Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Reservation Price — Definition, Comparison + Examples
As taught in the Negotiation Course for Procurement Professionals / ★★★★★ 4.9 rating
What is a reservation price?
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Reservation price refers to the lowest price that you’re willing to accept to agree to a deal.
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The reservation price establishes the minimum fulfillment price of the negotiation of two parties.
- Balancing the reservation price is crucial to achieve favorable results for both parties.
What is the Reservation Price?
Reservation price is the threshold at which a party is willing to accept or reject a deal. For a buyer, it represents the maximum price they are willing to pay, while for a seller, it is the minimum price they are willing to accept. It is often referred to as the walk-away point in negotiations. If this price is not reached, the party must either make a concession or leave the negotiation.
In auctions and bidding processes, the reservation price is different from the opening bid. The opening bid is often set lower to attract interest, while the reservation price protects the seller’s interests. If the final bid does not meet the reservation price, the seller is not obligated to complete the transaction. This ensures the item is not sold below an acceptable minimum price.
Difference Between Reservation Price vs Opening Bid vs BATNA
Examples of Reservation Price
A reservation price is the minimum amount a seller is willing to accept or the maximum a buyer is willing to pay in a transaction. The following real-world examples show how reserve prices are applied in different markets to protect sellers and ensure fair deals.
1. Industrial Machinery Auctions in Bankruptcy
In industrial machinery auctions, the liquidation trustee sets a reserve price to ensure equipment is not sold below a value deemed acceptable. The auctioneer may start bids low, but the machine will not be sold if offers do not reach the reserve price, even if the highest bid is below it. This protects the interests of creditors and sellers.
If the bid does not meet the reserve price, the machine is withdrawn from the auction, and the sale does not go through. This prevents financial loss during asset liquidation. The reserve price in this case ensures the sale is not unfavorable for the seller.
2. Hidden Reserve Price on eBay
Sellers on eBay auctions often use a reserve price that is hidden from buyers to protect the minimum value of the item. If the highest bid does not reach the reserve price, the auction ends as “Reserve Not Met” and the sale does not proceed. This allows sellers to avoid selling items below their desired minimum.
This practice is common for collectibles, electronics, or vintage items. Buyers can participate in the bidding, but the sale will not occur until the minimum acceptable price is reached. This balances buyer interest with seller protection.
3. Real Estate Auctions
In real estate auctions, sellers set a reserve price to prevent selling below an economically acceptable minimum. If the auction does not reach the reserve price, the seller retains the property or negotiates privately afterward. This ensures the sale is not unfavorable and protects the owner’s financial interests.
Reserve prices in real estate auctions allow sellers to participate in the market while avoiding the risk of underpricing. They are commonly used for houses, apartments, or commercial properties to achieve a fair market value. This way, sellers can control the minimum acceptable amount.
Determining the Reservation Price
So now we have a good idea of what the reservation price is, how exactly do we determine the reservation price for every negotiation? Well first off, the reservation price should be something that is agreed upon by you and your negotiations team. If you’re working for a procurement company or team, the reservation price is commonly decided by the leader of the team, which is always the procurement manager or procurement director.
But if you’re negotiating on your own or if you’re in an informal setting, your reservation price depends entirely on you. It is almost always the last price you’ll agree to be comfortable for you. You also need to determine whether the reservation price is acceptable to the other party. Set it too high and you’ll instantly get a walkout. Set the reservation price too low though and the other party will take advantage of it.
How to Deal with a Reservation Price
If you’re negotiating and you’re getting a reservation price from the other party, there are many ways to deal with this:
- Is the reservation price fair enough? If it’s a yes, then you can negotiate further. If it’s a no, instantly stop the negotiations and walk away.
- If the other party is not accepting any concessions with their reservation price, then it’s also a fair move to walk out from the negotiations.
- If it’s the other party that’s hardballing you from the get-go, you can drop your reservation price at once.
- If you don’t want to close doors with your opponent, negotiation concession is the answer. You could try getting a concession instead of walking away from the deal. Sometimes you have to lose a battle today to win a war tomorrow
- If you managed to get a concession despite the other party (or you) dropping a reservation price, do consider re-negotiating the deal as soon as you can.
- Remember, keep your reservation price to yourself or your team. Don’t let your opponents discover what it is! But if you’re able to discover the other party’s reservation price, then use it to your advantage!
Conclusion
The reservation price is a key tool in negotiations and auctions, as it defines the minimum or maximum a party is willing to accept, protecting their interests. It distinguishes the opening bid from the walk-away point and helps avoid unfavorable transactions. When set correctly, the reservation price allows negotiators to maintain control and make informed decisions.
Determining the reservation price requires analyzing one’s own goals, limits, and the other party’s expectations. Keeping this price confidential and using it strategically can increase the chances of a favorable outcome. In practice, the reservation price balances the interests of buyers and sellers, contributing to fair and stable business transactions.
After you read the rest of this article, have created a free-to-download, editable in-negotiation toolkit template. It’s a PowerPoint file that can help you create the best approach when negotiating with other parties. I even created a video where I’ll explain how you can use this template.
Frequentlyasked questions
What is a reservation price?
The reservation price is the last price you’ll agree to a negotiated deal.
How to deal with a reservation price?
There are two ways to deal with a reservation price. You can either accept it or walk away from the negotiations.
How to determine a reservation price?
Your reservation price depends on how much you are willing to accept to agree to a deal. You can talk about it with your negotiation team.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
