Bargaining

Bargaining is a process where offers and counteroffers are made until both parties reach an agreement. A common bargaining strategy is to ask for more than you want, then allow the other side to bargain you down.

For example, if you were selling a home, and you knew your home was worth $400,000, but wanted $425,000, you might list the house for sale at $450,000. Then, when negotiating with potential home buyers, they might say, "$450,000? The house is only worth 400," which allows you to say, "OK, how about I come down off of the price to 440?" To which they might reply, "440 is still way too high; we're not going to pay a penny over 410," which then allows you to counter with, "I can come down another $5000 to 435, but that's already costing me $15,000 off of what I wanted for the house." To which they would reply, "We're not going to overpay for a house like this, but we'd be willing to come up to 415." To which you might reply, "415? No way, I can't sell this for less than 430 and still be able to live with myself." To which they might say, "OK, OK, how about 425, would you accept that?" at which point you might say, "Well, I'm $25,000 in the hole, but yeah, I guess I'll take what I can get."

Agreeing to sell your house for $425,000 is to you $25,000 more than your house was worth, but to them, it was $25,000 less than the original price. As a result, both parties walk away from the deal happy.

Whenever we strike a deal with someone, we should aim for a win-win where both parties are happy with the outcome. As everyone likes to get a good deal, and people feel like they are getting a good deal when they pay less than the listed price, it is in everyone's best interest if there is wiggle-room in the original price.

Imagine a situation where you are out to buy a used car. The listed price for the car is $10,000, but you negotiated the dealer down to $5000. The question now is, did you actually get a good deal, or did the dealer list the price for double what they actually wanted? Further, did the dealer actually only want $2500, and quadrupled the listing price, knowing that customers would be happy getting half-off?

Fortunately, today we can look online for the typical price of a car based on make, model, year, and mileage, such that we would have a good idea if we were paying half of what the car was worth, or twice what the car was worth. Housing prices can also be found online, based on location, number of bedrooms, bathrooms, and square footage, so that our prospective homeowner in the earlier example could have known whether the house was a steal at $425,000, or if they overpaid by $25,000.

Even if you start a negotiation with a clear idea of how much you should spend, the other party may still try to negotiate you to a higher price. This falls into the category of "bluffing," as the seller might bluff that they will walk away from a deal, claiming their listed price is the final price, when in fact it is not.

If in our example, you were to say to the car dealer, "I looked online and this car is only worth $2500, so that's all I'm willing to pay," the dealer could bluff by saying, "I don't know what you saw online, but it wasn't for this car, and this car is listed at $10,000. I can bring it down to $8500, but that's the lowest I can go."

At this point, you might call the dealer's bluff by saying, "You and I both know that the price I found online is accurate, but I can see you want more than that. I'll be willing to pay you $2750." If the dealer replied, "Nope, I'm not selling it for less than $8,500," then you might call their bluff again with, "Alright, I can come up to $3000, and can sweeten the deal by paying in cash. How's that sound?"

Determining whether someone is bluffing largely depends on someone's body language, and while there are no foolproof tell-tale signs, any change in body language might indicate that they are starting to get worn down. For example, if they had their arms crossed and their body turned away from you when they said they were not coming down off of $10,000, but then, when you offered $2750 they uncrossed their arms, and at $3000, they turned their body towards you, that would indicate that they were becoming increasingly interested in making a deal.

You might then attempt to "seal the deal" by taking out a checkbook, and writing a check for $3000, and then offering it to them, saying, "Look, here's $3000 cash, $500 over the price I found online. What do you say?" If the dealer takes your offer, then you successfully called their bluff, as it turned out they were not willing to walk away from the deal just because it was less than the listed price.

In situations where there is little to no understanding as to the value of something - as might be the case for a piece of art - it's very difficult to know where to start bargaining, as you don't know if you are above or below the price someone might be willing to pay. Art auctions get around this problem by starting at a low price, and then letting competition increase the price until no one is willing to pay more.

Outside of auctions, starting at a low price is not a good idea - as people will always want a price lower than the listed price - but if you don't know where to start, and the negotiation has to start somewhere, this creates a conundrum: How can you pick a price to start a negotiation if you don't know where you should start?

The general approach to resolving this conundrum is simple, though it can be a bit awkward - never throw out the first price. Even if it takes quite a bit of conversational maneuvering, to the best of your ability you should encourage the other person to name their price before you name yours. Unfortunately, if they also employ the same strategy, you both might go around and around in circles saying, "What do you think the price is?" which gets the response of, "I'm not sure, what do you think?" to which is responded, "I'm more interested in what you think?"

Though this might sound absurd, playing this game can result in your getting far more than you thought was possible, as you only know what you would like to get paid, not what someone else is willing to pay. When they throw out their number first, you then have a starting point from which you can anchor the negotiation. From that point you simply ask for more than they offered - no matter how much their offer exceeds your expectations - and bargaining proceeds as usual.

Bargaining is a game that is as old as civilization itself, and is at the heart of just about every type of negotiation. Learning to play the game often starts with a leap of faith, but once you get the hang of it, you may never again believe that the initial offer is the final offer - which could be argued is the most important lesson in all of negotiation.