Split the Pie

1. Negotiate by splitting the pie, not the total

The pie is the additional value created through an agreement to work together.

Pie framework. The pie represents the value created by reaching an agreement, not the total amount being negotiated. It's calculated as the difference between what can be achieved together and the sum of each party's best alternative (BATNA).

Equal split principle. The author argues for an even split of this pie, regardless of the parties' relative size or initial position. This approach ensures fairness and recognizes the equal contribution of both parties to creating the additional value.

Examples:

• Pizza negotiation: 12 slices total, but only 6 slices in the pie
• Honest Tea and Coca-Cola deal: Splitting incremental sales above a baseline
• CEMA real estate transaction: Sharing tax savings from a specific financial structure

2. Understand and leverage your BATNA

Your BATNA (Best Alternative To a Negotiated Agreement) is what you will do if you can't agree on a deal.

Know your options. Understanding your BATNA is crucial for assessing the value of any potential agreement. It provides a baseline for comparison and helps you avoid accepting deals worse than your alternatives.

Improve your position. Actively work to improve your BATNA before and during negotiations. This can involve:

• Exploring other potential partners or options
• Gathering more information about market conditions
• Developing internal capabilities to reduce dependence on the deal

Strategic revelation. While conventional wisdom suggests hiding a weak BATNA, the author argues that selective disclosure can sometimes be beneficial. It can prevent the other party from assuming your position is even weaker and provide a basis for constructive negotiation.

3. Recognize equal power in two-party negotiations

Since each party is essential to the deal, each has equal power.

Symmetry in contribution. In a two-party negotiation, both sides are equally necessary to create the pie. This fundamental symmetry exists regardless of apparent differences in size, resources, or initial position.

Countering power imbalances. This perspective helps level the playing field in negotiations where one party might feel disadvantaged. Examples:

• Small company negotiating with a large corporation
• Individual negotiating with an employer
• Startup seeking investment from established investors

Principled stance. By recognizing this equal power, negotiators can confidently argue for an even split of the pie, providing a logical and fair basis for their position.

4. Reveal information strategically to create value

To create a pie, negotiators need to share information.

Balance openness and caution. While protecting sensitive information is important, strategic disclosure can lead to better outcomes. Sharing helps identify opportunities for mutual gain and builds trust.

Ask and answer questions. Encourage information exchange by:

• Asking about the other party's priorities, concerns, and constraints
• Being willing to answer similar questions about your own position
• Focusing on interests rather than just positions

Create value through insight. With better information, negotiators can:

• Identify complementary interests
• Develop creative solutions that address both parties' needs
• Expand the pie by finding synergies and trade-offs

5. Make precise bids and avoid extreme anchors

If you want to make a bid stick, make it precise.

Precision signals thought. Specific numbers (e.g., $485 instead of $500) suggest careful calculation and reasoning, making the offer seem more credible and less arbitrary.

Avoid extreme anchors. While anchoring with a low initial offer can be effective, going too extreme can:

• Insult the other party and damage rapport
• Force you to make large concessions, weakening your position
• Signal that you're not negotiating in good faith

Defensible offers. Always be prepared to justify your numbers. Use market data, cost analysis, or other relevant factors to support your position.

6. Give the other side what they want to get what you want

If they get what they want, you can get what you want.

Understand their priorities. Invest time in discovering what truly matters to the other party. This may involve:

• Direct questions about their goals and concerns
• Active listening to pick up on underlying interests
• Research into their broader business or personal context

Create value through trades. Look for opportunities to exchange items of differing value to each party. This "trading beets for broccoli" approach can significantly expand the pie.

Focus on their perspective. When presenting proposals or arguments, lead with what benefits the other party. This increases the likelihood of a positive reception and cooperation.

7. Use contingent deals to handle uncertainty

To ensure you aren't taken advantage of, set payments based on how big the pie turns out to be.

Align incentives with outcomes. Contingent deals tie compensation to future results, addressing information asymmetries and differing expectations.

Examples:

• Royalty-based book deals
• Performance-based earn-outs in business acquisitions
• Bonus structures tied to specific milestones

Manage risk. This approach allows parties to reach agreements even when there's significant uncertainty about future value. It can be particularly useful when:

• One party has more information or expertise
• The potential outcomes have a wide range
• There's disagreement about probabilities of success

8. Prepare thoroughly and anticipate objections

You want to plan for what could go wrong—in particular, what happens if there's no deal.

Comprehensive preparation. Before negotiating:

• Research market conditions and comparable deals
• Understand your own priorities and constraints
• Estimate the other party's BATNA and likely positions

Anticipate pushback. Identify potential objections to your proposals and prepare compelling counterarguments. This might involve:

• Demonstrating flaws in alternative approaches
• Providing examples of how your approach benefits both parties
• Addressing concerns about fairness or practicality

Flexible planning. Develop multiple strategies and be prepared to adapt. Role-playing potential scenarios can improve your readiness and confidence.

9. Be allocentric and demonstrate understanding

To be allocentric, you have to move away from seeing things from your perspective to seeing things from the other side's perspective to ultimately seeing things from both perspectives.

Empathy in negotiation. Actively working to understand the other party's perspective leads to better outcomes. This involves:

• Asking questions about their priorities and constraints
• Listening carefully to their responses and concerns
• Acknowledging their position, even if you disagree

Demonstrate comprehension. Show that you truly understand by:

• Summarizing their arguments in your own words
• Acknowledging valid points in their position
• Explaining why you've chosen a different approach, not due to misunderstanding

Build rapport and trust. This allocentric approach fosters a more collaborative negotiation environment, making it easier to find mutually beneficial solutions and expand the pie.

Last updated: October 17, 2024