Split the Pie: A Radical New Way to Negotiate

Barry Nalebuff (Massachusetts & Nuffield 1980) is the Milton Steinbach Professor at the Yale School of Management, where he has taught game theory, strategy, and negotiation for over thirty years. His new book might help the world do a bit less fighting.

I wrote Split the Pie to help change the way people negotiate. Specifically,

• I want to help people negotiate in a fair and principled way.
• I want to help people who see themselves as having little power recognize the true power they have in a negotiation, and,
• I want to help people achieve their negotiation goals without being a jerk.

Split the Pie is for anyone who wants to be a principled negotiator.  While the subtitle says it’s a radical new way to negotiate, the truth is that the main idea comes from the 2,000-year-old Babylonian Talmud.

Along with my day job as a professor, I’m an entrepreneur. I’m the cofounder of Honest Tea. I built this business with my former student Seth Goldman. The ideas discussed in Split the Pie first came into practice when we had an opportunity to sell Honest Tea to Coca Cola, a story I’ll preview below. Since then, I’ve had many opportunities to help organizations put Split the Pie into practice, including working with the NBA in their negotiations with the players union.

Here now are my five takeaways from the book:

 

1. You don’t need to be a jerk to succeed in a negotiation

People dislike negotiation … and with good reason. They go up against jerks who make low-ball offers, ultimatums, and try to take advantage of them. Some people feel they have to act like a jerk in response. Other are too nice and give away the store. There’s a better way, an approach that brings principles and logic into the negotiation.

The key insight is to identify what’s really at stake in a negotiation—what I call “the pie.”  The negotiation pie is the additional value created through an agreement to work together. Seeing the pie will change how you understand fairness and power in negotiation. While the notion of “dividing the pie” is commonplace in negotiations, most people split the wrong pie; they focus on the total amount, not the gain created by an agreement. As a result, they argue over the wrong numbers and issues, and take positions they perceive as reasonable but are, in fact, self-interested. The hard part of negotiation is to measure the pie correctly. When the stakes are correctly understood, it is far easier to reach an agreement.

 

2. People are confused about what a negotiation is about; they don’t see the negotiation pie.

The negotiation is really about the increase in value that the two sides can achieve through an agreement.

Allow me to use a bit of math to explain what I mean:

• Anju can earn 1% on her $5,000 or $50
• Bharat can earn 2% on his $20,000 or $400
• Anju & Bharat together can earn 3% on their combined $25,000 or $750.

 To get that $750, Anju and Bharat must agree on how to divide it up. Most people think the negotiation is over the $750 and propose each side earn 3%; Anju gets $150 and Bharat $600. I say the negotiation is really over the extra $300 of interest an agreement brings—the increase from $50 + $400 = $450 they get on their own to the $750 they get by coming together. To earn that $300, Anju and Bharat are equally needed, so it should be split equally. Anju ends up with $50 + $150 = $200, and Bharat ends up with $400 + $150 = $550. This perspective may be obvious in hindsight, but it isn’t the way most people perceive a negotiation.

 

3. Power is not related to size

Correctly understood, both sides always have equal power in a negotiation. Anju might have less money than Bharat, but she is equally essential in creating the $300 negotiation pie.

Let me give you a real example. My mom was renting a house in Sarasota. The owner saw a hot market and put the house up for sale. He offered her a deal, the chance to buy at $790,000 before listing it at $800,000.

What was the negotiation pie? It was the opportunity to save the 5% real estate agent fee (here $40,000). I proposed we split the $40k pie 50:50. He said he had more power as it was a “hot” market. True, but that meant the price would be high, not that he should get more of the $40,000. He needed my mother to be the buyer in order to save the commission. If he sold to anyone else, he would net $40,000 less than the sale price.

After hearing the pie perspective, he agreed to sell at the market price minus $20,000 or, more precisely, minus 2.5%, which was half the real estate commission. We determined the market price by looking at the several recent sales that had taken place on her street. We turned a negotiation into a data exercise. And then we found ways to make the pie bigger. We agreed to hire the same lawyer for the closing, split the cost, and thereby saved another $2,000.

 

4. Even zero-sum negotiations aren’t

Sure it’s great to grow the pie, but what about zero-sum negotiations? A zero-sum negotiation is like my mom’s division of the real-estate commission—the more of the $40,000 the seller gets, the less my mom gets. But, if they don’t reach a deal, they both get zero. That’s a lose-lose outcome. Avoiding the lose-lose outcome provides an opportunity to grow the pie even in a zero-sum negotiation.  

People reject deals that they perceive as unfair. Experimental evidence says this is deeply ingrained; even monkeys reject unfair splits. But people (and monkeys) don’t reject deals they see as fair. Thus, coming up with an objectively fair split allows people to reach a deal in a zero-sum negotiation and thereby avoid the no-deal lose-lose outcome.

 

5. Start a negotiation by discussing how you will negotiate

Negotiators often jump to discuss price way too quickly. You need to understand the other side’s interests. You want to help them understand yours. But even before you explore interests, it helps to first sent up a framework for the negotiation. How will you negotiate? Are you going to make ultimatums, try to take advantage of each other, and act like jerks? Or, can the two sides agree to create a big pie and split it? If the other side says no, you learn up front who you are negotiating with. If they aren’t sure, you can help them see a better way. And, this is key, if you can agree on splitting the pie, you can focus your attention on working together to make a bigger pie. This allows you to put your natural curiosity and empathy to work to expand the pie. You don’t have to watch your back and worry about being taken advantage of as you’ve already solved the contentious part—you’ve agreed to split the gains you can create.

In the case of my negotiations with Coca-Cola, we agreed they would buy Honest Tea in three-years time. We needed to grow the business so as to thrive inside the Coke system. During those three years, Coke would help us with production, distribution, and purchasing. But they didn’t want to pay more due to the help they were providing. Fair point! And yet, while it was true that their help would allow us to grow faster, they needed us as the vehicle to help. Only by coming together could we create a bigger pie.  Thus, we agreed they would pay full price on sales up to $X—that’s what we could do on our own—and half price on sales thereafter. We agreed to split the pie whatever it turned out to be. Like my mom’s deal on the house, the issue of figuring out $X was a data exercise more than a negotiation. We focused our attention on growing the pie and more than tripled our sales during those three years.  

 

I know there are lots of Yes buts. What if there are more than two parties, what if one side cares more, what if the other side doesn’t care about fairness? I have answers to all these questions. That’s why there’s a book, not just five headlines. Come along for the ride. You’ll never look at negotiations the same way again.

 

Bonus idea: How to grow the Pie. Try Yes, If

In improv, one key lesson is to employ “Yes, and.” The idea is to build on rather than contradict what the other person is saying. In negotiation, try “Yes, if.” Rather than say no, let the other party know what it would take to get to a Yes from you. Either the other party won’t go there in which case you are no worse off than if you had just said no, or they will make the stretch and you’ve got an agreement.

I wanted my daughter to join her high school math team. That wasn’t high on her list of priorities. It wasn’t even low on her list. But rather than saying No, she came back with Yes, if we can get a dog. The dog lasted 13 years and the math team only one. Even so, I think we both felt we got the better part of the deal.