Negotiation: Definition, How It Works, and Why It's Important


Investopedia / Ellen Lindner

What Is a Negotiation?

The term negotiation refers to a strategic discussion that resolves an issue in a way that both parties find acceptable. In a negotiation, each party tries to persuade the other to agree with their point of view. Negotiations involve some give and take, which means one party will always come out on top of the negotiation. The other, though, must concede—even if that concession is nominal.

By negotiating, all involved parties try to avoid arguing but agree to reach some form of compromise. Negotiating parties vary and can include buyers and sellers, an employer and prospective employee, or governments of two or more countries.

Key Takeaways

  • Negotiation is a strategic discussion that resolves an issue in a way that both parties find acceptable.
  • Compromise is normally the basis of negotiation.
  • Negotiations can take place between buyers and sellers, an employer and prospective employee, or governments of two or more countries.
  • Negotiating is used to reduce debts, lower the sale price of a house, improve the conditions of a contract, or get a better deal on a car.
  • When negotiating, be sure to justify your position, put yourself in the other party's shoes, keep your emotions in check, and know when to walk away.

How Negotiations Work

Negotiations involve two or more parties who come together to reach some end goal through compromise or resolution that is agreeable to all those involved. One party will put its position forward, while the other will either accept the conditions presented or counter with its own position. The process continues until both parties agree to a resolution.

Participants learn as much as possible about the other party's position before a negotiation begins, including what the strengths and weaknesses of that position are, how to prepare to defend their positions, and any counter-arguments the other party will likely make.

The length of time it takes for negotiations to take place depends on the circumstances. Negotiation can take as little as a few minutes, or, in more complex cases, much longer. For example, a buyer and seller may negotiate for minutes or hours for the sale of a car. But the governments of two or more countries may take months or years to negotiate the terms of a trade deal.

Some negotiations require the use of a skilled negotiator such as an advocate, a real estate agent/broker, or an attorney.

Where Negotiations Take Place

Many people assume that prices and offers are firm and final. But that's not necessarily true. In fact, many are actually flexible. Negotiating can be a way to come to agreements in a variety of areas. Some examples include:

  • Reducing debts
  • Lowering the sale price of a house
  • Improving the conditions of a contract
  • Getting a better deal on a car

Say you want to buy a brand new SUV. The negotiation process usually begins between you and the salesperson with the manufacturer's suggested retail price (MSRP). This is the price the producer recommends the dealership uses to sell the vehicle. What many people don't know is that most dealerships typically sell below the MSRP—unless the make/model is very popular. You may approach the dealer with an offer below the MSRP price—one that the dealership may accept or counter. If you have good negotiating skills, you may be able to drive away with a great deal, even lower than the vehicle's invoice price. This is the price the manufacturer actually charges the dealer.

Negotiation is also an important skill when accepting a new job. The employer's first compensation offer is often not a company's best offer, and the employee can negotiate different terms such as higher pay, more vacation time, better retirement benefits, and so on. Negotiating a job offer is particularly important because all future increases in compensation will be based on the initial offer.

Key Factors in Negotiations

When it comes to negotiation, there are some key elements or factors that come into play if you're going to be successful:

  • The Parties Involved: Who are the parties in the negotiation, and what are their interests? What is the background of all involved, and how does that affect their position in the discussion?
  • Relationships: What is the relationship between the parties and their intermediaries in the negotiation? How are the parties connected and what role does that play in the terms of the negotiation process?
  • Communication: How will the needs of the parties involved be best communicated in order to secure their agreements through negotiation? What is the most effective way to convey the desired outcomes and needs? How can the parties be certain they are being heard?
  • Alternatives: Are there any alternatives to what either party initially wants? If a direct agreement is not possible, will the parties need to seek substitute outcomes?
  • Realistic Options: What options may be possible to achieve an outcome? Have the parties expressed where there may be flexibility in their demands?
  • Legitimate Claims: Are what each party requests and promises legitimate? What evidence do the parties offer to substantiate their claims and show their demands are valid? How will they guarantee they will follow through on the results of the negotiation?
  • Level of Commitment: What is the amount of commitment required to deliver the outcome of the negotiations? What is at stake for each party, and do the negotiations consider the effort that will need to be made to achieve the negotiated results?

The Stages of the Negotiation Process

Negotiation is a very important part of our everyday lives. We're often negotiating even when we don't think about it. You may be negotiating your salary or it can be as simple as negotiating a curfew with your teenager. Regardless of what you're negotiating and with whom, there are usually several steps that are involved. We've highlighted the key steps that most negotiations need from beginning to end.


The first stage involves a lot of preparation work. Going in unprepared won't help you at all. This often starts by establishing and laying down the foundation. Make sure you answer some key questions, including:

  • What are your expectations?
  • What do you hope to gain?
  • What compromise are you willing to make?
  • What happens if you don't get reach your end goal?

Determine what your negotiating strategy is and how you intend to do it. Are you competing, accommodating, or will you be collaborative? You'll have to adjust this strategy according to your end goal(s) and what you hope to accomplish. This is followed by research. Find out as much as you can about the other party.

For instance, come prepared with information about why you deserve a raise if you're meeting your manager. Concrete examples of where you succeeded with hard numbers and results, along with testimonials from clients and/or coworkers, and any plans you may have to further your career can help firm your stance.

Exchange Information

Now that you've laid down the groundwork for your negotiations, it's time to sit down with the other party, who has probably also done their homework before meeting at the table. This is the point where both sides are able to lay down what their arguments are that can help them reach their end goals.

Communication is key here. Being able to articulate effectively and thoroughly is critical to the negotiation process. This means you shouldn't skimp on the details. As long as you lay your cards out, there will be fewer details to iron out later.

So if you're negotiating a contract, offer any details you have as to what you intend to bring, what your conditions are, and why you're hoping to gain. You can do this verbally, in writing, or in a presentation.


By this point, you've both explained your positions and where you stand. You should have a firm grasp as to what the other party is looking for and they should know what you want. This step is very important because you want to be sure that you and the other party are on the same page.

If there are any wrinkles that need to be ironed out, any additional information that you need, or any questions that are left unanswered, now is the time to ask. And be sure that the other party is satisfied with your position, too.


Now that all the information is exchanged and you both have clarity, it's time to start bargaining. This is where the true negotiation begins. And it can take time, so be sure you don't rush the process.

Be sure you pick up on any cues given by the other party (verbal and nonverbal) that may help you get to your end goal. Listening, reading body language and understanding the other party's tactics, and responding in a manner that will be accepted are critical when you're bargaining.

The key to this step is to refrain from being argumentative. This can actually take you away from the point. Be sure you're ready to compromise if the need arises. After all, negotiating involves a little give and take on both sides.


Once both parties are happy and satisfied with the results, it's time to end the negotiations. The conclusion involves coming to an agreement and solidifying it. This can come in the form of a verbal or written contract. The latter is usually a better idea as it clearly outlines the position of each party involved. Make sure there are clear details and expectations for each party. And include any concessions/consequences if one or more of you fail to live up to your end of the deal.

Tips in Negotiating

Not everyone has the skills needed to negotiate successfully. But there are a few things you can do to better help you make your position known:

  • Justify Your Position: Don't just walk into negotiations without being able to back up your position. Come armed with information to show that you've done your research and you're committed to the deal.
  • Put Yourself in Their Shoes: There's nothing wrong with sticking to your ground. But while you shouldn't go over your limitations—such as spending more money if you're buying a home or car—remember that the other party has its own restrictions as well. There's nothing wrong with trying to see things from the other person's perspective and why they may not accept your offer.
  • Remove the Emotion: It's easy to get caught up and be swayed by your personal feelings, especially if you're really vested in the outcome. The best thing to do is to keep your emotions in check before you start.
  • Know When to Stop: Before you begin the negotiating process, it's a good idea to know when you'll walk away. There is no use trying to get the other party to see where you stand if the talks aren't moving forward.

Skills Needed to Be a Good Negotiator

Negotiating doesn't always come easy for everyone. That's why it's often called an art. Some people are naturals while others have to chisel their skills. Regardless of which end of the spectrum you lie on, there are several skills you need to make you a good negotiator. Among them are:

  • Listening
  • Thinking clearly, concisely, and on your feet
  • The ability to work well under pressure
  • Articulating your thoughts
  • Being able to persuade
  • Flexibility
  • Knowledgable and being prepared

When Negotiations Don't Work

Even the best negotiators have difficulty at some point or other making things work. After all, the process requires some give and take. Perhaps one party just won't budge and doesn't want to give in at all. There could be other issues that stall the negotiation process, including a lack of communication, some sense of fear, or even a lack of trust between parties. These obstacles can lead to frustration and, in some cases, anger. The negotiations may turn sour and ultimately lead parties to argue with one another.

When this happens, the best (and sometimes only) thing the parties can do is to walk away. Taking yourself out of the equation gives everyone involved a chance to regroup, and it may help both of you come back to the bargaining table with a cool and fresh mind.

Why Is Negotiation So Important?

Negotiation is so important for so many reasons, whether it's done for individual, corporate, or government interests. It allows you to advance yourself and get ahead in your career and/or in life. Being able to negotiate also helps people resolve conflicts and create value for themselves.

What Makes a Good Negotiator?

Some of the key characteristics of a good negotiator include the ability to listen, think under pressure, be articulate, and have a willingness to compromise. It also helps if you're able to persuade and come prepared with some background about the other party.

How Do I Negotiate My Salary?

The best way to negotiate your salary is to come prepared. Have concrete examples of why you merit a raise or a particular salary. If you have numbers to back up your success (sales figures, months were you've met or exceeded quotas or goals) and any testimonials from clients and coworkers, these can help back up your request.

The Bottom Line

Negotiating is a very important part of the business world. And it also shows up in our day-to-day lives. Companies negotiate contracts, governments negotiate trade deals, and parents negotiate allowances with their children every single day. Regardless of what you're negotiating, being a successful negotiator means listening, compromising, and accepting the other party's position. But being argumentative never gets you anywhere. So knowing what to do when things don't go your way can help you reach your end goal.