What is Reservation Price?
Knowing your reservation price – the highest price you would pay in the negotiating scenario – can empower you to walk away from a bad deal and seek a better bargain.
In any negotiation, your best alternative to a negotiated agreement, or BATNA, is intimately tied to your reservation price. Determining your BATNA will help you know when it’s time to walk away and pursue your best alternative. BATNA assessment involves the following three steps:
- Identify all of the plausible alternatives you might pursue if you can’t reach a deal with the current party.
- Estimate the value associated with each alternative.
- Select the best alternative, which is your BATNA.
Once you identify your BATNA, you are in a position to calculate your reservation price, which is your walk-away point in the upcoming negotiation. In a price negotiation, this might be a particular number. In an integrative negotiation where multiple issues are at stake, your reservation price might be expressed as a package, such as the lowest salary, benefits, and responsibilities you’d accept to take a certain job.
Your knowledge of your reservation price will help you avoid two mistakes: (1) accepting a deal that’s worse than your BATNA or (2) rejecting a deal that’s better than your BATNA.
Furthermore, figuring out the other party’s reservation price is the key to knowing how far you can push them in price negotiations—or any business negotiation. Start by considering the other party’s BATNA: What will they do if they can’t close the sale with you?
Be aware, however, that even with preparation, you could unnecessarily lower you reservation price if you expect your counterpart to be a competitive negotiator. Research shows that people fall victim to a host of perceptual biases when assessing others. Therefore, be prepared to find out that your opponent is very different than you expected them to be – and perhaps less competitive than you expected.
Learn more and discover how to boost your power at the bargaining table in this free special report, BATNA Basics: Boost Your Power at the Bargaining Table, from Harvard Law School.
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