Negotiating is one of the most fundamental skills in business and, truthfully, life. Some people have a knack for it. As for the rest of us, a little structure and a few concepts can go a long way. This article and it’s follow up will introduce you to the fundamentals of negotiating and give you some basic but essential tools for crafting effective deals.

Dispelling One Big Myth About Negotiations

One of the most pervasive myths of popular culture is that the best negotiators are bullies: conniving cutthroats who know how to back people into corners and twist their arms until they cry uncle.

When we think of “expert” negotiators, we think of Frank Underwood. Or Donald Trump. People who “win” negotiations – as if there were such a thing as winning a negotiation – by having the best cards or using questionable methods to create leverage.

Don’t believe it. It’s bullshit. The people who actually negotiate that way are good at two things: destroying their own reputations and leaving value on the table.

The best negotiators, people like Bill Clinton and Robert Ury, have one thing in common: high emotional intelligence. They are good at reading, understanding, and empathizing with others. They are skillful at seeing the world from their counterparts’ points of view, making it easier to draft offers that work for all involved.

They don’t squabble or fight for the biggest slice of the pie. They actively work to make a bigger pie so that everyone walks away happy. Because happy people lead to better reputations, more deals, and more value.

Justin Fischer is a video game producer and consultant. He is currently laying the groundwork to start his own studio and pitching in on Ray’s The Dead. His game credits include Disney Infinity, Avengers Initiative, Guilty Party. He earned an MBA from Northwestern University’s Kellogg School of Management.

He wants to make life better for his fellow game developers (and end crunch) through more effective processes. To that end, he applies the knowledge he acquired through his MBA to game development at his blog Breaking The Wheel.

He can be found on Twitter at @justin__fischer (two underscores!) and is always happy to talk shop!

The Pitfalls of Negotiations

Bad negotiation outcomes typically fall into one of four buckets:

  • Leaving money on the table: the two parties could have crafted a better deal that created more value for everyone involved if they had been more collaborative
  • The “Winner’s Curse”: one side paid too much or accepted too little, generally because of a lack of preparation
  • Walking away: one (or both) parties left the table out of hubris when they could have struck a valuable deal through collaboration
  • Agreement bias: one side (or both) took an offer that was worse than its alternative simply for the sake of making a deal

The Types of Negotiations

The first concept to understand is that there are two fundamental types of negotiations: distributive and integrative.

Distributive Negotiations

In a distributive negotiation, the parties vie for who can get the largest slice of the pie, typically in the form of price. Distributive negotiations are single-issue discussions, meaning they’re zero-sum games. If I get more, you get less.

Distributive negotiations are expedient, and they come naturally to people with forceful personalities. But while they’re simple and easy, they also typically leave someone dissatisfied.

Distributive negotiations are fine for one-off transactions. But in an ongoing relationship, they are a recipe for bad blood.

Distributive negotiations are fine for one-off transactions: buying a car or an appliance, for instance. But if the negotiation is the prelude to an ongoing relationship, distributive negotiations are a recipe for bad blood.

Integrative Negotiations

Alternatively, in an integrative negotiation, the parties attempt to optimally align their interests over an array of issues. I give a little on this issue which is important to you in exchange for you yielding ground on a separate issue that’s important to me.

It requires preparation, trust, finesse, and lots of talking. But it has the potential to create the most value for all involved and establish the foundation of an ongoing, harmonious relationship.

In gamer terms, integrative negotiations are analogous to character creation in an RPG. You have an array of attributes (issues in a negotiation), a desired character class (your priorities), and a finite pool of ability points to dole out (what value you capture, versus what value you yield).

You may opt for a jack-of-all trades or a balanced specialist, or you might go straight-up min/max. But you can’t have it all. Your intentions will dictate your priorities and trade-offs.

In an integrative negotiation, the parties attempt to align their interests over an array of issues. It has the potential to create the most value for all involved and establish an ongoing, harmonious relationship.

An Example of How an Integrative Negotiation Increases Value for All

Let’s imagine that I work for Sony, and you and I are negotiating the revenue split on a distribution deal to get your game on PSN. In a distributive negotiation, we’d just haggle over the money. Our only option would be to browbeat each until one of us capitulated.

I push by pointing out how many sales PSN gets and why you should be happy with any percentage. You might counter by saying you can get a better deal with Microsoft Game Studios.

But what if we added other issues to the table? What if we were also negotiating exclusivity, the length of that exclusivity, and advertising on PSN? Now we have four knobs we can play with. And those four knobs have different respective values to us:

  • The revenue split is important to all involved, but more important to you because it’s your primary – or only – source of cash flow
  • The exclusivity is important to me because exclusives makes the purchase of PS4 consoles more attractive, and more consoles in the market mean more software sales
  • The timing of the exclusivity is more important to me for the same reason
  • The advertising is more valuable to you because you don’t have the advertising economies of scale that I do

On and on, until you and I iterate to an agreement that offers the best balance of our needs.

Using these levers, you can now focus on crafting a deal that creates the most joint value gains instead of playing chicken on price.

I might offer a 60/40 split in your favor, 6-months of exclusivity, and a call out on the PlayStation store. You might counter by asking for an 80/20 split and featuring in SCEA’s newsletters and social media feeds, but offer 12-months exclusivity.

On and on, until you and I iterate to an agreement that offers the best balance of our needs.

Negotiation Terminology

BATNA

BATNA stands for “Best Alternative To Negotiated Agreement”. In short, your BATNA is what you do if this deal doesn’t happen. Your BATNA is your biggest source of power in a negotiation. It defines the boundaries for what you should be willing to accept, and gives you leverage to say no or push back on terms you find unacceptable.

It’s critical to remember that you ALWAYS have a BATNA. Always. Even if your only alternative to striking a deal is to sit in your bathtub in your underwear while you eat ice cream and cry, it’s still an alternative. Before you do anything else in a negotiation, identify your BATNA.

You ALWAYS have a BATNA. Always. Before you do anything else in a negotiation, identify your BATNA.

You can reveal your BATNA if you choose, but tread carefully. A strong BATNA can provide a powerful motivator for your counterpart to come to terms. But it can also avail her of information that can help her box you in.

Reservation Price

Your reservation price is your walk-away price. It’s your bottom line. If the deal goes past that point, you are better off walking away.

Your reservation price is related to, but not the same thing as, your BATNA. Your BATNA is what you do if you can’t make a deal. Your reservation price is the collection of terms past which your BATNA is the better option.

Never, ever, EVER reveal your reservation price to your counterpart. Ever. If your counterpart knows your reservation price, they can corner you on it.

An Example of a Reservation Price Calculation

Let’s say you are negotiating with a publisher on a deal for a game. Your BATNA might be a Kickstarter campaign, from which you are confident you can raise $200k. But, that doesn’t mean that your reservation price is $200k  To determine your reservation price, you also need to account for various idiosyncratic factors.

For example, this might be your analysis:

BATNA$200k
Publisher’s advertising muscle+$50k
Access to publisher’s QA department+$25k
Dealing with publisher’s bureaucracy and interference-$60k
Prestige of having a publishing deal+10k
Reservation Price$175k

Based on your analysis, if you cannot negotiate a deal worth at least $175k, you are better off going with Kickstarter.

If you can accurately estimate the respective values of these factors, great. If not, just spitball. Sometimes the best you can do is the best you can do.

Value != Money

Your reservation price doesn’t need to be purely monetary. In the PSN example above, you may decide that your reservation price is 50% of revenue, 18 months of exclusivity, and a banner in the PlayStation Store.

Never, everEVER reveal your reservation price to your counterpart. Ever. If your counterpart knows your reservation price, they can corner you on it.

You should also take the time to try to estimate your counterpart’s BATNA and reservation price. These estimates will involve a lot of research, guess work, assumptions, and no small amount of empathy. But they will provide you with some benchmarks that you can reference while offers and counter-offers are made.

Target Price

Your target price is the price you actually want. It’s the deal that you would call you parents to brag about.

Your target price should be ambitious, but not overly so. Shoot for an offer that is just past what you think your counterpart’s reservation price is.

Ambitious target prices are useful for a couple of related reasons. First, if you make the opening offer, an ambitious target price can trigger an anchoring bias in your counterpart. You will center the conversation in a range that is most favorable to you. This tactic is particularly effective if your counterpart has not taken the time to determine his or her own BATNA, or reservation or target prices.

Your target price should be ambitious, but not overly so. Shoot for an offer that is just past what you think your counterpart’s reservation price is.

Second, if your counterpart makes the opening offer and attempts to anchor you, knowing your own target price in advance can de-anchor you and help you make more aggressive counter-offers.

Zone Of Agreement

“Zone of Agreeement” is a fancy term for the range of deals that work for both you and your counterpart. Anything in this zone represents a favorable outcome to both parties, as it is better than your respective BATNAs, even if only slightly.

If you get an offer in this range, and your counterpart is not willing to move any further in your direction, you should take the deal. Even if it’s not as strong a deal as you wanted, it’s still better than your best alternative.

Negative Bargaining Zone

The Negative Bargaining Zone is the opposite of a zone of agreement. If there is no overlap between your reservation price and your counterpart’s, you have a negative bargaining zone. In other words, there is no deal you can strike that wouldn’t be worse than one of your respective BATNAs (or both).

The big risk of a negative bargaining zone is agreement bias. It can be tempting to violate your reservation price for the sake of making a deal.

The big risk of a negative bargaining zone is agreement bias. It can be tempting to violate your reservation price for the sake of making a deal. Don’t. If there’s no deal, there’s no deal. It’s okay. Remember, if you can’t at least get to your reservation price, you are better off taking your BATNA.

Bridging a Negative Bargaining Zone

There are two main ways to bridge a negative bargaining zone, short of violating your reservation price or convincing your counterpart to violate his. One is to add terms to the table. Can you offer the counterpart, or can he offer you, other considerations that would improve the deal?

Get creative. Equity, turnaround time on milestone payments, turnaround time on milestone feedback, a featured slot on the corporate website, etc. The only limit to the kinds of things you can offer or request are legality and good manners.

The other way to bridge a negative bargaining zone is with contingent contracts, particularly if you and your counterpart have differing opinions on how the future will play out.

Let’s say you and a publisher have different forecasts of sales of your game. Your forecast supports at 20/80 split in your favor, the publisher’s only supports a 40/60. You can bridge the negative bargaining zone by offering a contingent deal.

If the game only sells to the publisher’s forecast, revenue will be subject to a 40/60 split. However, if sales hit your forecast, the terms change to a 20/80, retroactively. Again, get creative if you think it can help secure a profitable deal.

Multi-Issue Offers

One of the essential elements of an integrative negotiation is the multi-issue offer: offers should always be made as a package of all of the issues on the table. Never, ever, fall for the trap of negotiating a single issue at a time. If you do that, the only thing you accomplish is turning what could have been an integrative negotiation into a painful series of distributive negotiations.

It’s okay (and sensible) to discuss issues one at a time, just don’t agree to terms. Offers and counter-offers should always be made as a package. If your counterpart makes a single issue offer, deflect. Say something to the effect of “That’s possible, but I would need to see that within a package of terms to agree to it.”

Positions vs. Interests

A position is what a party says it wants, and an interest is the underlying need that drives the position. For instance, a potential employer might demand you sign a non-compete clause as part of a job offer. That’s its position. The employer wants this clause because it doesn’t want its trade secrets traveling to competitors. That’s the interest.

A position is what a party says it wants, and an interest is the underlying need that drives the position.

In a negotiation, you are always trying to identify and service the interests, not the positions, of your counterpart to make a deal. Your counterpart’s position is a starting point, but it doesn’t have to be the end game if you can find a different way to satisfy her interests.

Where Do We Go From Here?

Now that we’ve covered the fundamentals, we have the building blocks of a game plan. I’ll walk you through the practical steps to conducting a successful negotiation in Part 2, so click here to read on!

In the meantime, if you are interested in learning more about negotiations and other soft-skills that can help you establish better deals, I have a killer resources page here that I personally curated.

Special thanks to Arnaud from Indie Gaming Montreal for catching an error in my BATNA calculation which I have fixed.

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