Negotiation is the process of reaching an agreement with investors, suppliers, and business partners. Entrepreneurs with strong negotiation skills win more business and quickly establish their venture on a firm financial footing. Negotiation skills can be learned and cultivated to increase the likelihood of closing deals successfully and driving mutually beneficial outcomes. Here are some essential negotiation tips for entrepreneurs to help you master this art.
This post discusses the art of negotiation covering topics such as:
- The types of negotiations
- The stages of a negotiation
- Effective negotiation strategies
- Principles of influence in business negotiations
- Powerful negotiation techniques
Negotiation Tips for Entrepreneurs: Types of Business Negotiations
Broadly, negotiations can be classified into three types: integrative negotiation, distributive negotiation, and mixed-motive negotiation. Understanding these types is crucial as part of effective negotiation tips for entrepreneurs.
Integrative Negotiation
In an integrative approach to negotiation, both parties have compatible interests and aim for a win/win solution, getting what they want without making significant concessions. Integrative negotiations require both parties to figure out what they want out of the negotiation and why they want those things. Successful integrative negotiations require both parties to work collaboratively to meet their shared interests. For example, two start-ups agreeing to work together on a product that appeals to their shared target market.
Distributive Negotiation
Haggling is a crude but straightforward way to describe distributive negotiation. It is competitive rather than collaborative, with parties having incompatible interests and one winning and the other losing out. Distributed negotiation works best when interactions are short-term and transactional but is also suitable when one party believes that the other will take a competitive approach. Entrepreneurs may use this approach when entering short-term agreements with suppliers and dealers.
Mixed Motive Negotiation
Mixed-motive negotiations are a mix of distributive and integrative approaches to closing deals. The goal is to create additional value so that both parties have some of their interests met, but with the understanding the newly created value may not be enough to give everyone what they want or to the extent required. Mixed-motive negotiations are used when the parties are not sure if their interests are compatible or when there’s ambiguity about the value of the preferences or resources of the parties. Examples include negotiating a merger or expanding an existing business relationship.
Stages of a Negotiation: Essential Negotiation Tips for Entrepreneurs
A successful negotiation follows a systematic process involving three main stages: preparation, conduct, and closure.
Preparation
The preparation stage is crucial, during which you identify the following:
- What do you want to achieve from the negotiation and why?
- What are your strengths and weaknesses?
- What are your alternatives and fallback options?
- What is the best alternative to a negotiated agreement (BATNA) if the negotiation fails?
- The other party’s goals and interests, strengths and weaknesses, alternatives and fallback options, and most advantageous alternative course of action.
- Consider the external factors that may affect the negotiation, such as market conditions, industry trends, power dynamics, and other factors.
- Choose a time, place, and mode of communication for the negotiation. Ensure a comfortable environment that encourages cooperation and trust.
Conduct
In this stage, you interact with the other party, exchanging information and offers. It involves the following:
- Building a rapport with the party
- Clarifying questions and giving answers
- Identifying the needs, concerns, and expectations of both parties
- Bargaining whereby you exchange and evaluate offers and counteroffers
Best practices during the conduct stage of a negotiation:
- Avoid revealing too much information
- Avoid making assumptions; probe the other party and provide relevant, honest answers
- Avoid making concessions too quickly or easily; use tradeoffs to create value and satisfy both parties
These practices are fundamental negotiation tips for entrepreneurs.
Closure
At this stage, you finalize the agreement and put it in writing. The agreement will contain the following information:
- The main points and terms agreed upon by both parties
- Checking for any misunderstandings or disagreements
- Specifying roles, responsibilities, and deadlines for each party
After the deal is closed, it’s worth reflecting on how the negotiations went, what you might have done better, and how you can improve future negotiations.
Effective Negotiation Strategies for Entrepreneurs
A planned approach to negotiating effectively will put you on the front foot. The other party will also have strategies up their sleeve, so be prepared with your own moves to seize the advantage! Here are some negotiation tips for entrepreneurs that work well:
Showcase Your Expertise
Use your unique expertise and knowledge to position yourself as a valuable partner and enhance your bargaining power. For example, you can use your top case studies and specialized skills, along with industry insights, to showcase your value and make the other party recognize it as well.
Create Competitive Tension
When tension arises in a negotiation, our tendency is to make it go away. Introducing competition into the negotiation process is an effective way of creating urgency, shifting power dynamics in your favor, and increasing your bargaining power.
De-risk the Deal
Remove the perceived risks of entering the proposed deal to avoid triggering any loss aversion inclinations that could derail the deal. Anticipate the other party’s objections and prepare in advance to handle them effectively.
Demonstrate a Clear Value Proposition
A powerful way to overcome power imbalances is to clearly articulate the value proposition of your product or business. By making a strong case for the benefits you offer, the market potential of your product, and your competitive advantage, you can persuade the other party to put you above other businesses seeking to secure a deal.
Use the BATNA
As explained, you should always enter a negotiation with a clear idea of the BATNA, your best outside option if the negotiation hits a roadblock. While a BATNA has more trade-offs than a successful business agreement, it requires both sides to make concessions. Agreeing a deal under the other party’s BATNA will communicate that your offer is fair and help close the negotiation faster.
Bring in a Trusted Third Party
If both parties are unable to bring their best offers to the table, bringing in a neutral party to the negotiation can reshape power dynamics and foster collaborative agreements. If the negotiation tactic still doesn’t work and you’ve tried your best to make it work, you should offer to walk away.
Effective Communication in Business Negotiations
Effective and confident communication plays a critical role in business negotiations. The important communication strategies in negotiations are:
- Open communication, which fosters transparency and trust.
- Simple and direct language to facilitate easy understanding and avoid misunderstandings.
- Constructive words and a positive tone to help build rapport and set the stage for collaboration.
- Active listening to indicate that you understand the other party’s point of view.
- Silence and patience, allowing the other party to finish speaking before responding.
- Positive non-verbal cues such as nodding, smiling, and leaning forward to show engagement.
Principles of Influence in Business Negotiations
Persuasion is the process of convincing the other party to adopt a particular position or belief. Persuasion tactics help overcome the other party’s objection to reach a mutually beneficial agreement. They counteract the party’s defensiveness and elevate their trust in your vision.
Renowned social psychologist and ‘Godfather of Influence’ Robert Cialdini proposes six principles of persuasion:
- Reciprocity: Helping potential business partners or suppliers with their problems to encourage the likelihood that they will help you with yours.
- Social proof: Showing evidence of your achievements, milestones, and/or recognition received, such as reviews, endorsements, testimonials, or ratings for your minimum viable product (MVP).
- Commitment and consistency: Asking investors and/or business partners to commit to your visions, goals, and values, which can persuade them to support you and stick with you.
- Authority: Convincing the other party that your product/service/business is reliable and valuable.
- Liking: Building rapport with the other party and displaying your recognition or gratitude to them.
- Scarcity: Highlighting the uniqueness, innovation, or differentiation of your product/service to showcase your competitive edge.
Exploring the psychology of persuasion is well worth an entrepreneur’s time. Effective persuasion skills are vital in any entrepreneurial journey along which you will move, motivate, or change your customers, investors, suppliers, partners, and employees to achieve your business vision.
Negotiation Techniques That Give You the Edge
While there are many negotiating techniques you can leverage to gain an upper hand, the common ones are anchoring, analogical reasoning, framing and reframing, and questioning.
- Anchoring: A cognitive bias that occurs when people rely too much on the first piece of information they receive to make subsequent judgments or decisions. It can be used as a negotiation strategy to influence the other party’s expectations. You can make the first proposal or offer, setting the tone of the negotiation and making the other party adjust their demands.
- Analogical reasoning: Involves identifying similarities between different concepts or situations to make inferences or solving problems. In a negotiation, it can be used to simplify complex concepts, draw upon existing knowledge to understand new situations, and apply insights from one context to another to clarify and strengthen negotiation points.
- Framing and Reframing: By framing an issue in a certain way, you can highlight the benefits or drawbacks of a solution and appeal to the logic or emotions of the other party. For example, you can frame a negotiation as a collaborative problem-solving process rather than a competitive one to encourage both parties to work together in finding a mutually beneficial solution. Reframing involves changing the way an issue is presented to influence how it is perceived. It is useful in addressing conflicts or objections and bringing up issues that are more important to you.
- Questioning: Asking open-ended or clarifying questions to the other party during a negotiation helps you uncover hidden issues, test assumptions, gather information, understand motives more clearly, and challenge the other party’s arguments.
Build Powerful Negotiation Skills
A concerted effort to develop good negotiation skills helps entrepreneurs become better dealmakers and leaders. Keeping an open mind and ensuring the right attitude will make it less challenging to navigate complex situations, resolve conflicts, and achieve a favorable outcome.
For further reading on effective negotiation strategies, check out Harvard Business Review’s guide to negotiation.