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In price negotiations, make them happy with less
March 25, 2020 Negotiation Research

Price negotiations and other distributive (single-issue) negotiations often seem to come with a built-in Catch-22: If you get a great deal on price, your relationship with your counterpart may suffer because they feel as if you’ve won and they’ve lost. In a new study, Singapore Management University professor Michael Schaerer and his colleagues identify a promising way to improve the other party’s satisfaction even when you’re the one who claims the most value: asking them to compare your offer to their reservation price, or the lowest amount they’d be willing to accept.

In one experiment, participants were asked to imagine they were selling a three-bedroom condo and negotiating the price with another participant. They were told their target price (their ideal outcome) was $580,000 and their reservation price was $320,000, corresponding to the best offer they’d received from another buyer. Depending on which condition they were assigned to, the participants were then given one of three offers for their condo, ostensibly from another participant:

  • Reservation-price-frame condition: “My offer is $450,000. How does this offer compare to the minimum price you are willing to accept?”
  • Target-frame condition: “My offer is $450,000. How does this offer compare to your target price?”
  • Control condition: “My offer is $450,000.”

The results showed that participants who were asked to compare the $450,000 offer to their reservation price made less ambitious counteroffers ($470,200, on average) as compared to those who were asked to compare the same price offer to their target price (a $522,717 counteroffer, on average) and those in the control condition (a $506,778 counteroffer, on average). Despite making lower counteroffers, participants who focused on their reservation price were more satisfied with their outcome than those in the target-frame and control conditions.

The results of this and the researchers’ other experiments suggest that in single-issue price negotiations, asking a counterpart to compare your offer to the minimum they are willing to accept can help you not only get a great deal but also ensure that the other party is satisfied with the end result. It seems an offer looks much more appealing when we compare it to the least we would accept than when we compare it to the most we hoped to achieve.

There’s an exception, though: When a seller is in a powerful negotiating position—for example, when they already have an offer close to their target price from another party, then reminding them of their reservation price is likely to backfire, Schaerer and colleagues found in another experiment. Participants reminded of their strong alternative made more ambitious counteroffers and were less satisfied with their outcome as compared to those reminded of their target and those in the control condition. So, when negotiating with someone who you believe has a strong BATNA, or best alternative to a negotiated agreement, it would be a mistake to remind them of this fact.

Source: “Win-Win in Distributive Negotiations: The Economic and Relational Benefits of Strategic Offer Framing,” by Michael Schaerer, Martin Schweinsberg, Nico Thornley, and Roderick I. Swaab. Journal of Experimental Social Psychology, 2019.

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