Why You Should (Almost) Always Make the First Offer
For some reason, negotiation is considered a specialized job skill rather than a core life skill. Business school students and salespeople learn tons about how to close deals, but most of us never learn much about how to negotiate . This is one of the reasons why the purchase of a large asset, such as a house or a car, causes such stress for ordinary people – negotiation is a sacrament for us.
But everyone negotiates on an ongoing basis, and learning some of the basics of making a win-win deal is an important skill we should all acquire. Difficulties in learning to trade are often a mixture of emotion, psychology, and mathematics. Leverage can fluctuate between parties, and emotions can play just as much of a role as finances (anyone who overpaid for a house because they “fell in love with it” can attest to this). That’s why it’s so important to master some basic negotiation skills, starting with why you should always seriously consider the first offer.
Anchor effect
You’ve probably heard that you should always make the first offer in a negotiation, perhaps with some vague explanation about setting conditions. Actually, it’s generally good advice because of what’s called the anchoring effect .
The anchoring effect is related to bias, the irrational tendency of people to rely on the first piece of data they receive, regardless of its value. We all have this bias: study after study confirms that the first number you hear will affect how you evaluate something. When sellers make the first offer, the final price is usually higher , and one study found that 85% of negotiation outcomes typically match the first offer .
The crazy part is that even when we know that the first piece of data shouldn’t affect us, it does. In one experiment , people were asked to write down the last two digits of their social security number and then asked if they were willing to pay that much for various items. They were then asked to bid on the same things, and despite the fact that the “starting” number they were given was completely unrelated, people with higher Social Security numbers bid much higher rates for everything. .
Drop anchor
The irrational power of the anchoring effect is why the first offer (sometimes called “drop the anchor”) is a powerful negotiating tool. But that doesn’t mean it always works – you need to know how to use it to get the most out of the effect.
Here are some things to consider when planning to anchor in negotiations:
- Be aggressive. People often worry that being overly aggressive with an initial offer or price will offend or alienate the other party. But an aggressive first offer is your best strategy . An aggressive first offer leaves you room to “compromise,” but you still end up with a better deal in the end (a variation on the Door in Front of Your Nose technique).
- Don’t be absurd. Keep in mind that “aggressive” does not mean “crazy”. While an aggressive first offer can set the gate in your favor, turning down an offer that is completely untrue can make the other side question how serious, competent, or trustworthy you are.
- Be specific. The more precise your first sentence is, the more effectively it will anchor your opposition. The classic example is house valuation : A list price of $255,500 will receive higher bids than a list price of $255,000 or $256,000.
By reflecting on the specifics of your first sentence, you can make the most of the irrational power of the anchoring effect.
Other negotiation success factors
As powerful as the binding effect in negotiations is, it is not a magic spell. The first thing to keep in mind is that if you are dealing with an experienced and trained business or sales professional, chances are they know all about it and are trained in ways to “defuse” an anchor , which is often as simple as ignoring him and addressing the details, or offering an immediate “counter-anchor” in an attempt to redefine terms.
In fact, the key to a successful anchor first offer is information. The ideal scenario for anchoring is when you know more than the other side. When the other party has access to more information than you, it’s very difficult to anchor. For example, if a homeowner knows the real estate market in his area well, knows how much his property costs, then your aggressive anchor will seem simply absurd. Or consider going through a job interview – the interviewer knows what salary is budgeted for the position, but you don’t. If your first salary request is outside this budget, it will not have the intended effect.
On the other hand, if you both know the same amount of information, your anchor will be predictable and expected, making it easier to discharge. And if you’re both in the dark, the first sentence will be pretty much speculation, making it impossible to know if you’re really helping yourself with your dark anchor shot.
With all this, it has been proven that the first proposal has a beneficial psychological effect on the other side of the negotiations. So use this power. Just do your research first.