Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Reservation Price — 3 Things Every Professional Should Know
Key takeaways
- Reservation price refers to the lowest price that you can get that will make you accept a negotiated agreement.
- The reservation price establishes the minimum fulfillment price of the negotiation of two parties.
- Balancing reservation price is crucial to achieve favorable results for both parties.
Reservation price is a term that every procurement manager must know. It also comes easily with procurement analytics. So if you’re not familiar with it, then you are either a procurement specialist turned manager after a few months of working or you’ve completely forgotten about it already because someone else has to deal with it.
For this article, it’s time to learn what reservation price means. We will define the term, learn more about what it can do for your procurement process, and know when to take advantage of it.
After reading this article, you should already have an idea of what reservation price is all about.
But before you start to read this article, I 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.
What Exactly is the Reservation Price?
Reservation price, to put it simply, is the lowest price that you can get that will make you accept a negotiated agreement.
Of course, there are also two sides to this. For the buyer, the reservation price would be the maximum or bottom line they would pay, while for the seller, it’s the minimum amount of money they can accept before accepting the deal.
Sounds familiar? That’s because you’ve already encountered a reservation price in one of our earlier articles about the breakpoint in negotiations. The reservation price is also called the walk-away point of a negotiation.
If you don’t get the reservation price even after countless hours of negotiation, then it’s either you make a concession or you walk away.
In biddings, the auction’s starting prices usually start lower than the reserve price to gain the interest of the buyers. However, you must take note that the reservation price is different from the opening bid.
The purpose of the reservation price is to protect the seller’s interest where his or her item will not be bound to be sold at a lower price than his or her reserved price. Thus, if the seller gets the last bidding, which is usually less than the maintained reservation price, he or she is not required to execute it.
Reservation Price vs Opening Bid
The reservation price and opening bid are usually used interchangeably. However, they are both different from each other.
The reservation price is the minimum price a seller can willingly accept. On the other hand, the opening bid is the amount suggested to start the bidding. Bidders are not required to accept the opening bid. If no one bids, then the auctioneer will lower the starting bidding price.
If an opening bid is too high, then many buyers may start to be disinterested even if the auctioneer lowers the price. Thus, professional auctioneers start with a lower starting bid to gain the interest of the buyers.
Once the auctioneers get the interest of the bidders, then the buyers will likely become more invested and the price will continue to increase until it is sold.
Is BATNA the same as the Reservation Price?
BATNA, also known as “Best Alternative to Negotiated Agreement”, may sound like the same as reservation price, but the former is very different from the latter. A reservation price, as mentioned, is the last acceptable price you are willing to accept for a negotiated deal. The BATNA, however, is your backup plan in case negotiations fail.
BATNA also answers negotiations with specific scenarios instead of prices. So, for example, if you’re discussing a deal where your aim is getting a bid of $1 million, you can perhaps specify your reservation price to $300,000 or more. As with your BATNA, if in case negotiations are prolonged and a decision is still unclear, your BATNA can be to suggest a recess and get back for re-negotiations.
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, 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!
Example of Reservation Price and BATNA
Imagine that you are selling a piano online. You purchased the piano three years ago for $560 and it is still in good condition like it is brand new. Then, you decide to list the piano for $400 and decide that your reservation price is $370.
After many months, a buyer contacted you offering $300 for your piano, which is lower than you can go or your reservation price. You negotiate for $350 but he firmly declines and sticks with $300.
Thus, you decided to wait for another customer who will offer your reservation price or higher. However, you informed the buyer that if no one contacted you for one month, he could have the piano for $300. Therefore, the buyer will be your BATNA.
Conclusion
Reservation prices are tricky because it’s up to you to gauge your reservation price. You can’t go too high or the other party may walk away and you can’t go too low or else you get taken advantage of.
This means that you have to gauge it just right and with the knowledge Procurement Tactics has armed you with, you have the tools to do that.
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.
