The awkward moment of a negotiation: who should make that first offer? Learn all about anchoring and what it means for negotiating.
When it is time to get the ball rolling during negotiations and set that opening offer, negotiators are often overcome with anxiety.
Who should be the one doing it, them or me? Awkward situations where both parties are unwilling to set the opening offer are not unheard of, and can be quite frequent amongst those with no experience.
Many businesspersons believe that by starting a negotiation with an opening offer, one is at a disadvantage. Actually, not only business people think like that, but also conventional wisdom says so.
Unfortunately, conventional wisdom is wrong in this case, because studies have shown that those who make the first offer are more likely to have better outcomes. Likewise, research has shown that the most successful cases are from those who make ambitious opening offers.
In negotiations, we call these anchors. Every negotiator has a target point or a goal. Let's take an example of trying to sell a car. Your goal (or target point) might be to make $1,500 from selling it, while your backup plan (BATNA) is to sell it to the car dealership for $1,000.
That means, $1,000 is the lowest you will go, but your main goal is $1,500. In this case, your anchor should be higher than $1,500, something like $2,000.
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Why Do Anchors Work?
In psychology, there's a phenomenon called the "anchoring principal," where people mistakenly rely too much on the first piece of information they can get. This also ties in with the primacy effect, where people are more likely to remember the first piece of information presented to them. When someone uses a high opening offer, even if you recognize it as unreasonable, your unconscious mind will associate this information with the product's value.
You see the anchoring principal being used everywhere including your daily shopping where you might see an item marked a lot higher than its value, but it's on 40 percent discount. The original price has already anchored itself onto our unconscious mind and our focus will be on the discount we're getting rather than the actual price we're paying.
Caution, Anchors Can Backfire
While it's nearly always a good idea to use anchors, if you use them incorrectly, they can backfire. If you set the opening offer too high, you run the risk of looking stupid as well as causing the other party to walk away. Outrageous opening offers can also lead to the chilling effect where the other negotiator loses all motivations to continue negotiating.
Just like yourself, the other party also has a BATNA (Best Alternative to a Negotiated Agreement), for instance, they might be able to buy that same car elsewhere for $2,500. Ideally, your anchor should be close to what you think their BATNA is. If you already know their BATNA, then you will have a massive advantage. In one-off sales, knowledge is power, since you can bend the negotiation in your favor without having to consider long-term consequences.
How to Set the Opening Offer
Now that you understand anchors, how do you decide one that is not too high, but ideally near their BATNA? To do this, you must first understand the market value of the product you're buying or selling. In this case, look up how much other sellers are offering that car and similar ones for.
Research provides the ammunition for a negotiation. Not only does it make you sound like an expert in the topic you're discussing, but it'll also allow you to draw outside reference points, for instance, if a seller starts complaining about the price being higher than they expected, you can point to examples online where the same car was sold for higher. Furthermore, you'll be educated on topics such as: how mileage influences the cost of a car or how much it will cost to repair the current damages to the car (any dents or engine problems).
With all of this said, sometimes an opening offer can be too high even if it's close to their BATNA. The best way to determine how high you should set your anchor is by asking yourself this question: Can the anchor be justified? Can you debate well enough to say that your anchor is a fair price? If you can't do that, then you'll need to lower your opening offer.
A good negotiator can create higher opening offers since they'll be able to justify them whilst less perceptive negotiators can't. For instance, a negotiator might take into account the mileage of a car, but a good negotiator might say that mileage alone isn't accurate since some people take care of their cars a lot better and how "highway miles" are better than city miles.
How to Deal With Anchors
Finally, now that you understand anchors, it's time to learn how to deal with them in case someone directs them at you. The one deciding the opening offer might have an advantage, but if you're aware of the bias, you will be nullifying its effects, especially if you're prepared to deal with it. Here are two ways to respond to an anchor:
- You can respond to the other parties' anchor by throwing out your own anchor. This is the simplest way since both parties will be experiencing the "anchoring effect."
- You can call them out on their ridiculous offer. Tell them their opening offer is too extreme and force them to make a more reasonable opening offer. Avoid treating this moment like a concession (or bargain), but rather, be specific that you want them to adjust their opening offer so it becomes reasonable enough to negotiate over. Don't hesitate to throw out your own anchor if they aren't making significant adjustments. Keep in mind that more frequent concessions don't necessarily lead to better bargaining ranges.
In order for these counter-tactics to work, you'll need to understand the market price of the item or service being sold. This is why research is so important! If you come in unprepared, then you'll never be able to convince the other party that their prices are unreasonable. Remember always to do your homework before entering a negotiation.