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Why reserve price is crucial to negotiation

March 2, 2013

Woman analyzing data to determine reserve price

Have you ever bought or sold anything on eBay, the online auction site? If you have, you’ve encountered the term reserve price, which is the lowest price the seller will accept for an item—it is the dollar amount below which the seller will walk away from any deal (or the amount above which the bidder will not pay). Naturally, that price is not disclosed to bidders. Every negotiator should determine his or her reserve price in advance of any negotiation. Consider this example:

 Oscar and Janis are listing their business for sale with a business broker. As part of their discussions with the broker, they say, “Based on your assessment of the market and the appraised value of our business, we’d like you to list it at $795,000. However, just between you and us, we’ll entertain offers down to $725,000. That’s our reserve price; we are unwilling to sell below that amount.”

 Your reserve price is your walk-away price.

 The wise negotiator determines reserve price only after careful thought. Consider Oscar and Janis. They did not pull the number $725,000 out of a hat! Instead, that number resulted from a professional appraiser’s valuation of their business and the amount that the partners determined necessary to make the deal worthwhile to them. “If we can’t get at least $725,000,” Janis told Oscar, “we won’t have enough money to retire in the style we’d like. We’d be better off keeping and running the business.” Naturally, they will not disclose their reserve price to the other side.

Sellers aren’t the only ones who should know their reserve price; buyers should also have one in mind as they enter a negotiation. For example, if you are shopping for a house, you should have a dollar amount above which you will not pay. That’s your walk-away point.

 NEGOTIATING TIP: TRY TO LEARN THE OTHER SIDE’S RESERVE PRICE WITHOUT REVEALING YOUR OWN.

 If you can learn the other side’s reserve price—or approximate it—you’ll know how hard you can push without forcing that person to walk away.

Adapted from How to Become a Better Negotiator, Second Edition by Richard A. Luecke  and James G. Patterson.

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About The Author

Richard A. Luecke (Salem, MA) is a freelance business writer and publishing executive whose articles have been published by Oxford University Press, John Wiley & Sons, and Harvard Business School Press. He has negotiated over one hundred contracts with individuals, businesses, and non-business institutions. He is the author of The Manager’s Toolkit and The Entrepreneur’s Toolkit. James G. Patterson (Tuscon, AZ) is a training consultant who has taught leadership and communication skills for the U.S. Army Military Intelligence School.

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