Your reservation price is the least favourable point at which you will accept a deal.  The reservation price is derived from your BATNA,but it is not the same thing.

The BATNA is what you are going to do when you walk away from a deal.  The reservation price is the least favourable point at which you will accept a deal.  If you are a buyer, it is the maximum you will pay.  If you are a seller, it is the minimum you will accept. Theorists say that the BATNA and the reservation price can be the same thing only in purely economic negotiations.  I don’t think even that is quite true.  Theoretically you can’t walk away from a deal (BATNA) and accept it (reservation price) at the same time.  The reservation price in this instance must be at least one value unit above the BATNA.  There are other times when the gap between the two is more pronounced ie: when you don’t have a BATNA (BATNA = zero).

Colloquially, the reservation price is known as the “walkaway price” or “the bottom line.”  The reservation price operates in two ways:

• It prevents you accepting a deal that you should not accept, and
• It gives you a yardstick to measure how much the better the current deal is than your least favourable position.

In the textbooks, the BATNA gets more column inches than the reservation price.  The reservation price is seemingly cut and dried and commentators simply move on.  In my view, however, the reservation price is not only the least favourable point at which you will accept a deal:

• The reservation price is also the least favourable price you would accept if you knew you could not get more.

In reality, few people have perfect knowledge of whether the other side would have paid more, so most (but not all) negotiations are theoretically a less than perfect result.  Another practical point is that even if you do walk away, you may still be able to call the other party the next day and accept the offer.  That doesn’t happen in theoretical negotiations!

Reservation prices, like BATNAs, are two fold: there is a seller’s reservation price and a buyer’s:

• The supplier might go into a negotiation knowing that it will sell at a minimum of $5 a unit.
• The buyer might go into a negotiation knowing that it will buy at a maximum of $6 a unit.

Thus, there is a “zone of possible agreement” between $5 and $6 where a deal might be done.  This is why reservation prices are important – to find the zone of possible agreement.

You see the most obvious form of reservation price in house auctions – if the bidding doesn’t reach the reserve, the house is not sold (on the day, at least).  That is the vendor’s reserve I am talking about.  The bidders’ reservation prices, even on this the biggest purchase of most people’s lives, are often completely absent going into the auction.  Thus they get caught up in the heat of the moment, bidding far more than they were prepared to do at the outset.

Ascertaining the reservation price of the other side is certainly the fastest way to a concluded bargain.  This can often be done simply by engaging in pre-contractual conversation and listening very carefully to the conversations between the people on the other side.  There are three types of information that you can glean from the other side:

• Relational information – facts, beliefs and feelings about the relationship between the parties on the other side.
• Substantive information – facts, data and questions about the other side’s offer and reasoning behind it.
• Procedural information – open discussions about the negotiation process that helps to manage that process.

It has been said that negotiators faced with multiple sources of information simplify matters by allowing one reference point to dominate. [1]  That reference point is usually the reservation price. [2]  This is often in the face of other information that was more relevant such as new market information or comparable dealings.

The Effect of the First Offer

Many people believe that they should never make the first offer and name a price.  I think this ignores the anchoring power of the first offer.  The reservation price for most people is what they can afford, or what they are prepared to pay for the bargain.  When they receive the first offer, though, this information tends to “anchor” the price, with seemingly little regard for how outrageous the offer.  There is research that says that the other party may change its reservation price in the direction of that first offer, particularly if it was delivered credibly. [3]

The Aspiration Price

The “aspiration price” is the highest price that a party gives at least some possibility of the other side accepting.  Thus the buyer’s aspiration price is at least in some way guided by the buyer’s guess about the seller’s reservation price (the seller’s lowest price for the negotiation).  The range for each party is between their own reservation price and their own aspiration price.

If you knew the other side’s reservation price, you could make an offer equalling that price and incur the minimum risk. Conceivably, the reservation price could be worked out with mathematics and estimates, but that does not allow for the “humaneness” of negotiation. The best way is to engage with the other side at length with questions and see if you get some clues from that.  Few people disclose their reservation price for the simple reason that there would then be no reason for the other side to offer more.

How to Determine Your Reservation Price

The process is quite similar to the process for determining your BATNA:

• Whiteboard out your alternatives
• Evaluate your alternatives till you arrive at the best, most valuable alternative (your BATNA)
• Attempt to improve your BATNA
• Work out your reservation price from your BATNA.

The reservation price has to seriously consider the probabilities of each of the alternative courses of action actually occurring.

Conclusion

The BATNA is what you are going to do when you walk away from a deal.  The reservation price is the least favourable point at which you will accept a deal.  If you are a buyer, it is the maximum you will pay.  If you are a seller, it is the minimum you will accept.  The other side’s reservation price is rarely known, but one way of shifting it is by making a first offer that is in your favour.  No matter how high (or low), the first offer has the effect of anchoring negotiations, so long as there is some credibility attached to it.

[1] White, Valley, Bazerman, Neale and Peck (1994)

[2] Ibid

[3] Birnbaum, Coffey, Mellers, & Weiss, 1992; Birnbaum & Stegner, 1979