Negotiating a deal? Don’t make this error
Think you’re a great negotiator? Chances are you do -- and you’re probably wrong. Or so says a study released last week.
That means you’re likely to overpay when buying a house, a car or items at a swap meet. And you’re likely to be underpaid, or at least earn less than you could in a new job, said Rick Larrick, associate professor of management at Duke University’s Fuqua School of Business and coauthor of the study.
“Even experienced negotiators are not immune,” said study coauthor George Wu, a professor at the University of Chicago’s Graduate School of Business. “People almost always underestimate” how far they can get the other side to go.
In a series of experiments, both buyers and sellers walked away from negotiations convinced that they’d won when their opponents in fact were willing to give considerably more. The results were consistent, even with graduate business students who had spent at least a decade in the workforce and had plenty of experience negotiating over houses, cars and jobs.
Negotiating skills may not matter too much when buying small things. But for big-ticket items, thousands of dollars can lie in the balance. So how can you be a better negotiator?
Know your alternatives.
Negotiators ought to be more aggressive and push harder for the best deal, Larrick said. What stops them is fear of having their opponent walk away. Usually, that’s a mistake that could be avoided by simply taking stock of your options, he added. Depending on the market, houses, cars and jobs could be in great supply -- or rare. How aggressively you negotiate should hinge on the alternatives, he said. If you’ve got lots of options, you shouldn’t worry about having one negotiation break down.
“The only time you should be concerned about the other side walking away is when you don’t have good alternatives,” he said. “If you’re buying a house, you should know if there is another one out there that you would be happy to buy if you couldn’t get this one at a certain price. If there is, you can make the other side sweat.”
On the other hand, if you’re unemployed and employers are not beating down your door, you might not want to push your luck -- but you also don’t want to make that your pattern.
“If you are in a situation where there are not good alternatives, you may leave money on the table this time,” Larrick said. “But there is no reason to think you couldn’t do better in the future.”
Establish the product’s value.
Cars: It’s pretty easy to establish the value of an automobile by searching on the Internet. Kelley Blue Book ( www.kbb.com), for example, offers three prices for new cars: the manufacturer’s list or sticker price, the invoice price paid by the dealer, and the market price -- the average amount paid by people in your area.
The market price is useful because it takes into account supply and demand, said Robyn Eckard, a spokeswoman for Kelley Blue Book in Irvine.
“Even though the Mini Cooper is listed at $20,000, it’s in high demand and low supply so people are paying $23,000,” she said. “The Chrysler Sebring lists for $27,000, but people pay $24,000.”
A car-buying negotiation typically involves three things: the purchase price, the interest rate on your car loan and how much you’ll get for your trade-in. Eckard advises negotiating each component separately.
You can check with banks, credit unions and manufacturer websites to learn what interest rates are available. You can learn the value of your old car from auto-pricing websites. The only time you should have the dealer finance the purchase or buy your old car is when you’re certain you can’t do better elsewhere.
Other websites that provide car price data include Cars.com, ConsumerReports.org and Edmunds.com.
Houses: It’s tougher to establish the value of a house because they’re not standard. The price of a home can vary based on the neighborhood; the size; the number of bedrooms, bathrooms and fireplaces; the decorating, the yard; and hundreds of other hard-to-quantify extras. Still, a good real estate agent should be able to help you get a handle on value by showing you the sales prices of similar homes, said Fran Vernon with Dilbeck Realtors in La Canada.
If you’re selling, Vernon suggests that you ask three agents to provide a market evaluation of your home. The estimates are sure to be different, she said, but they’re likely to fall into a range. The next step is to get in the car for a closer view.
“Drive around, look at open houses. Ask your Realtor to show you the competition,” Vernon said. “If you are going to ask $1 million, you should look at everything in that range and know what else buyers interested in your house might be seeing.”
Then set an asking price. Buyers should do the same type of research before making an offer, Vernon said.
Jobs: Establishing the value of your work can be especially tricky. Websites such as Salary.com can provide a glimpse of what similar positions pay. You also can look at job postings and talk to people who work in similar jobs at the company you want to work for and its competitors. That’s likely to provide a fairly accurate salary range.
But when negotiating you have to be realistic about supply and demand, said Bill Coleman, senior vice president of Salary.com.
“It comes down to an issue of leverage,” he said. “When there are more openings than candidates, the candidates win. When there are more candidates than openings, the companies win.”
During the late ‘90s, for example, salary surveys couldn’t keep up with reality because there was such heavy demand for tech-savvy people that companies would at times pay $20,000, $30,000 or even $40,000 more than the norm for a candidate with the right skills. A few years later, the trend was reversed and a job that would normally pay $50,000 could often be filled by someone happy to earn $45,000.
Know your priorities.
Negotiations often have many moving parts. Think through what terms might be crucial to you and look at those when offers are relatively similar -- or when you think you can’t do better with the bottom line, Dilbeck’s Vernon advises.
For instance, a buyer who is willing to close a home purchase quickly -- or delay because that suits the seller’s needs -- can rise above other buyers offering a similar price.
A manager may be constrained by office norms or policy from offering you the salary you want but may be able to offer you a flexible schedule or extra vacation time, Coleman said.
“There are a lot of things you could be negotiating for other than the base pay,” he said. “You can negotiate for a bonus, for extra time off, for a flexible schedule.”
When a negotiation hits a wall -- the employer says it can’t go any higher on salary -- it’s a great time to bring up these other issues that might make you close the deal.
“Sometimes people get so caught up in the negotiating that they forget what the point is -- that’s having a career and a life that you like,” he said. “It’s not just about money.”
Don’t get cocky.
Even after you complete a deal, you might want to do some post-mortem second-guessing, Larrick said. The reason: Most people walk away believing they were the winner when they weren’t. If there’s no reality check, they’re likely to repeat their mistakes. Few people do it because no one wants to admit they were wrong. But you would be wise to consider whether the deal you got was a good one, Larrick said.
“The more confident you are that you walked away a winner, the more likely you are to handle your next negotiation like your last,” he said. “Don’t be smug.”
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