This article will define ZOPA and help you understand ZOPA in negotiations. After reading it you will know what ZOPA is, why ZOPA matters, and how ZOPA can be expanded and probed. At the end of the post, you will find a few more examples of determining a ZOPA.
ZOPA is an acronym that means Zone Of Potential Agreement. ZOPA is the range where the parties could agree. It is the part of each party’s bargaining range that overlaps with all the other parties’ bargaining ranges. It is where, if the negotiators do their job, the deal is.
Why ZOPA Matters
Knowing where a deal can happen is important because it also tells you when a deal should happen. Deals are all about value. People make deals when they can get more value by working with others than they could by working alone. Each party determines their range where they want the deal. If there is a place where the ranges for all parties overlap, that means that all parties think they are better off doing that deal.
An Example of ZOPA
If Sam and Al are negotiating over the price of a hamburger, Sam has a minimum price she is willing to take and Al has a maximum price he is willing to pay. Assuming both parties are using a traditional approach to negotiations Al will make a low offer and Sam will reply with a high counter. Each side establishes their bargaining range. The ZOPA is where the parties bargaining range overlaps.
Not that Simple
Rarely if ever is the question of defining ZOPA and a bargaining range as one dimensional as the illustration above. Money is important, but there are surely other things that Sam may value that could alter her bargaining range. Let’s say she recognizes Al as a social media influencer and food blogger. Exposure on Al’s social media channel could be worth way more to Sam than the six bucks she was hoping to get.
Look for Opportunities
Creating value is important in any negotiation. When we find value or the potential for value we should look at our own bargaining range and see what an impact it has on it. If Al is a popular food critic, he may be happy to accept a deal where he posts a picture of the burger on his Instagram if Sam will sell him the burger for $6 and if Sam wanted to be blogged about, she may consider the exposure in her requested price. Sometimes the opportunity is as simple as future relations and sometimes it will be much much bigger. In employment settlement the structure of the deal can impact how much money the plaintiff in a case will take home.
The key to creating value is communicating with the other party and staying curious about what they need out of a negotiation. By listening to each other the sides may find they can create better deals. This is why some parties choose to use mediators to help them create all the value they can out of a potential deal.
Anticipate Their Bargaining Range
When you formulate your BATNA it is important to try and take a guess at your other’s BATNA. Being able to accurately detect their BATNA should allow you to anticipate their potential bargaining range. From there you can plot a path to negotiate a deal with maximum value for you.
What if there is No ZOPA?
Parties do not share their bargaining ranges. Skill is needed to probe the range of potential positive outcomes in a negotiation. Some deals shouldn’t be done, but sometimes good deals die because negotiators were not thinking. I don’t like bottom lines in negotiation. I use resistance points instead. The result of abandoning bottom lines is if you find other sources of value throughout the negotiation, you can consider them without abandoning your bottom line.
Bringing additional sources of value into the negotiation mix can create a ZOPA where there wasn’t one before.
Example of Expanding ZOPA
The most common example of creating a ZOPA I can think of is the work car dealers do with their clients. Buyers come in wanting to not pay too much for their chosen car. They usually want to pay less than the sticker price. Since most people borrow money to buy cars their are additional sources of value the dealer can introduce into the deal:
- Interest rate reductions
- Lower payments with a longer term
- Extended warrantees
Many people will agree to pay more in the long run to pay less now. The salesperson uses these tools to add value to the deal for the buyer. The genius in the car dealership model is that all of these sources of buyer value are also sources of dealer profit. By expanding the deal dealers satisfy the buyer and end up making more on the deal.
ZOPA Example #3: There is no ZOPA
Not all potential deals will have zones of potential agreement.
An employee who is let go after a short tenure may think that they should get six months notice but be willing to settle for four months. The employer, who is experiencing financial trouble, may be unable to pay more than two months.
In this case the employee’s bargaining range is four to six months and the employer’s bargaining range is zero to two months.
Assuming there is nothing else that can be added to the negotiation a deal seems unlikely.
Bargaining range is not static and is based on the BATNA, the best alternative to negotiation and the WATNA, the worst alternative to a negotiated agreement.
When the employer is sued for an amount higher than six months notice, and now they need to incur legal and other transactional cost, the extra two months may be in their bargaining range. The trouble is now the employee has incurred transactional costs of their own and may have adjusted their bargaining range.
The value in involving a mediator in a dispute early is that they help parties examine their bargaining ranges and work with parties to predict how these ranges may shift over time. If you think you can use a mediator for your work related dispute, drop me a line and we can have a no obligation conversation about if mediation is right for your dispute.