Suppose that you want to sell a product that costs you $18,000. You calculate that you can reluctantly let it go at the break-even sell price of $20,000 but would like to sell it for $30,000 to meet target margins. A buyer wants to buy it for $15,000 but is willing to pay up to a maximum of $25,000. The ZOPA where both buyer and seller can negotiate within would be between $20,000 to $25,000. You (the Seller) would not entertain a bid at $15,000 because you would lose money and the Buyer would not consider your asking price of $30,000.
Beware the dangers of not understanding the ZOPA. If you, the seller, start your offer at $40,000, so far outside the buyer’s ZOPA, the buyer will walk away since he or she may think that any discounting will never reach their buying range. The Seller had demanded too much and shut down negotiations. Likewise, the Buyer may make such a starting bid so low that the Seller might not think that he/she is serious and decides to walk away.
In Sales, a negative ZOPA exists when the walkway points of both parties are too far apart with no common area of overlap – a negative ZOPA. With a negative bargaining zone both parties may (and should) walk away.
If we study the current North Korea standoff, we see this negative bargaining zone. North Korea’s current walkaway point is that the US and world must drop sanctions before talks. The US walkaway point is that N. Korea must abandon pursuit of nuclear weapons.
Moving a ZOPA
Can you move the ZOPA? Yes, but it requires combining common interests to create a “win/win” for all. I, as the Seller, might be able to offer a demo or refurbished version of my product at a slightly reduced price which reduces my break-even sell price. The Buyer may be willing to offer me a testimonial for my promotional material or offer to buy in volume to reduce the Seller’s transportation and installation costs.
Likewise, a Seller or Buyer can shrink a ZOPA by adding terms and conditions during negotiations. True Story: A couple was getting very serious about marriage. The woman kept mentioning “little” things which got the man’s spiderman senses tingling (their ZOPA was shrinking). Finally, she mentioned that she would be in charge of their future finances and ration him $50 per week – their ZOPA went completely negative and he ran for the hills...and is still running.