Win-win negotiations do not mean meeting at the middle
Consider this situation: You are an accomplished mathematics tutor with a proven pedagogy to teach the subject in a totally different way, and you have a good number of students. You have been approached by a tuition agency to offer your curriculum to their students. This is a good opportunity for you to expand your market and get greater social proof of your methodology. Let’s say for argument’s sake, you currently charge $100 per session per student and that your average class size is 11 students (you normally don’t start a class unless there are 8 students in it). The agency asked for your proposal and you decided that, since they would be handling the venue rental, the printing of materials, and the marketing, you decided to charge them $65 per student, provided that they did not charge anything less than $100 (so as not to cannibalise your business). In addition, you laid down a condition of minimum class size of 8 students. You figured that with this condition, the agency can earn a decent amount for your services; you will earn minimally $520 and they can earn minimally $280. When they responded to your proposal, they said everything was well and good but, “Can we discuss on the price? Can we do a per-session basis? And we are not sure about meeting the minimum 8 pax class size. Is there room for negotiation?”
Obviously, you could say no, and force them to either take the offer as it is, or drop it. In all honesty, if you don’t give them the option to negotiate, you will force them to seek someone else out; your competitor, perhaps. And that will stop you from testing out your market value and also expand your customer base. You also want greater social proof, so saying no would defeat the purpose. Hence, you should say “yes”.
But “yes” to what?
Regular readers to our blog will know that we advocate win-win negotiations. A “beggar-thy-neighbour” tactic is not sustainable, and you force them to take alternative steps that would preclude you. But what does win-win negotiation look like? Does it mean that you would have to give up more ground and meet in the middle? How sustainable is that? In reality, it is not.
Winner’s Curse and Buyer’s Regret
There are two cognitive biases we look out for in negotiation: Buyer’s Regret and Winner’s Curse. As the name implies, the Buyer’s Regret sets in when a buyer who may initially agree to a purchase, comes away regretting it. This will see the person cancelling on the agreement, sometimes forfeiting on certain deposits. Buyer’s Regret comes in when the situation is Lose-Win; that is, the buyer perceives that he is in a losing position in the agreement, and this is causing him a lot of cognitive dissonance. The only way to kill that dissonance is to cancel the agreement.
The Winner’s Curse is just the opposite. This is the dissonance that comes to a seller when he opens an offer and the buyer immediately pounces on it and agrees to the offer. This will cause the seller to second-guess his offer, thinking that the buyer knows something that the seller does not. It seems to suggest that there is more value in the object or service that is being sold than the seller is aware of, leading to a Win-Lose proposition. And just like the Buyer’s Regret, the seller might renege on the agreement to sell so that he sets aside the cognitive dissonance in his mind.
Both of these conditions are bad even when there is a negotiated agreement. Hence, when we work on win-win, we must strive for both parties to walk away smiling; we must strive to ensure there is no cognitive dissonance.
Zone of Possible Agreement (ZOPA)
So, what is the win-win situation for you as the mathematics tutor? In any negotiation, there will be a price floor (minimum amount acceptable) for the seller, and a price ceiling (maximum amount payable) for the buyer. Now, if the price floor is lower than the price ceiling (meaning the minimum amount to sell is lower the maximum amount to buy), there is what we call a positive zone of possible agreement, or ZOPA; and the final agreement will lie somewhere in this zone. However, if the price floor is higher than the price ceiling, no amount of negotiation will be possible to get to an agreement. That is called a negative ZOPA. Mind you, both parties will never reveal their side of the number, so the ZOPA needs to be worked out by either side based on best-case assumptions.
So, for you as the tutor, you would have to work out the ZOPA. What is your price floor? Obviously, your price floor will be the price that you absolutely cannot do the deal for. But that amount usually moves upwards, and is also dependent on what prices are currently being paid by your best customers. You obviously cannot give your best price to a new client, no matter what they promise. This will cause the dissonance we spoke about, and Winner’s Curse will set in. Hence, your price floor for this agreement will be somewhere between the best customer price (and let us say for argument sake, that price is $45 per student) and the price that you offered, $65. In absolute terms, since the other party has requested a per-session pricing, that would be between $360 and $520 per session (basis 8 students per class).
Next, you need to assess what is the other party’s price ceiling. You can do some back-of-the-envelope calculations to assess this. You estimate the party’s direct costs for offering this service and then you add a margin so that the person can make some money off this. For example, let’s say that rental and utilities will be about $33 per student (assume the rental and utilities is $12,000 per month. Assume there are 3 classrooms. And assume there are 20 learning days a month. And assume there are 6 students in each room, since they say they might not be able to commit to 8 pax per class) Add the price of printing and consumables in the classroom, that will be another $2 per student. So, the price per student would be $35. On the basis of 8 students per class, that would be $280 per student. Adding your cost into this cost, the total cost to the agency would be between $640 and $800. At $100 per student, and a class size of 8 students, the agency would not earn anything if you stuck to your quotation of $65. In fact, they will only earn $160 per session at your floor price of $360. Looking at this, even if you were to offer the agency your best customer price (which you know you cannot), the agency will in all intents and purposes, would not agree since there is very little margin for them.
The agency will therefore want you to lower your costs, requesting you to lower both your per student rate and the minimum number of students, converting that into a fixed per-session rate. If they can get you to accept, say, $42 per student, with minimum of 6 students in the class, making the per-session rate of $252, then the agency’s total cost would be $532 per session; and at $100 fee per student for basis 8 students, then they would make $268 per session.