When it comes to negotiating a business deal, coming out on top is obviously the best scenario. Distributive bargaining is a negotiation strategy that may increase the odds of you getting the best bargain in a deal.
Distributive bargaining is generally used to distribute fixed resources. The result is one party gaining while the other party loses. One side comes out ahead with distributive bargaining, winning the maximum share of the product or funds being distributed.
The Power of Distributive Bargaining
Distributive bargaining is generally good for buying and selling things. Other negotiation strategies that strive for a win-win for all parties, such as integrative bargaining, focus on building relationships, according to Doug Noll, a lawyer and professional mediator.
"Distributive bargaining is the haggling part of the negotiation where offers and counter-offers are exchanged until a deal is made,” Noll says. “Integrative negotiation focuses on identifying and satisfying the interests of the deal makers."
Distributive bargaining occurs often in business, according to Rick Hoskins, founder of air filter producer Filter King.
“From raw materials to human resources, there is always a price that can be negotiated,” says Hoskins. “How fast you wish to scale your company is generally the driving force behind your negotiation tactics. Distributive bargaining can allow you to scale quickly.”
Using distributive bargaining has helped King remain competitive.
“For my raw materials, I don't want to pay out through the nose, whereas the supplier wants to get the most profit possible,” he says. “If I acquiesced each time with the supplier's price, then I would have to charge more for my filters or reduce my profit margin.
"Having a competitive selling price is paramount to winning the market share," he continues. "If I didn’t use distributive bargaining, I wouldn’t increase my earnings.”
Distributive Bargaining Tactics
There are several tactics you can use to help you gain the best outcome possible when employing distributive bargaining techniques.
1. Determine your walk-away value.
The first step to effective distributive bargaining is determining your walk-away value, also known as reservation point. (This is best done before you begin negotiating.) Your walk-away value is the maximum or minimum you will accept before walking away from the deal without finalizing.
During negotiations, I explain how I will provide a lot of business for the supplier, so providing me a cheaper price will pay off in the long run.
—Rick Hoskins, founder, Filter King
It’s also advisable to determine what are referred to as your BATNA (best alternative to negotiated agreement) and WATNA (worst alternative to negotiated agreement). Knowing these tipping points when price bargaining will help guide you during negotiations.
2. Know your opponent and their intentions.
“Once distributive bargaining begins, the trick is to not let your opponent understand your reservation point while asking questions to uncover theirs,” says Stephen Light, co-owner and chief marketing officer at mattress company Nolah Mattress.
“This is easier said than done," he continues, "but you will be in a very advantageous situation when you unearth their reservation point.”
Knowing the least favorable condition your opponent will accept allows you to negotiate to that point. This will maximize your distributive bargaining results and allow you to leverage the best possible deal.
3. Avoid showing your hand when distributive bargaining.
When asking questions to determine the other party’s reservation point during distributive bargaining, give as little information as possible regarding what you know or will accept.
“The less the other party knows about your personal interests, the better your position will be,” says Eden Cheng, founder of invoicing software company WeInvoice. “Avoid showing eagerness, as you will often end up revealing a weakness they could exploit.”
4. Make it clear that you have other options.
During distributive bargaining, let the other side know you have alternatives and options, advises Cheng.
“This shows your willingness to walk if the situation calls for it," she explains, "which tells them that regardless of the outcome, there will be no loss on your side.”
Cheng used this tactic during the development phase at her company.
“When we first developed our template platform, we had to outsource freelance designers to help with our platform’s design,” she says. “We used distributive bargaining to keep our costs down without compromising the quality of the end product for our user base.
"We negotiated with most of the designers," she continues, "letting them know we had alternative candidates to consider. This resulted in outsourcing the work to talented designers and programmers without compromising our set budget.”
“There is no room for sentimentality in business and negotiation," Hoskins adds. "Explain the reasons why you would prefer a particular supplier but make it clear that you’re not afraid to go elsewhere.”
When seeking the raw materials for his factory, Hoskins often negotiates with more than one supplier during distributive bargaining.
“There is likely one I prefer but I won't let it rule my negotiations,” he says. “During negotiations, I explain how I will provide a lot of business for the supplier, so providing me a cheaper price will pay off in the long run. If they are stubborn, then I blatantly point out that there is a competitor I will happily bring my business to.”
Though Hoskins risks losing preferred suppliers during such distributive bargaining negotiations—and he has—experience has taught him to stick to his price point.
“I had a preferred supplier not budge on my preferred price, so I went to a competitor,” he says. “A year later, the preferred supplier returned, because they could see how my product was in high demand and that I also required a high volume of raw materials.”
At that point, the supplier was ready to meet Hoskin’s budget.
Distributive Bargaining Drawbacks
Since one party loses during distributive bargaining, it can be an aggressive, tense process. When using this negotiating tactic, there’s a chance you could burn bridges.
“Distributive bargaining is only advisable if the relationship with the losing party is not essential, and you want to maximize the benefits of the transaction,” says Light. “If you’re not willing to risk your relationship, avoid this negotiation strategy.”
Consider it as one of your negotiating tools: Accord to Noll, many successful business negotiations are a combination of distributive and integrative negotiation.
“Good negotiators know when and how to use each type of negotiation,” he says.
Credit: Getty Images