The zone of possible agreement (“ZOPA”) is the “contract zone”  – the place where you can get the deal that you wanted – at least the deal that you would be happy with.

The ZOPA is the third of the first three key concepts in negotiation, the first two being the best alternative to a negotiated agreement (“BATNA“) and the reservation price.

• The ZOPA is the area between your BATNA and your reservation price on the one hand and the other party’s BATNA and reservation price on the other where a deal can be done that potentially satisfies both parties.

In essence, when there is an overlap, a deal can be done.  When there is no overlap, no amount of negotiating is going to result in a deal.  The ZOPA is the common ground within which the parties are able to reach an agreement.

For example, if you wanted to improve your company’s profitability prior to a capital raising or business exit, ideally you might want to buy product at $5 a unit (your aspiration price), but the top price you would pay is $5.75 a unit (your reservation price).  Your supplier might want to sell you product at $6 a unit (the supplier’s aspiration price), but would go as low as $5.25 a unit before walking away (the supplier’s reservation price).  In this example, the ZOPA is between $5.25 and $5.75 a unit.  Any agreement within this range potentially satisfies both parties.

It is here again that knowledge of the other side’s reservation price produces a commercial advantage.  Short of industrial espionage, how would you find this out?  I often tell people it is sometimes quite easy – just pick up the phone and call one of your competitors – sometimes they just tell you what they are paying to a supplier.  It’s worth a phone call, especially if the product you are buying is not particularly important in the overall pricing structure between competitors.

If, however, your reservation price is $5 a unit and your supplier’s reservation price is $6 a unit, there is no ZOPA and thus no amount of negotiating is going to get you a deal (when everything else is equal).  This is particularly so in distributive negotiations. If there is no ZOPA, you need to walk away.

It is about here that most people realise the importance of either knowing or guessing the other side’s BATNA and reservation price.  If the ZOPA is large, knowing the other side’s reservation price enables you to pitch an offer just near it, knowing that they should accept it.

How do You Find the ZOPA?

The ZOPA is the zone between the parties’ respective BATNAs and reservation prices, but the problem is most people don’t reveal their BATNAs and reservation prices.  So how do you find the ZOPA?

Usually the only way to find the ZOPA is usually through information gathering and/or sharing.  In this regard, first principles dictate that:

• The BATNA is the best course of action if an agreement cannot be reached.
• The reservation price is the walkaway price or the bottom line.
• To get to any sort of ZOPA, you need to at least know your own BATNA and reservation price.
• Then the work begins on finding out the other side’s BATNA and reservation price, or guessing it.

Co-operation in finding a ZOPA is more common in integrative negotiations than distributive negotiations. This is made more difficult by the fact that in a lot of negotiations, if the reservation price or BATNA is disclosed at all, people pretend to the other side that their reservation price is higher or lower than it really is, or that their BATNA is stronger than it really is.  The difficulty here, though, is that such pretence, if believed by the other side, might narrow the apparent ZOPA or reduce it to zero or less, whereas in fact a ZOPA did exist.

ZOPAs in Distributive Negotiations and Integrative Negotiations

The ZOPA is more narrow in a distributive negotiation than it is in an integrative negotiation.   In a distributive negotiation, the parties are competing for a greater share of a fixed amount.  If you can work out the other party’s BATNA and reservation price, you can claim more value in a simple distributive negotiation.  Further, if you can convince the other side that your BATNA and reservation price is very close to theirs, then you can claim more value.

In an integrative negotiation, however, there is room for enlarging the amount by creating value and doing trades.

The Importance of Superior Information

The number of people that walk into an important negotiation with little or no information about the other side never ceases to amaze me.  What you can learn in a couple of hours from Google could be worth millions of dollars when applied correctly.  You at least need superior information on:

• The product
• The market
• The buyers and sellers in this negotiation and in the sub-sector
• Economic conditions in general and in this sub-sector.

I don’t mean just collecting newspaper clippings (or their modern day electronic equivalent).  I am talking about reverse engineering the other side’s costs, knowing their current position vis a vis their competitors and even knowing the other side’s principle negotiator’s schooling, family, career details and hobbies (someone whose hobby is extreme skiing is more likely to take risks than someone whose hobbies are listed as “gardening.”).   If you know the other side’s manufacturing and marketing costs, you can easily counter their claim that “selling to you for that amount would result in a loss to us.”  If you can guess their risk profile from their hobbies and sports, you can guess how much you should discount the more outrageous of their claims.

Superior information also helps you get out of a narrow ZOPA by linking previously unrelated issues.  If the narrow ZOPA is price, then you can link payment terms or service levels to agree on price, but extend payment terms or reduce service levels.

Conclusion

The ZOPA is technically the set of all feasible alternative bargains within the reservation prices that the parties prefer over their BATNAs in a negotiation.  Within that definition, there are the essentially human tasks of first of all ascertaining your own BATNA and reservation price, then gathering information to guess the other side’s BATNA and reservation price.  There is no such thing as doing too much research on the other side’s position.