The Importance of First Offers (i.e., Anchors) in Negotiation
Written by Linda L. Barkacs
We have all heard “on the street” advice about negotiation. One of the most repeated is “never make the first offer.” It’s so popular that there is even a book with that title! But is this good, or even feasible advice? Let’s start with feasibility. You and I are going to negotiate, but neither one of us can ever make the first offer. Let’s start now!
[Long pause].
It’s absurd. Someone always has to make the first offer. But that’s not even the worst of it. If you truly believe making the first offer is a mistake, but you do so anyway, that voice in your head starts berating you for making a “mistake.” The likelihood of crafting an optimal deal in these circumstances (i.e., mired in self-doubt) is scant.
So should you make the first offer? The answer is (drumroll) . . . yes, no, and it depends! (I sound like the lawyer I am). But overwhelmingly, the answer is YES, so for purposes of this article, let me make the case for making that strong first offer.
According to one research study, first offers correlate with outcomes as much as 85% of the time. That means that your opening offer has a powerful psychological effect on the outcome of the negotiation. My spouse (also a professor/attorney) and I decided to test this theory in the classroom, so we created a simulation in which half of the negotiators are affirmatively prompted to make a strong first offer and the other half are given no special instructions with regard to the amount of any offer. The vast majority of the time, those who make a strong first offer (i.e., anchor) tend to claim more for themselves than those who are not given a prompt. So instead of just telling our students what the research says, we have them validate the research by experiencing it themselves. Nevertheless, some are still not convinced.
By way of example, let’s continue with the story of a graduate student I will call “Justine.” After the exercise on anchoring, Justine stayed after class to talk about a proposal she had put together for a non-profit she was working for. She wanted to ask for more funds for the project but said she “knew” they would be unwilling to go that high. So I asked: “Can you be successful with the lower amount you are requesting?” Her response: “No.” At this point, I gently asked why she would set herself up for failure. A few weeks later, Justine stopped by after class to say she had taken our discussion to heart, increased her ask, and received the entire amount requested. Moreover, near the end of the semester, she updated me on her success. The project had gone so well that the firm had offered her additional funds to expand and further upgrade the project. She was thrilled. Conversely, imagine if she had asked for and received the lesser amount, and fell short in her efforts because of insufficient resources. Lesson learned.
Many negotiators refuse to make strong first offers out of fear that the other party will do one of two things: 1) walk away from the negotiation out of anger; or 2) immediately accept the first offer (known as “winner’s curse”). Let’s start with #1, the walk-away. In order to avoid this outcome, the negotiator must do their homework. Research the value of whatever it is you are bargaining for so you understand what is within the range of acceptable terms. Extreme offers may cause the other party to question whether you are negotiating in good faith. Your first offer should be slightly worse for the other party than your estimate of their bottom line. The logic here is that your offer is “almost” acceptable so they will try to get you to move in their direction (somewhere near their “worst possible deal.”)
The other fear that negotiators have is that they will suffer from the winner’s curse. This occurs when you make the first offer and the other party immediately accepts it. When this happens, it is caused by a woefully unprepared negotiator who mistakenly makes an offer that is much too generous to the other party. Once again, it all comes down to preparation. Do your research. When should you NOT make the first offer? 1) When you are not prepared; 2) When the other party is better prepared and knows more about the value in play than you do; and 3) When you are well-prepared and confident that you know the value in play better than your counterpoint, let the other party make the first offer – they may make a mistake! (And because you are so well prepared, their anchor will not affect you adversely).
Anchoring is often based on price, but sophisticated negotiators go beyond mere dollars and cents. You can anchor on many other things. Take volume as an example (anyone been to Costco lately?) You can anchor on duration (can’t afford to finance that new car for three years? Why not five years?)
A product line is also often overlooked as a great place to anchor. When starting our corporate training business over 15 years ago, my spouse and I were making a pitch over the phone to do negotiation training for a well-known global organization. Their negotiation training in the past consisted of three levels of training: entry-level (new graduates); intermediate level (middle management); and expert level (partners and directors). After making our pitch, we were offered an opportunity to teach one level of our choosing. We immediately counter-anchored with the following: “Let us teach all three levels, because . . . . “ We were awarded a contract to teach all three levels and did so for a number of years. In that extraordinary example, we were not able to make the first offer, but we made a strong counteroffer and prevailed.
You can also anchor on level of quality, options to renew, and access to others in the organization (e.g., potential customers, references). The list is endless. Now go out there and make a strong first offer – anchor your way to success!