’m looking at replacing my car. I had planned to drive it into the ground, but I have more leverage and less to lose if I start shopping and negotiating now. 1) I’m not in a hurry — makes it easier to walk away, and 2) My car is… Read more »

Linda Vergon
6 years ago
Reply to  Beth

Thanks, Beth. Changes made…

Emily
Emily
6 years ago
Reply to  Beth

Okay, I’m glad someone else noticed/explained this, because I found this post really confusing. But the way I learned about the concept is also a little different than yours. To take the Hawaii/Chicago example again (although it’s not a very good one, since your spouse is someone you kind of *have* to negotiate with). Your BATNA, depending on your preference, is either to turn down the job and stay in Hawaii, disappointed at your prospects, or separate and take the job on your own. Her BATNA is to keep her job in Hawaii while you go to Chicago. Since you… Read more »

Beth
Beth
6 years ago
Reply to  Emily

Well said!

Ross Williams
Ross Williams
6 years ago

A rookie car salesman is NOT negotiating with you. Their supervisor is. They need to convince their boss that they are getting the best deal possible. Your job is to help them do that. Which is really the central issue. You need to understand who you are negotiating with and how they define their own interests. How you think they should define their interests is irrelevant. You also need to clearly define your own interests. If your goal is to “win”, your “opponents” may figure out your interest is believing you got the best deal possible. They have sold you… Read more »

victoria
victoria
6 years ago
Reply to  Ross Williams

And you also have the alternative of going to another dealership or looking for a private party seller. You have a month before you’ve determined you need a car, the car the dealer showed you has the very highest mileage you were even willing to consider, and they’ve started the negotiating at 15% higher than you’re willing to spend. Walk away! There is no possible way you’re getting the best car for you at the best price under these circumstances.

TB at Blue Collar Workman
TB at Blue Collar Workman
6 years ago

How come it’s not BANA given the definition of the acronym?

Concept sounds good though. When my wife and I bought a house many years ago, the real estate agent didn’t use that acronym, but she basically set up the scenarios for us on whether we buy or not this home. She basically helped us through BATNA and it ended up working out great. We love our home, no regrets.

Stephen E
Stephen E
6 years ago

I did an exercise one time at a conference where two different pharmaceutical companies were negotiating with an egg suppliers (so three parties involved). The parameters were set up so that if each party stuck to the basic facts, a deal could be cut but none of the parties would get a real upside to the transaction – that is, one of the pharmaceuticals could win the negotiations for the eggs, but they wold pay at the upper limit of their allowance, and the egg guy would make a 1% profit. Afterwards, we learned that if the two pharmaceutical companies… Read more »

TB at Blue Collar Workman
TB at Blue Collar Workman
6 years ago
Reply to  Stephen E

That’s a tough one because like you say, people like to hold their cards awful close to their chest. If you blab important info about your company or yourself, you risk losing all power in the negotiation and the other person then holds all the cards. But like in your scenario, it can be really beneficial sometimes. How does one know when to keep quiet and when to blab? When I do contracting work on peoples’ homes and I talk with potential new clients, I like to be very open and honest about costs, time, and other options they may… Read more »

Anne
Anne
6 years ago
Reply to  Stephen E

I obviously missed something here. If one company is paying top dollar for the eggs and yet the farmer is only making a 1% profit, how is the two companies going “together” on the eggs going to lift the egg farmer to a 20% profit?

The two pharma companies now have so much power they can offer less money and even cut into the 1% the farmer is making.

I’m just curious.

Samantha
Samantha
6 years ago
Reply to  Anne

The negotiation is more complicated – if I remember correctly, there’s also quantities at play so that without joining forces, one pharma company will “win” by paying their highest price, which means they can buy only a small quantity. The farmer cannot sell the rest of his lot, so his profits on the small quantity are assessed against the costs of the whole herd, and results in a small profit. I did this negotiation once too. I specifically asked if anyone could pool their interests and the yolk people said no, what they needed was a whole egg. So I… Read more »

Stephen E
Stephen E
6 years ago
Reply to  Anne

I can’t remember all of the details, but Samantha’s memory helps some. Basically, each company could each pay $100 total, and that’s what the seller’s costs were, so one company could pay $100 and the seller basically broke even. And one seller gets left out. So buyer pays top dollar, and nobody really “wins.”

If the two buyers worked together, they could each pay $60, thus saving their companies $40 each (and looking like awesome negotiators), and the seller could make $20.

Or one party refuses to play ball like in Samantha’s example!

Mike B.
Mike B.
6 years ago

I agree that this article presents an overly adversarial view, *particularly* in the first example. The scenario is set up incorrectly for a healthy marriage — your goal is *not* to convince your wife to move! Your goal is to decide jointly whether it makes sense to move, given a much higher real salary for one partner, but a less appealing climate and uncertain job prospects for the other. Your BATNA is the apartment, but possible career-stagnation for the higher-earning partner. And some couples will take that decision and be perfectly okay with it, because they love Hawai’i and hate… Read more »

imelda
imelda
6 years ago
Reply to  Mike B.

Yeah, that was kind of sad. Though I’m not married, so what do I know.

However….move from Hawaii to Chicago?? Gah! Why!? Not worth $40,000!!!!

As the saying I just made up goes, if you can make it there, who cares where else you can make it?

Allyson
Allyson
6 years ago
Reply to  imelda

“as the saying I just made up goes” –> this cracked me up.

Lizzie
Lizzie
6 years ago

As a conflict resolution nerd (with the impractical degree to prove it), I’m glad to see BATNA shared with readers as a negotiation tool. However, there’s a hiccup with the way it’s used in the examples above, as a rational and unilateral approach. When two parties are negotiating, they likely have different ideas of what the BATNA is/are. No one is psychic here, so what I imagine to be your BATNA may not even cross your mind. In the car example, for instance, the salesman may be convinced that someone else will come along to buy the Jeep at its… Read more »

Allyson
Allyson
6 years ago

I appreciated the article for the ideas it presented. Very good food for thought. But I agree with others above that the example involving convincing the wife to move is a poor one. I would think that BATNA is more appropriate for business and/or purely financial transactions, not a marriage relationship, especially when the question at hand involves a major life change.

Sanora
Sanora
6 years ago

Helpful tips to know the other side’s best negotiated alternative.

I agree that learning how to negotiate will save you huge money and provide more happiness over time.

Funny how the women are bent out of shape about the marriage example. Get a grip.

Beth
Beth
6 years ago
Reply to  Sanora

Nope. There’s a man commenting on it as well. No need to reprimand the women. (More women than men comment on this blog, so the gender balance is always going to be skewed regardless).

Interestingly enough, a similar situation happened to two engaged couples I know. One compromised and moved and the other went their separate ways. I don’t think they used any formalized negotiation methodology though.

Lisa S
Lisa S
6 years ago

I’ve learned a lot lately about the power of being willing to walk away. My husband and I are trying to furnish our formal living room on the cheap so we’ve been doing a lot of Craigslisting. I recently went to look at a Pier 1 coffee table and end table that someone had posted for $100 for the set. It was a decent deal, but I was willing to give them up to find an amazing deal. I offered $60, pretty sure they wouldn’t take it. They did and I love the tables!

Negotiations
Negotiations
6 years ago

Using your BATNA is essential for negotiating pay increases and when negotiating with difficult people.

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