07 May 2012  Research & Ideas

The Art of Haggling

When teaching negotiation skills, many educators now focus almost exclusively on an interest-based approach in which both parties openly collaborate to find a mutually satisfying solution. Michael Wheeler argues that it's important for students to realize that there's also a time and place for old-school haggling.

 

Let's say a successful businessman is in the process of buying a lakeside cottage from the original owner. The prospective buyer makes a lowball offer. The owner counters with a high demand. Both parties chest their cards, each hoping the other will misplay his hand. After lots of back-and-forth posturing, they settle on a price each can live with, although both know that the deal is likely better for one side than the other.

"At some point, it still comes down to determining who gets which slice of the pie."

Now imagine the same property but a different process, one in which the parties openly reveal their own interests from the get-go. The seller learns that the buyer plans to use the cottage only in the summer, and in the course of negotiation agrees to look after the property in the off-season. Here both sides win: the seller gets a little extra cash and the opportunity to spend additional time in the cottage, and the buyer takes care of winter maintenance concerns. Win-win solutions like that could leave both parties better off than a straight cash deal.

In academic circles, the former approach is called distributive bargaining, while the latter approach is known as integrative bargaining. The debate over which type of negotiation strategy is better has been raging since the early 1980s, when two books came out focusing on opposite sides of the issue. In You Can Negotiate Anything, Herb Cohen made an old-school argument for a "more for me, less for you" style of bargaining, while in Getting to YES, Harvard Law School Professor Roger Fisher and Harvard Negotiation Project Senior Fellow William Ury advocated for an approach that can benefit both parties. Fisher and Ury's message took hold, given people's understandable frustration with unreasonable behavior and protracted disputes.

Integrative bargaining is the process that is emphasized in most professional schools. Rightly so, says Harvard Business School Professor of Management Practice Michael A. Wheeler, who notes that many situations that initially look like win-lose propositions may actually present opportunity for mutual gain. But while Wheeler supports the interest-based approach, he cautions that the approach has its limits. "It's unrealistic to imagine that pies can be infinitely expanded," he says. "At some point, it still comes down to determining who gets which slice of the pie."

The art of negotiation lies in simultaneously creating and claiming value, says Wheeler, who likens it to "riding two different horses at the same time." On the one hand, if we don't explore mutual interests, we may not create mutual value. But on the other hand, if we show our cards and the other side doesn't reciprocate, then we run the risk of losing the whole pot.

Some negotiation professors sidestep this dilemma, however, and only address the value-creation side of the question. Such teachers may want to see themselves as peacemakers rather than pit bull trainers, Wheeler says, explaining why the hard-boiled notion of "more for me, less for you" doesn't get any play in some classrooms.

"Likewise, I'm not interested in training a bunch of used-car salesmen," adds Wheeler, who teaches the second-year MBA elective Negotiation. "But I think we're obliged to give our students a realistic picture of how the world can sometimes work."

To be effective, he says, negotiators must be adept at both styles of negotiating. That doesn't need to mean going for the jugular, but it does require being prepared to deal with other people intent on dominating, and who refuse to engage in problem solving.

Skillful negotiation starts with having a clear sense of when to walk away, in order to avoid being browbeaten into accepting unreasonable terms, he explains. It also involves having a keen sense of where the other party will be left if you hold firm on your terms. Careful analysis may reveal that the other party needs the deal as much or more than you do. Then there are psychological factors to consider, like the power of working from one's own ideal number rather than getting anchored by the other side's demands.

In class, Wheeler reminds students of a core strategic choice: assessing when to focus on dividing the pie and when to focus on growing it. "Sometimes getting 70 percent of the small pie might be better than getting 50 percent of a marginally larger one," he says.

Wheeler also wants students to weigh the moral issues that negotiation inevitably raises. Acknowledging the distributive aspect of the process makes them confront the issue of fairness. "How much do we owe the other side?" he asks. "Is there an ironclad rule, or does it vary from case to case?"

Go back to the example of the two strangers negotiating the sale of the lakeside cottage. What if the current owner is putting it up for sale because he has lost his job, while the businessman just happens to be Bill Gates or Mark Zuckerberg? Scenarios like that spark spirited discussion in class. "Some students say 'buyer [and seller] beware,' while others say they'd be uncomfortable making a lopsided deal," Wheeler says. In each instance, he presses students to articulate their underlying principles.

Real-world negotiators face strategic and moral issues every time they go to the bargaining table. "In the long run, reputations matter," Wheeler says. "And what we think of ourselves when we look in the mirror may matter even more. When parties can get beyond mere haggling and are able to create tangible value, they may also be more inclined to reach outcomes that square with one another's personal values."

About the author

Katie Johnston is a writer based in Medford, Massachusetts.

Comments

    • Allan Cohen
    • Professor, Babson College

    The dilemma described, that revelaing interests can create more options, but that going first can leave one vulnerable, is the core of negotiations. But teaching about influence leads me to ask students to pay a lot of attention to HOW to counter a negotiator who tries to force you into a win lose posture. Since you can't easily know how much potential value can be created before exploring, it is critical to tune into the posture of the other, look for signs of attempted dominance, name it when it appears, make the case for a more collaborative approach -- and be prepared to be as tough as necessary when no reciprocity is forthcoming. That is negotiations sophistication.

     
     
     
    • Robert Akrong
    • President, HCT

    "What if the current owner is putting it up for sale because he has lost his job, while the businessman just happens to be Bill Gates or Mark Zuckerberg?" Does this question presuppose that in the real marketplace people go buying or selling with their identity written all over them? Or that people tend to wear their moral/fairness hat when they go shopping? May I suggest that you take a trip to a typical African market and experience a real-world, no-frills sell/buy negotiation taking place. I will recommend the Makola Market in Accra, Ghana. This is not to belittle this great and insightful article. I, however, feel that the insights of the author assume and apply the protocols of a very refined marketplace. You may be pleasantly surprised to experience the negotiation that occurs when a seller with a bowl of tomato (that will rot if not sold that day) meets a buyer who needs that tomato for her marriage to survive, where it is late and the market is closing for the day, and each senses the other's desperation.

     
     
     
    • Magid Mazen
    • Professor, suffolk University

    Thanks for the insightful article. Oftentimes, creating and finding value hinge on 'finding' value, and that may depend to a large extent on the way we structure negotiations. In a carpet shop in India, the seller tried all known tricks of the trade. I replied: "Give me a price that if beaten by another merchant in town (Madras, then), I'll consider that you are asking me not to come back." He tried to change the structure but I was sminlingly firm. I used a similar structure buying three cars. A recent sales manager in a Mass dealership commented: "You teach negotiation but you are not negotiating." Politely I responded that I am negotiating, but not haggling, the type he is trained to win. Sometimes, after a fair value has been found, post-settlement, settlement haggling begin. It is an intimate, intricate, intertwining process that worked for me in the old grand souks and bazaars of the world as well as car dealerships in Massachusetts .

     
     
     
    • Thomas McDonald
    • V.P., BPS

    Many years ago I read the novel "The Truth Machine" by James Halperin. The premise is that a 100% effective lie detector is developed, eventually miniaturized, and worn like a ring. A red light indicates a lie and green light for truth. They become ubiquitous in society and it becomes pointless to lie about anything.

    The book focuses on how everything in society shifts as a result of everyone always telling the truth. One of the memorable points for me was that business negotiations flip. On the outset, the seller reveals the absolutely lowest price they can sell an item/service and the buyer reveals the most they're willing to pay. They split the difference for the final price and everyone benefits.

    Now all we need it to get everyone to always tell the truth. Simple.

     
     
     
    • Pankaj Sahai
    • Enterprise Consultant & Coach, Author: Smooth Ride To Venture Capital

    Thought provoking article. I believe that there is no good or bad style, just ethical or unethical people.

    How you negotiate depends on your market leverage and your clarity on what is the Value to you of the product/issue under negotiation, and the reasons why you attribute that particular value. In a depressed real-estate market, for example, a cash rich buyer will have all the leverage to do the deal on his terms and, hence, will have no incentive use the distributive bargaining negotiating style. Also, the perception of Value varies subjectively. In the same market conditions, if the seller was someone like, say, Zuckerberg, a star-struck buyer may be willing to pay more and explore options, leading him to adopt a more flexible, distributive deal making approach. Same deal, different styles.

    Also, "expanding the pie" negotiating approach works best in cases where there is a continuing relationship between the parties; in one off transactions it has much less relevance. In Prof. Magid Mazen's example above, if the intention was to have a regular source of good quality carpets which could be traded for a profit in the US, then the value of the continuing relationship with the carpet dealer in Madras would have to be factored in while negotiating the price....one would necessarily have to protect the interests of the Madras trader in order to protect one's value, hence one would need to use the distributive style negotiation to secure the deal.

    This negotiating style or that, the deal making process must, I believe, should be ethical and should leave the other party (without market leverage) satisfied and on an even keel. Reminds me of a quote by J. Paul Getty, which sums up his view on how to negotiate : " My father said: You must never make all the money in a deal. Let the other fellow make some money too, because if you have a reputation of always making all the money, you won't won't have many deals."

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Haggling by buyer presupposes thar the price tagged by the seller to the item being exchanged is inflated. The vice versa is the haggling by the seller considering the price being offered by the buyer is low. For a deal to mature both the seller and the buyer have to make adjustments in such a way that both are satisfied that there is no loss to either. Once that happens, haggling halts. Fixation of ideal price depends on many factors. When a seller is in dire need of funds, he is prepared to reduce or even totally shed his profit margin creating a win scenario for the buyer. He has to dance to the tune of the buyer as there is little choice. Then, there is no scope for haggling. Haggling is very common when sale/purchase transactions take place in unorganised markets. The sellers are pretty sure that the buyer will do his best for getting the final price reduced considerably and, therefore, in the beginning itself quote a cost much more than what is reasonable. The gullible are duped thogh feel satisfied that they paid only 40-50 percent of what was demanded. At that stage the seller is satified that he could 'dupe' the buyer by selling the item at a cost higher than what it was- may be just 25% or so of what was originally sought. However, as soon the buyer learns of the deceit, reputation of the seller suffers and people shy away from dealing with him. With this backdrop, creating a win-win situation is ideal though in reality even then one amongst the buyer and the seller will be at an advatageous position but not of a level which could cause pain/discomfort to him at the time of the deal or therafter.

     
     
     
    • Prof S P Singh
    • Professof & Director, Royal Group of Institutions,Guwahati,India

    What a paper,very systematically written with conclusive examples.Success in every business depends on successful negotiations and success of negotiation depends on reputation.Every company and every person should understand this to become successful in life. Prof.S.P.Singh,PhD

     
     
     
    • Ankur Sharma
    • Product Manager, ESPN

    Very Insightful article on negotiations. It is indeed a skill which is yet to be taught in Indian B-Schools, yet highly essential, considering that's what real job (and life) is made up of.

     
     
     
    • sani
    • Manager, CS CDC

    "FACE "value Vs. "Fact" value

    At time , when "Face" value over take" Fact " value , hard-liners appeared, they think themselves as warrior , while disagreed soft-liner approach , because it make them look like shopkeepers( beg you for mercy to sell ) . So organisation end up lost "benefits" because boss say so cannot changed.

    The distribution of a common territory or the conditions under which two sides can benefit will only be achieved with Integrative bargaining, which have economic logic (true fact) drives the outcome for both sides benefit in mind. In the contrary, with "face" value, we tend to process with distributive bargaining because I am the boss syndrome is much in place when people practice "Face" value . As the result only one party's gain ,and the other party's loss. But, if we can look around we see more leader practice "Face value " than "Fact value" at work .

    Are you're the "Face" practitioner or "Fact" practitioner? Perhaps as Katie Johnston suggested ,it time we practice the The Art of Haggling?

     
     
     
    • Victor Ng
    • Proprietor, Law Firm

    In my line of work when negotiating contracts, I always adopt a mutual interest/value approach. Thank God, the lawyers I deal with know their work and normally are understanding of each party's interest and strive to strike a balance instead of forcing a lopsided deal so that takes alot of the hardwork out of the process of negotiation. When it comes to technical issues, it's always best left to the professionals. Sometimes, the other party don't care about a client's interest because they think they can arm-wrestle with you thinking they have an upper hand (it's a seller's market, if you don't buy from me, there are many more lying in wait). The client facing a lopsided term in the contract may be hard pressed to accept it because he is getting a good deal buying below market price. The issue faced by either party is always how badly do you want to conclude the deal. Are you going to focus on the big picture and accept a little risk or inconvenience?

    On an economic level, whether as a consumer or a producer/seller, I believe that our powers of negotiation on the price are very much restricted and tied to market forces. A simple factor would be supply and demand. Prices of real estate in South East Asia have grown to double and even triple in just the past few years. When subprime kicked in, who are we to say that our house is worth much more than what others are willing to pay when all the houses around you are being auctioned off at such low prices? We are just a tiny drop in the ocean of masses so who are we alone to control how the market moves?

    On the point of morality, if you are a producer and through new tech you are able to produce something for half the cost now, will you cut your product price to half? If you are a consumer knowing that the seller has a profit margin of 50%, do you think you are able get the seller to give a 40% discount because you think it's only fair but all other sellers in general charge the same price? As bleak as it may sound, we are at the mercy of monopolistic markets. And only in a truly open market, we see the water finding its level and the fittest survive and grow their market share. They who can produce good quality products at a lower price than the competitors wins. Of course not forgetting clever tools like branding and advertising that influences consumer behaviour. Let's face it, all producers who are in it for the money have the objective of maximising profits and minimising costs.

    As a consumer, we can only attempt to level the playing field by doing the bare minimal. If you are to buy a carpet, you would as measure of prudence survey the locality for the average prices and go to the one with the lowest price, if quality is equal among all. But I doubt you'll be able to get the vendor to sell you substantially lower than what others are selling. Neither do I think the seller would offer to sell you substantially lower than what others are selling unless there are exceptional factors like tomatoes that are rotting or products being phased out or getting outdated.

     
     
     
    • Matthew Brandt
    • Founder, MB Brandt Consulting

    It always scares me when I read articles like this. After dealing with the Chinese for more than twenty years now and living in China for the better part of the last ten years (and commuting for 12 before that), I cringe to think how badly this win-win strategy works in much of the real world.

    I love the strategy personally, but have witnessed, and suffered, countless occasions where "they" win and "we" lose.

    I was part of a five person panel a few years ago, invited by Wharton Business school to speak in Shanghai to a group of their Fellows. Part of the session involved a two hour 'mock negotiation' with the Chinese EMBA students at CEIBS. It was a debacle.

    The West needs VERY DIFFERENT rules when dealing with Chinese (who basis training is The Art of War and basic thrust is around deception and a "kill or be killed" mentality. I wish it weren't so, but feel very strongly that it is.

    I'm considering writing a book called "Cheat, retreat, and Cheat again," which is how the CIA characterized Chinese / Taiwanese behavior in studies from the 40s and 50s. Not much has changed, in my opinion, except in small circles (PE) where incentives and disincentives are aligned differently than for other business models.

     
     
     
    • Anonymous

    "....underlying principles" ".....reputations matter"

    decency....integrity...

    Ah, t'were it so.

     
     
     
    • JT
    • Unemployed

    I will approach the question of distributive or integrative form of negotiation technique from a simple perspective of 'will I see the person again?'. If it is a one-off transaction, the approach is more likely to be haggling for the best possible price. If it is a long-term partnership, value creation approach may benefit beyond the deal that is currently being negotiated.

    In the example in the article of buying the house at the lakeside, it does not matter if the buyer is some billionaire and the seller is some pauper. It is a one-off transaction, the seller has a reason to sell and the buyer has a reason to buy. If the billionaire wants to be charitable, there are ways and means for him to redistribute his wealth. From my perspective, a transaction of such nature is not the right place for such charity.

    Matthew Brandt mentioned interesting experiences of dealing with mainland Chinese. I will like to say that my experience is mixed. They are cut-throat negotiators and they are long-term 'guan xi' builders. I happened to be working on long-term contracts during my stint there. The hard haggling will eventually give way to long-term relationship considerations. There is always a walk away point and nobody wants to get to that point. I have to say that I had more demanding negotiators from Korea than the Chinese. The Koreans can be even more hardball at the negotiation table. We could not meet even somewhere in the middle as the middle ground put us in such a compromised position. We had to walk away.

    Lastly, I won't approach a one-off transaction looking to build a long-term relationship and I won't approach a long-term contract trying to squeeze out every single drop, hoping that I won't see the guy across the table again.

     
     
     
    • Adjoa Acquaah-Harrison
    • Founding Principal, WingSpan Philanthropy Advisors, LLC (Ghana)

    This is a wonderful article on a subject I grew up with - Haggling! An African child understands haggling as a natural bargaining process for bringing home a bigger slice of the bounty from the market. Somehow, calling haggling "negotiation" adds a Western patina to the process. Haggling in the African context is an art form that sometimes looks like the parties are in a screaming match, each calling the other names like 'thief, highway robber," and if the buyer happens to be a woman to a male seller, she might even pull a womanly wile and expose him as a "woman-cheater!" Body languages, fingerpointing, teeth-sucking, pretent departures from the scene, knowing the buyer will worm his way back and adjust his firm stance on the price, all add to the comedy of haggling. Each party tries to suck in a bystander, a passer-by or two, sometimes other vendors might pour out of their stalls to help the process a long; just know that the audience involvement also has to do with timing and entertainment factor. At the core of all this pomp and haggling circumstance, there exists an unspoken agreement between prospective buyer and seller that this is all fun and games. What is a purchase without haggling in most African markets? In fact, it might just be UnAfrican to just pay for an item without enjoying a bit of theatre, to create a story that could be told about the purchased item which becomes a conversation piece in one's home. I have definitely enjoyed this article for the instances where I have haggled at Makola market and the Accra Arts Center in Ghana and collected some wonderful pieces of artifacts along with the satisfaction that only an amateur actress could enjoy on a temporary stage. Thank you

     
     
     
    • D Ingerson
    • Accountant

    Thank you for this article. I read Cohen's book a while ago and thought it a rather dog eat dog style. I figured if that's the negotiation world then I better understand how to get all I can get. Then I realized the "real world". In some circles Cohen's arguments are probably true but in the majority of cases I've recognized that the majority of people want to be fair and reasonable and measured in their negotiations. Provided both parties have something the other wants to some degree reasonably equal terms can be negotiated based on fairness and equality. I'm certainly not naive but Cohen is an extremist and seems to write/negotiate on the margins of society while the rest of us negotiate in the middle exactly where most of us live.

     
     
     
    • Abdulla Al Babul
    • Student MBA (HRM) Program & Batch Representative, Bangladesh University of Professionals

    Thanks for the insightful article. It will be helpful for getting the solution on integrative&distributive bargaining from here.