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What Is a Reservation Price?

Deciding how to price your products and services can be challenging.

High prices may scare customers away, but low prices may mean youโ€™re underselling yourself and your effort. Given this, itโ€™s important to understand the model that works best for you and what youโ€™re selling, as there are many to choose from.

In this post, weโ€™ll talk about reservation pricing and give an overview of what it is, give scenarios where it makes sense to use the strategy, and how you can calculate your own.

Buyers also have a reservation price, and itโ€™s the maximum amount they would be willing to pay for what you have to offer.

You may be most familiar with this pricing strategyย during auctions, where a seller wonโ€™t accept anything less than a specific bid amount, which is their reservation price. People selling at an auction typically give a starting bid equal to their reservation price, so all subsequent offers go above their bottom line and gain a profit. Although theyโ€™re common at auctions, you can also find reservation pricing in real estate when sellers list their homes at a preferred starting price.

As a reservation price is typically cut and dry, you may be wondering how it factors into negotiations.

Reservation Price In Negotiation

As mentioned above, reservation price in negotiation is the point at which youโ€™ll walk away from discussions with a buyer.

These negotiations typically revolve around the zone of possible agreementย (ZOPA), which is the range of prices that either side is willing to pay or accept. For example, if your reservation price is $5 and the buyer is $10, the ZOPA is any amount between five and ten dollars.

While negotiations will end if offers are lower than reservation prices, some sellers opt to lean on a BATNA for a worst-case scenario, which weโ€™ll discuss below.

Reservation Price vs. BATNA

BATNA, which stands for Best Alternative To a Negotiated Agreement, is often confused with reservation pricing. Although theyโ€™re similar, BATNA is a backup plan to unsuccessful negotiations, while a reservation price is a set number.

Your BATNA is essentially responding to the question of what youโ€™ll do if your negotiation falls through and goes below your reservation price.

You can think of it like this: youโ€™re selling your car worth $7,000, so you set a reservation price of $6,000. Your negotiations with interested buyers fall short after a month of trying because theyโ€™re offering less than your reservation price, so you fall back on your BATNA and sell the car to your friend that initially offered you $5,700 when they learned you were selling.

If you were committed to your reservation price, you would keep trying to find a buyer until you were offered more than 6K.

As a final point of comparison:

  1. Your BATNA is where you go after you walk away from a deal,
  2. Your reservation price is the lowest possible amount youโ€™d accept from a sale. Your reservation price can play a factor in your BATNA.

Letโ€™s go over how you can calculate your reservation price.

How To Calculate Reservation Price

Coming up with your reservation price centers around figuring out your bottom line. Depending on what youโ€™re selling, the process and factors can be a bit different. Here are some scenarios:

  • If youโ€™re selling a house, youโ€™d want to consider the price you bought it for, the amount of money youโ€™ve put into maintenance and reservations, and what your current housing market looks like. All of these factors can help you figure out the most feasible price for your home, and youโ€™d want to set a reservation price close to that number, so you donโ€™t lose money.
  • If youโ€™re selling a car, you want to consider the condition of the vehicle, its mileage, and if the buyer would need to make additional repairs after purchasing. This will lead you to your bottom line, from which you can negotiate higher prices and step away if youโ€™re lowballed.
  • If youโ€™re a freelance photographer, youโ€™d want to assess the costs youโ€™d incur to take the job (transportation, materials, effort), your level of experience, and the desires of the person hiring you. Youโ€™ll understand your worth and present that as a starting value when sending quotes to customers.
  • If youโ€™re leasing office space, youโ€™d want to consider the square footage of the area, amenities within the space, and the location of the building (i.e., is it close to transportation, restaurants, downtown, etc.) Youโ€™ll get a sense of the value your space is worth, and you can step away if you feel like offers from buyers arenโ€™t taking that into account.
  • Suppose youโ€™re a wholesale company selling food supplies. In that case, your reservation price should be based on the unit prices of your items, the amount of effort put into creating the product, the type of product youโ€™re selling, and any costs associated with the sale like shipping and handling. You can set this as your reservation price and raise prices depending on the additional needs of the buyer.

Ultimately, a reservation price ensures that youโ€™re getting what you are worth as a seller. You won’t lose out on money for something youโ€™ve put time and effort into, and youโ€™ll know when to walk away if youโ€™re underselling.

pricing strategy