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Understanding BATNA

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BATNA is a well known negotiation acronym that stands for “best alternative to the negotiated agreement.”

If you’re familiar with the concept of opportunity cost, then BATNA will sound very familiar. The idea behind opportunity cost is that the price of something isn’t just the number listed on the tag. There’s an opportunity cost involved and that cost is the price of the next best alternative. Let’s say you have two potential events you can attend this weekend. You can either go to a movie or go to a concert. The opportunity cost of going to the movie is the enjoyment you would’ve experienced if you went to the concert instead. The opportunity cost of going to the concert is the enjoyment you would’ve experienced if you went to the movie instead. So the cost of the movie is not only the ticket but concert enjoyment. Got it?

BATNA is a similar idea. When you’re negotiating anything, it’s important to know the other side’s BATNA. You’re trying to create a win win situation, so you have to create wins for the other side. If you know their next best offer is worth $10, you can offer a $9 solution. They would simply say no and go to their BATNA. You want to know how much their next offer is worth and offer something better.

Here’s a simple example. You are walking around a flea marketwhen you eye a purse on the rack, priced at $30. You start talking to the store’s proprietor and try to haggle down the price. What is the store owner’s BATNA?

Is it the rack price? Maybe. If it’s been flying off the rack, then you probably can’t negotiate with the owner because the BATNA is to wait until the next shopper comes. But what if sales have been slow? If the BATNA is that the purse sits for a week or two before it sells, then maybe the owner takes less in profit but improves the store’s cash flow or reduces inventory?

Finally, sometimes you have to let the other side know what their BATNA is! If they don’t sell you the purse, maybe it sits around for a while. When the owner knows the BATNA, maybe he or she sells it to you for a little less.

That’s BATNA in a nutshell. You can read more about it on the Wikipedia page for BATNA.

{ 4 comments, please add your thoughts now! }

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4 Responses to “Understanding BATNA”

  1. Interesting concept. You are right, that it is very similar to opportunity cost. An example of BATNA in practice would be Donald Trump making lowball offers for buildings that he knows the owners want to sell but can’t find a buyer. He’s gotten some amazing deals using this concept.

    -DC

  2. Damon Day says:

    Hey Jim,

    I think most people are familiar with the concept but maybe don’t actually know they are employing it when they do. We use it quite a bit when negotiating with our client’s creditors. When you know that the creditor is going to be charging the account off the books in a few weeks, it makes the negotiation much easier. We know what their alternative is and by making a better offer at the right time, to the right person, a deal gets done.

  3. Great post! A very useful tool for savvy consumers– everything is negotiable to some extent.

  4. PF says:

    It is interesting idea to bring them together.

    Yet, I think although they are similar in the way that both is about the 2nd highest option, there is fundamental difference between them.

    Opportunity Cost, is really a kind of “cost”.

    For example, I choose to go swimming, mean that I lose the chance of my 2nd highest valued activity, say biking.

    So, I can say, my cost of go swimming is biking. I really have given up (paid) the biking to exchange for swimming.

    For BATNA, I think we won’t consider it as a “cost”

    For example, If company A offers me $20K/mth, while I am negotiating with company B, then my best alternative is $20K (BATNA). Say, finally, company B offers me $22K/mth. Then of coz I wll choose B.

    But, will we say “I take the $22K offer with a cost of giving up the $20K offer”?

    My feeling is, BANTA is something we are ready to & willing to give up, if we can make a better negotiated option.

    For the opportunity cost issue, both swimming & biking we do not want to give up, but we HAVE to give up the less good one. So, the option that we give up is really a “cost”.

    While, I think it is a bit strange to consider the BANTA that we wish we can give it up as a “cost”. I think I would feel more comfortable to decribe it as “best contingency plan” or “best backup option”.


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