The art of negotiation requires that people know the definitions of some confusing terms. Reservation price, BATNA, surplus, demand, ZOPA – these words can easily overwhelm a new negotiator.
However, once you know the simple definitions of these not-so-simple words, you will be able to use them with ease and authority and apply their concepts to negotiate successfully.
Reservation Price Definition and Examples
Reservation price is the least favorable price at which a negotiation will be accepted. This price is always a numeric amount. Simply put, the reservation price is the lowest amount that a seller will accept for an agreement and the maximum amount a buyer will pay. This is also known as the “walk away” point.
For example, imagine that you are selling the house you purchased 15 years ago at $500,000. Your house is worth $1.5 million, but with the current state of the housing market and the demand for purchasing a house, you would be okay with selling your home for $1 million.
You meet with a prospective buyer, and they tell you that the highest they are willing to pay would be $1 million. This would be your reservation price. From this point, you can decide whether to sell your home to this buyer or wait for a higher offer.
Many people confuse reservation price with BATNA. BATNA stands for “best alternative to a negotiated agreement” and, unlike reservation price, it expresses a scenario rather than a number. BATNA answers the following question: “What will you do if you are unable to reach a negotiated agreement with your partner?” While the reservation price is dependent upon reaching a negotiation, the BATNA is a back-up plan in case negotiation fails.
Using the previous example, imagine that you are still selling your home worth $1.5 million. Your reservation price is $1 million, as it will be the lowest price you would accept from a buyer. However, a close relative is moving to your city from out of state and is looking for a place to live. She offers you $900,000 for your home, a little more than half of its current worth but nearly twice what you paid for it.
If you are unable to reach a negotiated agreement with an outside buyer, your BATNA would be selling your home to your relative. Your reservation price will remain the same and while you would not be able to sell your home at the desired price, you will still make money off the negotiation.
Often, reservation price and BATNA do not yield such a wide profit margin. Imagine you are selling a guitar online. You purchased the guitar five years ago for $500, and it is still in good condition. You decide to list the guitar for $350 and decide that your reservation price is $200.
A buyer contacts you after six months of waiting for a response. He offers you $150 for your guitar, which is lower than you’ll go. You negotiate for $200, but he refuses. You decide to wait for another offer to come along but inform the buyer that if no one gets back to you, he can have the guitar for $150. This buyer would be your BATNA.
Why Is Reservation Price Important?
Simply put, reservation price is important because it allows a negotiator to define their baseline. For consumers and sellers alike, reservation prices help us make rational, informed decisions during negotiations, ensuring that no shady deals or lowballing takes place. Reservation prices protect everyone during negotiations and enable appropriate discourse.
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