One of my key steps in preparing to negotiate is to know your alternatives. In other words, what do you do if you cannot make this deal? A key factor in negotiating is the ability to walk away from the negotiation. If you have viable alternatives to having to make this deal; you are in a position to walk away from the negotiation. If you ever pass the point where you can walk away, you have lost your negotiating position and you may as well throw in the towel.
When I was buying antiques for resell; I used to go to auctions and I would see where people lost control of the buying by passing their walk away point. They would take it personally that someone was bidding against them and decide they were buying this item regardless of price. You could often recognize these people because they would stick their hand up in the air and not take it down. Auctioneers loved these people and would rattle off prices as fast as they could to run up the price. It never dawned on some people that just because some other dealer was bidding on the item that they were going to resell it. If a dealer were buying the item for his own collection, he would be willing to pay more than if he was going to sell it and make a profit. Just as people can get carried away in an auction setting, some people can get carried away in a negotiation and “just have to have the item”. We attended an action house regularly and we got to know several of the dealers that also attended the auctions. One dealer (a doctor) would always ‘win” on the items he bid on. He would bid up items well over their retail value and go home happy. Several years later we attended the auction where he liquidated the stock from his shop. Sure enough, a lot of the items were things we saw him buy and the prices were about a third to a half of what he had paid.
Another reason to have alternatives in a negotiation is to give you options in the current negotiation. You might find that you could incorporate some of your options into the current negotiation to add value to what you are want to get. For instance, besides a favorable price, expedited delivery, extra features or an extended warranty might be factors that one of your alternatives has that this particular party is not currently offering.
Being willing to walk away from a negotiation is a must if you really want the best deal. Having alternatives gives you options other than having to settle. In a negotiation, the person with the most options has the most power. Knowing your alternatives gives you those options.