For Better Deals
The art of negotiation is an important skill in any business setting, and the use of a reservation point is one of the keys to success. A reservation point is the lowest point you are willing to accept for selling your product/service – we often call it your “least acceptable outcome”. Knowing how to use it effectively will help you get what you need in your next negotiation. It will also enable you to walk away from bad deals and exercise your BATNA.
This article will provide an overview of what a reservation point is and how to use it to get the best deals in any situation.
What Is The Reservation Point In A Negotiation?
The reservation point in a negotiation is the point at which a negotiator is no longer willing to make any further concessions and is prepared to walk away from the deal. It is the point at which the negotiator feels they have traded as much as they can, and any further concessions would be too costly.
This usually happens when there is an established highest price at which a customer is willing to purchase a product/service and the lowest price that a salesperson is willing to sell the product or service.
Why Is Reservation Point Important?
Having the confidence to walk away from a deal that doesn’t work for you is essential. Part of knowing when to walk away is understanding your reservation point.
Setting clear expectations about reservation points, specifically in relation to price/service offerings, is important for successful sales teams. Sales people need clear guidelines about how much leeway they’ve got when negotiating a deal.
How To Calculate A Reservation Price
In nearly every negotiation, a Best Alternative to a Negotiated Agreement (BATNA) is directly tied to a Reservation Price. Thinking through your BATNA and the trigger points is essential to knowing when it’s time to walk away from a deal and pursue your best alternative.
What Is A BATNA?
A Best Alternative to a Negotiated Agreement (BATNA) is the most favourable alternative course of action a negotiator can take if no agreement is reached or viable. It’s the minimum outcome you are willing to accept from a negotiation before you’ll walk away.
According to HBR/PoN, BATNA , there are four steps to developing your BATNA:
Step 1: List your alternatives. Think about all the alternatives available to you if the current negotiation ends in an impasse. What are your no-deal options?
Step 2: Evaluate your alternatives. Examine each option and calculate the value (financial and non-financial) of pursuing each one.
Step 3: Establish your BATNA. Choose a course of action that would have the highest expected value for you. This is your BATNA—the course you should pursue if the current negotiation fails.
Step 4: Calculate your reservation value. Now that you know your BATNA, calculate your reservation value (i.e. the lowest-valued deal you are willing to accept). If the value of the deal proposed to you is lower than your reservation value, you’ll be better off rejecting the offer and pursuing your BATNA. If the final offer is higher than your reservation value, you should accept it.
Note: The above 4 steps are a direct quote from the source material.
How To Calculate A Reservation Point
Clarity on your reservation point is essential for a salesperson to avoid two mistakes.
- Firstly, it ensures a salesperson avoids accepting a deal that is worse than the established least-acceptable-outcome for this deal.
- Secondly, with the right preparation, it ensures the sales person is mentally prepared to start signalling to the client that you’re reaching the end of the line.
Once a salesperson has identified their BATNA, they’re in a strong position to calculate a Reservation Point – this is a “walk-away” point in the upcoming negotiation. In a negotiation where multiple issues are at stake, a reservation point will include several variables, e.g. price, scope, contract duration, termination rights, etc.
The skill here is building reservation points that enable you to trade off variables with your counterparty. This enables them to get a win, and for you to achieve a deal that is much better than your reservation points.
Should You Reveal Your Reservation Point In Negotiation?
In short, no, never – you should not reveal your reservation point in negotiation.
As much as it can be tempting to be fully open and honest with a customer, salespeople really do need to be aware of the amount of information that is being shared with a potential prospect.
Revealing a Reservation Point within a negotiation is one of the biggest mistakes that a salesperson can make, as it leaves them wide open to having a weakened proposition exploited. It’s important for a salesperson to play their hand wisely. Under no circumstance should they give up this information when speaking with a customer.
What will become obvious to your customer, is that you’ve reached the limit of the negotiation, beyond which, you’ll walk away and exercise your BATNA. The skilled negotiator knows how to construct an effective deal that is nowhere near their reservation point, yet is still valuable to the customer.
Apply Your Reservation Technique To Your Negotiations
From Anchoring (insert link to Anchoring blog) to Concessions (link to Concessions blog) , there are many tactics which can be included in discussions in order to achieve the desired outcome.
The Reservation Point within negotiations is another element which can help you to achieve what you want out of your future negotiations. However, as we have seen in this article, you will need to have a clear understanding of your reservation point and BATNA before entering into any negotiation.
For more negotiation techniques and tips, read our advice section at Piscari.