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December 4, 2018

What Is ZOPA Negotiation?

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Chip Tames

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A key element to mastering the art of negotiation is knowing the value of a deal and the limits of your interests. Going into an agreement, you should know how much you’re willing to sell a product for and the optimal terms that will benefit you or your company the most.

Negotiation science has developed several terms that define key concepts in determining the worth of the agreement and the ability of a negotiator to walk away from the table satisfied. One of these tools is known as the zone of possible agreement, or ZOPA. These negotiations are critical to the practice of negotiation, because they express the financial range in which the terms of an agreement can be reached.

 

The Definition of ZOPA Negotiation

ZOPA negotiation is concerned with the range in which deals can be made so both negotiating parties can leave the agreement satisfied. ZOPA is also referred to as the “bargaining range.”

For example, imagine you are selling your used car. You purchased your car for $25,000. You hope to sell your car for $18,000 but will go as low as $15,000. A buyer contacts you and explains that they have a budget of $17,000 to purchase a new car. The ZOPA would be between $15,000 and $17,000, as this range is above the seller’s lowest selling price and below the buyer’s highest purchasing price. Both parties will leave the deal satisfied if the car is sold within this range.

 

ZOPA Versus BATNA and Reservation Price

ZOPA can be easily confused with two other terms that describe the possible outcomes of a negotiation: BATNA and reservation price.

A reservation price is the lowest possible price a negotiator would feel comfortable selling goods and services for. It can also be the highest possible price a buyer would feel comfortable paying for a product or service. The reservation price is also known as the “walk away” point and is always expressed by a number. In the same example, if you are selling your car for $18,000 and you are willing to sell it for as low as $15,000, your reservation price would be $15,000. It is unlikely that you will sell your car to a buyer below that amount.

BATNA stands for the “best alternative to a negotiated agreement.” Unlike the reservation price, it is not expressed as a number but rather a scenario in which you settle for a “plan B.” Again, imagine that you are selling your car for $18,000, but will go as low as $15,000. Your younger sister has recently gotten her driver’s license and your parents are looking for a cheap used car to give her for her birthday.

Your parents tell you if you are unable to find a buyer, they could give you $10,000 for your car – lower than your reservation price and much lower than your selling price. If you are unable to find a buyer, your parents become your BATNA.

ZOPA is a different concept entirely. It explains the financial range at which an agreement can be met, and both parties can leave happy, neither a worst-case scenario nor absolute lowest selling point. ZOPA can work in tandem with these concepts, however. The reservation point can be the low or high end of the ZOPA range and can be used when determining if a BATNA is the best option to pursue.

 

Why Are ZOPA Negotiations Important?

ZOPA negotiations are not always as simple as the used car example. When entering a business negotiation, the reservation price of the opposite party is not always explicitly stated or shared beforehand.

A negotiator should always enter a deal knowing their own reservation price and the BATNA. That way, when a negotiator learns the reservation price of the opposite party, they can quickly calculate the ZOPA. From there, the negotiator can begin to sketch out the preliminary terms of the agreement and use collaborative techniques to close a deal.

However, it is possible that no ZOPA is present. For example, a negotiator can enter an agreement with a reservation price for selling their product is $15,000. During the negotiation, the negotiator can discover that the reservation price at which the opposite party would feel comfortable purchasing the product is only $10,000.

From there, the negotiator can try to negotiate with the opposite party to raise the price limit to $15,000. The opposite party will attempt to persuade the negotiator to drop the price to $10,000. Both parties are attempting to create a ZOPA, so they can reach a satisfactory negotiation.

ZOPA, BATNA, and reservation prices are all key concepts to mastering the art of negotiation. To hone these skills, a novice negotiator must familiarize him or herself with the terminology and best practices necessary to effectively close major deals.

 

To learn more about this practice, contact Shapiro Negotiations today to enroll in our negotiations training program.

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