Negotiation Lessons from the Pawnshop

Special thanks to JAMS and Editor Richard Birke for their gracious permission to reprint this article which was originally published in JAMS Dispute Resolution ALERT , Vol. 8, No. 2, Spring 2008.

My resume is loaded with Alternative Dispute Resolution credentials: law school professor and then a dean; teaching negotiation and mediation for decades on several continents; writing books and dozens of articles; negotiating and mediating land use lawsuits, commercial cases, employment issues, institutional conflicts, and many other types of disputes with up to eight-figure payouts; serving on umpteen advisory boards and “blue ribbon” commissions. But my resume is not the reason you should follow my advice about negotiation. The reason you should pay attention to what I have to say is that I am the son of a pawnbroker.

The most important lessons about negotiating and reaching agreements were provided by my Dad, in a pawn­shop in East St. Louis. Since then, I’ve learned new, fancier names for some of the concepts I was taught as a youth, and I’ve been involved in more complicated transactions and disputes, but the pawnshop experience offered invaluable, practical lessons in how to negotiate. Here I will pass along to you some of what I learned at my Dad’s side.

Schmooze and Learn

My Dad, a high school dropout, was a savvy and professional negotiator, but he didn’t come across that way. His humble and friendly manner put customers at ease. Dad was a good “schmoozer,” who listened more than he talked. He told me “we were born with one mouth and two ears so that we can listen twice as much as we speak.” If by asking questions and listening you can learn what is in the head and heart of someone, it is much more likely that you will make a per­sonal connection, satisfy their needs, and in so doing, get what you want. If you actively allow others to express themselves, they usually will tell you what you want to know. The more you talk, the less they can say, and the less you can listen and learn. Dad emphasized that you seldom learn anything new by speaking. When you do speak in a negotiation, particularly at first, do so in a way that elicits more information, directly or indirectly, or that helps build trust. Connecting with people, whether as a pawnbroker with a client or a lawyer with their opposing counsel, makes our work worthwhile. Tak­ing the time to establish a personal connection and trust is usually time well spent.

Soda Pops and Reciprocity

Reciprocity works. People tend to return favors and are more likely to respond positively to those who reach out by offering a small gift or show of concern. When someone seemed like a serious customer, particularly in the hot summers in East St. Louis, my Dad would ask if they would like a cold pop (a “soda” in the Midwest). This seemed to break the ice and created a sense of both trust and obligation. This is a simple lesson practiced by fruit peddlers, who offer free samples, and by law firms, where a receptionist asks, immediately upon greeting you, if you would like a cup of tea or coffee. In your legal negotiations, look for a non-costly concession to make early. Giving a little something early on will likely trigger more cooperation from the other side. My Dad’s offer of a cold pop helped turn reluctant “lookers” into more relaxed customers who were more likely to reciprocate Dad’s sincere but calculated kindness.

The Secret Code

Legal folklore and some academic texts assert that when negotiating you should let the opponent make the first offer. However, negotiators may have an advantage if they make the first offer. First offers, like prices we placed on items in the pawnshop, act as an anchor point for bargaining. A pair of diamond earrings with a $300 price tag is much more likely to sell for $200 than if marked $200. However, the first offer or demand should not be so exaggerated that you are laughed out of the room or that bargaining never starts because your offer (or price) is out of the bargaining zone. The important lesson is to aspire high, but have a realistic bottom line that you don’t forget. In the pawnshop the aspirational sticker price was, typically, double the amount loaned on clothing and household items; triple the amount for jewelry, musical instruments, guns, and tools. The bottom line was the amount loaned plus 10%.

Dad needed a code to keep the bottom line secret from others but clear to him and those of us who worked in the shop. He went back to his fruit ped­dling days and used the 10-letter code “fruitandco,” representing, from the first letter to the last, the numbers one to 10. With fruitandco in our minds, we could count to 10 with 10 separate letters forming a secret digital code.

Each item for sale in the store had a tag with the “price” written at the top for all to see and at the bottom the cost plus 10% written with the code “fruitandco” letters in smaller print. A bottom line amount of $5.70 would be written “tno”. All of us who worked in the store knew the code and never lost money on a sale – we would walk away from the deal when we hit the bottom line. But we started every negotiation trying to hit the goal – to come as close to the marked target price as possible, which was profitable but also fair and reasonable.

Gold Plated Perceptions

In the pawnshop, I learned that deals take place when the offer on the table leaves

everyone better off than no deal. The same is true for settlements of lawsuits. In other words, you don’t get any of what you want unless the other side gets at least some of what it wants. Wants, needs, and values are matters of perception.

Pawnbrokers and lawyers try to change the other sides’ perceptions through persuasion that the unre­deemed item for sale (or the lawsuit) is worth more and that buying it (or paying the claim) is a good deal. The person on the other side of the store counter (or the lawsuit) points out flaws, highlights perceived better alternatives, and argues that the goods or claim is worth less than we think.

Dad was a master at the art of managing percep­tions. Behind the counter displaying used watches, he kept a stack of high-end fashion magazines with glossy advertisements for expensive watches. He would deftly flip one of these magazines open while a customer was looking at a pawned watch and bring the customer’s attention to the price of a new watch that resembled one in the case. (Never mind that the advertised watch was real gold and ours was gold plated.)

Similarly, a plaintiff’s lawyer will be quick to compare the amount of his demand to a large verdict for a similar claim. The defense lawyer will point out why the current claim is, at best, a plated imitation of the golden facts that resulted in the big verdict and more similar to a recent case resulting in a defense verdict. By referring to carefully selected reference points by way of comparison, each negotiator will try to change the other’s perception in a way that will result in a sale or settlement agreement.

Do the BABULEW

The best thing that ever happened to boost our sales was when a jewelry store that sold only new merchandise opened in the neighborhood. Once that store opened, my dad had a tool, even better than glossy magazine adds, to deal with any customer who wanted too good of a deal. When anyone was unsure about whether to buy at our shop, Dad would suggest that they visit the jewelry store down the street and then do the BABULEW – which stood for “Best Alternative to Buying Used from Lew.” The BABULEW comparison usually closed the sale.

This type of analysis was popularized in the best selling negotiation book, Getting to Yes, which emphasized the importance of knowing your “best alternative to a negotiated agreement” (BATNA). Before you decide if an offer is worth taking, compare what will happen if you don’t make a deal. The better your walk-away alternative, the easier it is to walk away. In lawsuit settlement negotiations, the BATNA is usually mediocre – further delay and costs along with the prospect of a risky trial.

If you can point out to the other side that their walk-away alternative might not meet their interests as well as the deal you’re offering, they too, might do the BABULEW.

Diamonds for Vacuum Cleaners

My Dad focused on his customer’s underlying interests rather than just the amount of money they offered. He didn’t get hung up on a customer’s bravado or the occasional low offer or insulting comment. Customers used monetary offers to communicate all kinds of things that had little to do with dollars. The same is true with litigants. Plaintiffs in lawsuits ask almost exclusively for dollars in their complaints and the defense invariably offers fewer dollars than the plaintiffs demand. But the dollars usually represent basic human interests. These interests might be met more creatively if better understood.

People need money to satisfy material, social, and emotional needs. Finding out how the money will be used or what needs must be met is helpful to fashioning a satisfactory agreement. I remember a customer who brought in a modest diamond wed­ding ring to pawn. Dad wouldn’t give her the amount she wanted – the ring wasn’t valuable enough to justify her asking price. Instead of just saying “no,” Dad asked why she was pawning the ring and for what she needed the money. She said that she was recently divorced and needed money to buy a vacuum cleaner for her housecleaning jobs. Dad had lots of unredeemed vacuum cleaners and a mutually advan­tageous trade was made. Focusing on needs, not just dollar demands, facilitated a deal in a situation that did not look promising.

People also have “process” interests in making deals and resolving differences in a way they con­sider fair or, even better, advantageous. Our cus­tomers usually thought they did well, were treated with respect, and had some fun bargaining with the pawnbroker. Dad was a master at making people believe they “bargained him down.” He knew the importance of being able to come down from his opening price so that the customer could get more than a good deal – she could get the satisfaction of successfully bargaining for concessions. Dad knew it was important for customers to leave the shop feeling good – not just about the final price, but about the way they got there. The same is true for lawyers with whom you negotiate.

Give and Take

Concessions are the incremental compromises a negotiator makes after an opening offer. Usually the concessions made are offered in return for concessions from the other side. Making concessions can be done strategically, knowing that the timing, amount, and nature of concessions are a form of communi­cation by which each side sends signals about their values and reservation points. The pattern of con­cessions sends a message. By carefully considering what you want to communicate, you can manage concessions to shape the message, particularly about how close you are to your bottom line. (Diminishing concessions signal you are close.) Consider the fol­lowing pattern of concessions and the message my Dad was sending when selling a watch:

“Lew, that old watch isn’t worth $100. I will give you $50.” “Ok, business is slow; I can give you a 10% dis­count. $90 and it’s yours.” “It’s only worth $50.” “I can sell you that other watch in the case for $50, because it isn’t gold plated. This watch would cost you $200 new.” “You are a good salesman, Lew. Wrap it up and I’ll give you $60.” “No, I can’t do that. Elgin watches are in demand and I don’t get them in often. If you want to take it right now, I will accept $85. That’s it.” “I know you are robbing me, but I will pay $75, if you will throw in a new band for it.” “The band will cost you $10, so the total will be $95.” “Lew, you’re going in the wrong direction.” “No, you’re getting a real bargain and I can’t come down.” “You don’t have to come down. I’ll pay $85 with the new band.” “It’s past our closing time and I need to go. I will let you have the band at cost for $6, if you buy the watch now for $85.” You drive a tough bargain. Here is $90. Take it or leave it.” “OK, you’re killing me, but I really do need to close the shop.”

The timing of concessions is critical. Concessions given in rapid succession early on may signal risk aversion or desperation. Giving away too much in the initial stages of the negotiation depletes the reserve of concessions that can be offered later when they may be more appreciated. A negotiator should space concessions because while gains feel good, they only feel good for a little while, so it’s best to string them out and get the most from them.

Concessions should be made in the context of reciprocal trade-offs or exchanges rather than given simply to find the other side’s point of acceptance. Remember the caution not to “bargain against yourself.” Demanding a concession in return both reinforces the value of what is being conceded and signals the resolve of the negotiator making the concession. It also helps to build the process of give and take and fuel movement toward agreement.

Leveraging Nylons and Jeans

I started working in the pawnshop after the end of World War Two. Dad had a good stock of some price controlled items in short supply after the war – particularly nylon stockings and Levi jeans. This supply gave him bargaining power in negotiating for the sale of other goods that weren’t price controlled, because he could dangle the possibility of including one of these “scarce” items in a package sale with other less coveted merchandise.

Dad did not put the nylon stockings on display, despite the fact that most women wanted them. Instead, he would let it be known that he had qual­ity stockings and would make them available if the buyer was a “good customer,” i.e., one who spent a lot. “Buy this used suit and you could also get a pair of hard to find nylon stockings for your honey.”

The nylon stockings and jeans gave Dad the scarce ingredient he needed to create a package that al­

lowed him to move merchandise that was harder to sell. Both sides got what they wanted through packaging, just as you can in settlement deals. For example, in land use disputes, municipalities may al­low a developer more building density or height if the developer will include more scarce affordable housing units or public amenities. Packaging works.

Power and Commitment – Please Don’t Try This

If my Dad had something in the store that a cus­tomer wanted, he had a degree of power because he controlled if the customer got it. The customer, of course, had something Dad wanted – money. In any negotiation there must a degree of power and motivation to fill a need on both sides. The negotiation process, in part, is how each side shapes the perception of their power in the mind of the other.

Power is linked to commitment. If the other negotiator perceives that you are committed to give (or not give) what he wants only if he gives you what you want, then you have power in the negotiation. A hostage taker adds credibility to his bargaining position if he shoots one of several hostages, but in so doing he also risks ending the negotiations. Similarly, lawyers who have trial experience and demonstrate a credible commitment to go to trial, will do better in negotiations than lawyers who have only settled cases. However, if her willingness to litigate is overplayed, a lawyer risks alienating the other side and forcing a trial where a settlement would have been both possible and desir­able.

Dad told me a story that illustrates the power of an irrational but credible commitment or threat. A man walked into the pawnshop wanting to pawn a gun. He wanted $50. Dad would normally hold firm not to give more than $20 on a similar gun. The man explained that he needed $50 to pay his rent, which was past due, and if he didn’t get it he would kill himself. This threat would generally not move my father to part with more money. However he looked into the man’s eyes, which were bloodshot from tears, and saw a commitment that seemed real. The man got his $50. This may have worked in my Dad’s shop, but please don’t try it in your next negotiation.

Playing “What If”

“Lew, you can’t outshoot me.” “Yes, I can.” “No, you can’t.” “Want to put your money where your mouth is?” “Why not?” “Loser pays for all the ammunition.” “OK.”

My Dad’s pawnshop became well known for offer­ing a staple item in rough and tumble East St. Louis, unredeemed guns. We also sold ammunition for both personal weapons and hunting guns. Outside, behind the store, we had a makeshift shooting range. A brick corridor four or five feet wide, formed by the side of our building and the one next door, terminated in a brick wall, in front of which Dad layered wood and metal to absorb the bullets. Paper bulls-eye targets were regularly blasted to bits in back of the shop. My Dad was an excellent marksman.

Dad liked to challenge customers, including police officers who were regulars in the shop, to shooting matches. The deal was that the customer would pay full price for all the ammunition used, but only if they lost. Dad promised that if he lost, he would pay for the ammo. Perhaps my memory is colored by the awe I had for my father’s shooting prowess, but I don’t recall Dad ever losing. The ammo sale was based on who won the shooting match – a kind of “contingent agreement” – a commercial bet on an uncertain future outcome, where each perceives that they are likely to win.

If parties in a negotiation have different predictions about future events or disagreement over the risks that will flow from concluding a deal or reach­ing a settlement, they may reach impasse. However, if the negotiators, like Dad, put their money where their mouths are, they can struc­ture an agreement that builds upon these differences. In appropriate circumstances, negotiators can agree to disagree and write contingent outcomes into the deal. When are the appropriate circumstances? When the parties think the risks are worth taking and they are confident of their shooting abilities.

Exploding Offers

Negotiations are like gas – they expand or contract to fill the space or time available. I’ve seen many stalled mediations conclude only when the disputants become aware that the time to make a deal or settle is running out. Sometimes the deadline is imposed by a court, and sometimes it’s self imposed, like a plane to catch. As the end looms, concessions are offered and compromises are reached that would not be considered earlier.

There comes a time in some negotiations, like in sales, when one negotiator thinks it is advantageous to prevent the other side from exploring alterna­tives, getting more information, or having second thoughts. In these situations, the negotiator may try to impose a deadline. Introducing deadlines into a negotiation is a way to create a perception of a vanishing opportunity.

In the pawnshop we had to take inventory once a year to calculate merchandise taxes due. But just about every other week I would hear Dad close a sale late in the day by saying “we are getting close to taking inventory for the merchandise tax. Buy this right now and I will knock off another 10% so I don’t have to pay tax on it.” The idea that the discount was fleeting made it especially alluring. (It was true that everyday the inventory was closer to happening and if sold before then there would be no tax due on that item.) This type of take-it-or-leave-it deadline is sometimes referred to as an “exploding offer.” Lawyers do something similar when they say “you have until 5:00 p.m. to accept this settlement offer or it’s off the table because tomorrow we start preparing for trial.”

A Good Loser

Never celebrate a victory, at least not in the pres­ence of your opponent. If you can leave the other side convinced they did well, there will be fewer issues going forward and less likelihood that the other side will back out of the deal. The relationship between negotiators is strengthened if no one feels they were beaten. There is value in the rapport established for future negotiations. Conversely, if an opponent or his attorney loses face, he may feel compelled to “get even” at the next opportunity.

I will never forget hearing this exchange in the pawnshop at the end of vigorous bargaining be­tween Dad and a regular customer over the price of an electric fan on a hot summer day:

“Glen, you drive a hard bargain. You can take the fan for $17 on one condition; don’t tell anyone how little you paid for it. I’m losing my shirt to you.” “Stop your bellyaching, Lew. You gotta be making money. How else do you stay in business and feed your family when you always lose money selling this stuff?” “You’re right. I lose money on almost everything I sell, but I sell so much I can afford to lose more money. It’s a matter of volume!”

Glen left the shop feeling like he had bargained well. The person you negotiate with should always feel they got a good deal. A positive experience prevents buyer’s remorse and may bring them back for more. When appropriate, congratulate your counterpart on the agreement achieved, but not too much.

Relationships Matter

Pawnbrokers, like lawyers, develop reputations and depend on relationships to succeed. The interest in creating or preserving a relationship is particularly important when negotiating contracts and resolving business disputes, where the parties see or once saw a benefit in working together and anticipate future transactions. In the 1965 Academy Award-nominated movie “The Pawnbroker,” an old, lonely gentleman pawned something every week just to have a reason to talk to the pawnbroker.

Some regulars at the pawnshop pawned their jewelry a few days before payday and retrieved it af­ter getting paid. Musicians would pawn instruments between gigs and come into the shop mid-week because Dad would let them practice at impromptu jam sessions, which also drew in other customers. The relationship between my Dad and his “band of regulars” was good for the soul and good for busi­ness. Your relationship with other lawyers, including opposing counsel, is important for your long term success as a negotiator.

Live and Learn

I can’t fully capture here all my Dad taught me about negotiation. There are too many good pawn­shop stories and lessons and too little space in this newsletter. I’ve shared a few of my favorites in the hope that you learn something from my Dad that helps you negotiate better. But I hope you learn something else as well – that no matter what your background, no matter what your parents did for a living, there’s a lot to be learned from a life well-lived that can apply to the resolution of legal disputes. Mine were lessons from a pawnshop, what were yours?