How to negotiate

What is Negotiation and Why Does It Matter?

Negotiation is the process of reaching agreements between parties, a fundamental skill for business owners. Successful negotiation is the key to securing deals, resolving conflicts, and achieving your goals. This section will introduce you to the importance of negotiation skills in business and why mastering them can contribute to your success.

The Main Parts of a Negotiation

Negotiations can often seem complex, but they can be broken down into several stages. The core components include preparation, discussion, proposal, bargaining, and finally, agreement. Let’s define each component:

1. Preparation: The initial phase of negotiation involves each party gathering important information, setting clear goals, and understanding how the negotiation will work. It's the foundation upon which your negotiation strategy is built.

2. Discussion: During this stage, you talk to the other person or party. They share their viewpoints, concerns, and priorities, and you share your side. Effective communication is key to establishing a common ground.

3. Proposal: Each party presents its initial offers and solutions. This is where the formal negotiation process begins, and both sides start to state what they want.

4. Bargaining: This is the heart of negotiation. It's where concessions (something a party gives in to, or yields), compromises, and counteroffers are made. This is often a series of back-and-forth exchanges as parties work toward a mutually acceptable agreement.

5. Agreement: The goal of negotiations is to reach an agreement that satisfies all parties involved. The agreement can be a formal contract, a verbal commitment, or a written understanding. It marks the successful conclusion of the negotiation process.

Different Kinds of Negotiations

Whether you're dealing with suppliers, customers, employees, partners, or investors, there are universal rules of negotiation, but you can customize them to specific situations. Here are examples of negotiations you may encounter:

1. Supplier Negotiations: These negotiations revolve around procuring goods or services from suppliers. Effective supplier negotiations can lead to favorable terms, cost savings, and reliable, long-term partnerships.

2. Customer Interactions: These negotiations can include pricing, terms of sale, and customer service agreements (if a business is selling a service rather than a product, this might be called a service level agreement or SLA). Building strong customer relationships through negotiations is crucial for long-term success.

3. Partnership Agreements: Negotiating partnerships, joint ventures, or collaborations with other businesses requires careful consideration of shared goals, responsibilities, and benefits.

4. Employee Contracts: When hiring or retaining talent, you may negotiate salaries, benefits, and work conditions. Effective negotiations here can lead to high levels of job satisfaction and productivity.

5. Investment and Funding: Negotiating investment deals with potential investors or securing funding from financial institutions is vital for business growth. These negotiations often involve complex financial terms and agreements. If this is not an area you are comfortable working in, find an expert who can help you negotiate the best terms for you and your business.

6. Contract Renewals: Long-term client, supplier, and/or partner relationships may require contracts. If so, it is essential to negotiate mutually beneficial terms to keep both sides happy.

7. Conflict Resolution: Negotiation is also a valuable tool for resolving conflicts within the business, whether they involve disputes among employees, partners, customers, or investors.

When Negotiation is Needed

There will be times in business when negotiation becomes essential. As a business owner, you will frequently encounter these situations: customer pricing and contracts, vendor agreements, employee issues, partnerships and strategic alliances, and conflict resolution.

Assessing the Need for Negotiation

Determining when negotiation is the right course of action requires a thoughtful assessment.

1. Identify Objectives: Clearly define your objectives or what you hope to achieve through negotiation. Whether it's securing better terms, resolving a dispute, or reaching a mutually beneficial agreement, having clear objectives is crucial.

2. Assess Interests: Consider the interests and priorities of all parties involved. Understanding what motivates each party will help you identify potential areas of agreement and negotiation.

3. Evaluate Alternatives: Explore alternatives to negotiation, such as seeking legal action, walking away from the deal, or pursuing different opportunities. Assess the pros and cons of each alternative to inform your decision.

4. Cost-Benefit Analysis: Weigh the potential gains against the time, effort, and resources you need for negotiation. This analysis will help you determine whether negotiation is worth pursuing.

Identifying Key Parties

Identifying the key parties involved in a negotiation is essential for effective preparation:

1. Primary Parties: These are the main people or parties directly involved in the negotiation, such as customers, suppliers, employees, or partners.

2. Secondary Parties: Secondary parties may not be involved in the negotiation but can still influence the outcome. Examples include legal advisors, financial experts, or consultants.

3. Internal Stakeholders: Don't forget to consider internal stakeholders who are part of your business, such as department heads, managers, or board members, who may have a vested interest in the negotiation.

4. Third Parties: In some cases, neutral third-party mediators, arbitrators, or facilitators may be involved to assist in reaching a resolution.

Understanding the roles and interests of these parties is crucial for determining your negotiation strategy and ensuring that all relevant voices are heard during the negotiation process.

Know Your Limits

1. What is Your Absolute Minimum? Negotiations often involve setting boundaries. In advance, you must identify your bottom line, the minimum terms you can accept in a negotiation. Establishing these limits is critical to protecting your interests.

2. Where You Can Give a Little: While boundaries are important, negotiations also require flexibility. Recognize areas where concessions can be made, where you can “give in” a little, without compromising your core objectives.

Find Middle Ground

1. Know When Everyone Wins, Someone Loses, or Everyone Loses:  Negotiations can lead to different outcomes, including win-win, win-lose, or lose-lose scenarios. In a long-term relationship, win-win is probably the most desirable outcome. However, in certain instances, achieving a beneficial result for all parties may not be possible.

2. Understand the Role of Compassion and Seeing Another's Viewpoint: Empathy is a powerful tool in negotiations. Take time to understand the other party's perspective and how it can contribute to a successful outcome.

When to Say No

In business negotiations, two important aspects often determine the success of a negotiation: knowing when to accept a deal and, equally important, knowing when to walk away.

Not every negotiation will culminate in a favorable agreement. In fact, some deals may ultimately not align with your business objectives or may carry too high a cost in terms of concessions , things you give up, or obligations, things you must do or owe. To navigate this, you need the ability to weigh the pros and cons effectively.

1. Objective Assessment: Consider factors such as the terms, pricing, delivery schedules, and any non-financial aspects that may impact your business. Consider how these impact your business and the cost: financial, time, resources, etc.

2. Alignment with Goals: Does the proposed agreement align with your long-term business goals? Does accepting the deal advance your mission or is it just a short-term gain?

3. Cost of Concessions: Concessions made during negotiation come at a cost. Do your concessions outweigh the benefits of the agreement?

4. Risk Assessment: Are there potential legal or financial risks? What is the likelihood of these risks materializing, and can your business withstand them? Can you protect against or mitigate them? (See the Business Risk and Insurance session to learn more about business risks.)

5. Time and Resources: Evaluate whether the cost of your time and resources aligns with the potential rewards.

6. Alternative Opportunities: Are there alternative opportunities that might be more advantageous for your business? Making informed decisions about walking away from a negotiation is crucial for preserving your business's long-term interests. Sometimes, saying no is the wisest choice, and this decision should be grounded in a thorough assessment of the pros and cons.

Figuring Out Your Best Option if Negotiation Fails (BATNA)

It's important to acknowledge that not all negotiations lead to successful agreements. BATNA - Best Alternative to a Negotiated Agreement - is your safety net. Consider it a strategic lifeline that helps you to make informed choices when negotiations don't unfold as planned.

• BATNA is the best alternative that you can pursue if the current negotiation fails. It should be a practical and achievable option that aligns with your business goals.

• Consider whether it is a realistic and attainable alternative. Assess the potential benefits, costs, and risks associated with pursuing this course of action.

• Compare the proposed deal and your BATNA. Look at the terms, benefits, and drawbacks of each one. This analysis will provide a clear basis for decision-making.

• Knowing your BATNA will strengthen your negotiation position. You let the other party know that walking away from the deal is a viable option for you.

Gaining a deeper understanding of your market and competition enables you to make informed decisions for negotiation success.

Market Research

Market research involves collecting, analyzing, and interpreting data related to your target market. It will help you spot important market trends and movements that can significantly impact your business. Here's how:

1. Data Analysis: Data analysis allows you to uncover patterns, trends, and shifts in consumer behavior and preferences. These insights provide a competitive edge by enabling you to adapt to changing market conditions effectively.

2. Track Market Shifts: Staying ahead of the competition requires dedicated awareness. Market research can proactively track market shifts, identify emerging opportunities, and weaken potential threats to your business.

3. Economic Indicators: Economic indicators are measurements that provide insights into the economic conditions of a region or industry. Here's how you can leverage them:

1. Key Economic Indicators: Learn about key economic indicators, such as GDP growth, unemployment rates, inflation, and consumer spending. These indicators are signals of economic health.

2. Interpretation: Develop the ability to interpret economic indicators as they relate to your business. For instance, rising consumer spending might indicate a good time to expand your business.

3. Data-Driven Decisions: Once you understand and interpret key economic indicators, you can make smart, data-driven decisions (rather than decisions based on hunches or emotions) that align with market conditions and your business.

Analyze the Competition

Success in the business often depends on how well you know your competitors. Here's how you do it:

1. Assess the Competitive Landscape: Identify your competitors, ranging from direct competitors (businesses that offer a similar product or service) to indirect competitors (businesses that may not offer a similar product or service, but are competing for the same customers), and classify them into these two categories based on their market presence.

2. Strengths and Weaknesses: What are your competitors' strengths and weaknesses? This will help you identify areas where you can potentially outperform or differentiate your business.

3. Strategy Analysis: Study your competitors' strategies, including their marketing, pricing, distribution, and customer engagement approaches. This analysis will reveal their game plans and objectives.

4. Anticipate Their Moves: This proactive approach allows you to develop counter strategies, (strategies or plans in response to a competitor’s strategy or activities) and maintain a competitive edge.

Use Market Research and Competitive Analysis in Your Negotiation

Let’s now look at how to leverage this knowledge during negotiations to improve your positions and decision-making.

• Armed with market research and competitive analysis, you can negotiate from a position of strength with facts to support your position. Your understanding of market conditions and competitor strategies lets you share your demands and objectives effectively and with confidence.

• During negotiations, you can make more informed decisions. Your insights provide a solid foundation for evaluating proposals and assessing them against your business goals.

• Lastly, by leveraging your knowledge, you can make your negotiations adaptable to evolving circumstances. It becomes easier to respond to twists and turns in the negotiation process because you understand how those changes will impact the market and your competitors.

Do Your Homework

Success in negotiations begins with thorough preparation: gather information, conduct research, and be well-informed about the negotiation context. Doing your homework will boost your confidence and ability at the negotiation table.

Creating a To-Do List for Negotiation

Organization is key to effective negotiation. Create a to-do list and checklist for your negotiations to avoid overlooking critical steps or details. A well-structured plan can significantly enhance your negotiating position.

Set Your Goals and Plan

Clearly defined goals are essential for productive negotiations. Set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals and develop a negotiation plan. This structured approach will help you stay focused and give you a better chance of achieving your goals.

Predict and Understand the Other Party's Wants and Needs

Understanding the other party’s motivations is a crucial aspect of negotiation. Anticipating and analyzing the wants and needs of the other party allows you to tailor your negotiation strategy for maximum effectiveness.

Practice with Simulations and What-Ifs

Practical experience is invaluable. Practice your negotiation skills through simulations and scenarios. These exercises will help you apply what you've learned and prepare for your real-world negotiation challenges.

Scenario: Maria owns a small bakery, "Sweet Delights," in her local town. She has been sourcing ingredients from a large supplier, but she wants to negotiate better terms to reduce costs and possibly extend her payment period.

Background: Maria took the Negotiation session of MOBI’s free online business course, so she understood the importance of preparation, researching the market, and empathizing with the other party.

Negotiation Strategy:

1. Preparation: Maria did thorough market research to understand the average costs of bakery ingredients from various suppliers. She also reviewed her business's financials to understand how much she could afford to spend and how different cost savings scenarios would impact her business. She found that if the supplier was not willing to modify the price or payment period, she could find a better deal with another supplier. She calculated even a 5% discount from her supplier would make a positive impact. An extended payment period would help her with her cash flow, but was not absolutely necessary. Any improvement here would be beneficial.

2. Understanding the Supplier's Perspective: Maria recognized that her supplier values long-term, consistent business relationships.

3. Setting Clear Goals: She aimed to negotiate a 10% reduction in ingredient costs and a 30-day extension on payment terms. In return, Maria would commit to remaining a loyal customer.

The Negotiation: Maria met with her supplier. She started by letting them know how much she appreciates their quality ingredients and reliable service. Then, she presented her proposal:

• She said a slight reduction in cost would significantly help her business, especially in a competitive bakery market with low profit margins.

• Maria said she researched other suppliers but preferred to continue with them, showing loyalty.

• She proposed a longer-term agreement in exchange for the cost reduction and extended payment terms.

Outcome: The supplier, understanding Maria's situation and valuing the long-term relationship, agreed to a 7% reduction in costs and a 15-day payment term extension. Both parties felt the negotiation was successful - Maria saved on costs and maintained her supplier relationship, while the supplier secured a longer-term commitment.

Learning and Application: Maria used the skills she learned in the MOBI Negotiation session effectively. She understood her supplier's position, set realistic goals, and communicated her needs clearly while showing a willingness to maintain their business relationship.

Negotiation is not just about words; it's about understanding the unspoken cues, actively listening, asking the right questions, and persuading effectively. Let’s review how to master the art of negotiation.

Understand Body Language

Non-verbal communication is a language of its own, and it plays a significant role in negotiation. Learning how to interpret body language cues can provide invaluable insights into your counterpart's thoughts and emotions during negotiations. Here's how to harness the power of non-verbal communication:

1. Observation: Observe the other person’s body language, including facial expressions, gestures, posture, and eye contact. These cues can reveal hidden feelings, such as confidence, hesitation, or discomfort.

2. Emotion Recognition: Practice recognizing common emotional signals in body language, such as crossed arms indicating defensiveness or leaning forward signaling interest. This skill will enable you to gauge their emotional state and adjust your approach accordingly.

3. Mirroring: This technique has you subtly copying your counterpart's body language. It can establish rapport and create a sense of connection.

Hone Your Listening Skills

Effective listening involves actively processing and understanding the underlying messages. Here's how to sharpen your listening skills:

1. Active Listening: Give your full attention to the other person. Avoid interrupting and don’t generate your response while they speak. Focus on understanding their perspective.

2. Ask Clarifying Questions: When someone shares information, ask clarifying questions to make sure you clearly understand them. This shows your genuine interest and commitment to their needs and concerns.

3. Empathetic Listening: Put yourself in their shoes. Understand their feelings, motivations, and interests. Done successfully, it can lead to more productive and collaborative negotiations.

Ask Both Open and Closed Questions

By knowing when to ask open-ended and closed-ended questions, you can steer the conversation in your desired direction. Here's how to use this technique effectively:

1. Open-Ended Questions: These questions encourage your counterpart to provide detailed responses. They often begin with words like "how," "what," or "why." Use open-ended questions to gather information, explore issues, and encourage your counterpart to share their thoughts and concerns.

2. Closed-Ended Questions: These questions typically get you brief, specific responses, often with a simple "yes" or "no." Use closed-ended questions to confirm facts, narrow down options, or guide the conversation toward specific points of agreement or disagreement.

3. Strategic Sequencing: Combine open and closed questions strategically. Start with open-ended questions to gather information broadly, and then use closed-ended questions to clarify details or secure commitments. This sequencing can help you control the flow of the negotiation.

Persuade Others

Persuasion techniques can help your negotiations and build stronger relationships. Here's how:

1. Establish Credibility: Share relevant expertise, provide evidence to support your claims, and demonstrate honesty and trustworthiness in your actions.

2. Build Rapport: Find common ground, acknowledge their perspective, and show genuine interest in their needs and concerns.

3. Use Persuasive Language: Emphasize how your proposal addresses the other party's interests and offers a win-win solution.

4. Overcome Objections: Address their objections with well-reasoned arguments and evidence to support your position.

Remain Professional

One of the most important skills for successful negotiations is managing your emotions and remaining professional in your conduct. There are several benefits:

1. Your counterpart will be able to listen to your points without being distracted by your emotions.

2. You will be able to communicate more clearly and remember your key points more easily if you are not in a heightened emotional state.

3. You will maintain a respectful dialogue with your counterpart that you could continue later if a break is needed. If negotiations become heated, you can suggest that the parties take a break and resume at another time.

4. You will build credibility for yourself and your business and establish positive business relationships, even if negotiations don’t always go your way.

In both successful and failed negotiations, it’s important to understand what led to the outcome. These exercises will help improve your win/loss record going forward. 

Analyze negotiations that didn't go as planned and determine the reasons behind their failures. The findings will give you a better understanding of common pitfalls to avoid and the importance of adaptability in negotiation.

Create Scenarios

Develop scenarios that mimic real-world situations. Then, apply the knowledge and techniques you've learned in a practice environment. Gain awareness of your own body language by practicing negotiation in front of a mirror, or record yourself on your phone to practice your verbal communication and responses to questions.

Get Feedback from Others

Constructive feedback will help you identify areas for improvement and refine your negotiation strategies.

Write Down Your Thoughts

Write about your experiences, successes, and challenges in negotiations. Done correctly, it will help facilitate continuous improvement.

To navigate the delicate world of negotiation, you must learn to speak the language. Below is a partial list of commonly used negotiation words and phrases.

• BATNA (Best Alternative to a Negotiated Agreement): Your best alternative course of action if negotiations fail to produce a satisfactory agreement.

• Concession: A compromise or a willingness to yield on a particular point or issue during negotiations.

• Counteroffer: A response to an initial offer, typically proposing different terms or conditions.

• Deadlock: A situation in which negotiations reach an impasse, meaning there is no further progress possible.

• Mediation: A process involving a neutral third party (mediator) who assists in facilitating communication and resolving disputes between negotiating parties.

• Negotiating Position: The demands or objectives that someone brings to the negotiation table.

• Ratification: The formal approval or acceptance of an agreement.

• Reservation Point: The lowest or highest acceptable outcome someone is willing to consider during negotiations.

• Terms and Conditions: The specific details, rules, and provisions that define the terms of an agreement.

• Trade-off: An exchange in which one person gives up something in exchange for concessions or benefits from the other party.

• Walk Away Point: The point at which someone is willing to abandon negotiations if their minimum requirements are not met.

• Non-Disclosure Agreement (NDA): A legal contract that requires parties involved in negotiations to keep certain information confidential.

• Due Diligence: The process of researching and verifying information about a potential business deal or agreement before finalizing negotiations.

THE TOP 10 DO'S

1. Your Homework: Always research the parties involved, market conditions, and any other relevant factors before going into a negotiation.
2. Set Clear Objectives: Know what you want to achieve in the negotiation. Having clear goals will guide your strategy and help you stay focused.
3. Listen Actively: Pay close attention to what the other party is saying. Active listening can provide insights into the other party’s priorities and concerns.
4. Be Willing to Compromise: Negotiations are about give and take. Know where you can be flexible and where you can't.
5. Use Open and Closed Questions: Use a mix of open-ended questions to gather information and closed questions to confirm specifics.
6. Pay Attention to Body Language: Non-verbal cues can provide valuable information about the other party's feelings and intentions.
7. Know Your BATNA (Best Alternative to a Negotiated Agreement): Be aware of your alternatives so you know when to walk away from a bad deal.
8. Maintain Professionalism: Always remain professional in your conduct, even if the negotiation becomes tense or heated.
9. Show Empathy: Try to understand the situation from the other party’s perspective. This can often reveal new ways to create a mutually beneficial agreement.
10. Follow Through: After an agreement is reached, make sure to fulfill your part of the bargain. Trust is crucial for any future negotiations with the same party.

If you are currently writing or have developed a business plan, consider taking a moment now to include any information about your business related to this session. As a reminder, MOBI’s free Business Plan Template and any worksheets, checklists, and templates from this course are available for you to download. Just visit the list of MOBI Resource Documents on the Resources & Tools page of our website.