One frequently discussed issue by negotiation experts is when should you make the first offer in a negotiation? Conventional wisdom is to never make the first offer in a negotiation. After all, by making the first offer you risk “showing your cards” too early and leaving money on the table. On the other hand, there are many cases where it is to your advantage to make the first offer. So how do you know? This answer depends on information.
The benefit of making the first offer is that it acts as an anchor. Anchoring is a well-documented cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions. This initial piece of information biases our expectations subconsciously.
A classic case of anchoring is the sticker price of a new car. It’s common knowledge that the price you actually pay for a car is less than the price on the window sticker. So why do car dealerships even bother posting the sticker price? The answer is simple: anchoring. For example, let’s say you are willing to pay $18,000 to $19,000 for a particular car. You go to a car dealership and see that the sticker price is $20,000, but then after some negotiating the salesperson offers to sell it to you for $19,000. Because of the anchoring effect, you will be convinced you are getting a much better deal than if the car was initially priced at $19,000. The initial price, whether we like it or not, tends to act as an anchor or reference point for all subsequent discussions regarding price, shifting the discussion (in this case) toward the higher end of your price range.
So, given the power of an anchor, isn’t it always better to make the first offer? No, sometimes it’s better to let the other party make the first move. The danger of going first is that you could start with a price that is less than what the other side was willing to pay. In this case, you have inadvertently anchored the negotiations but to the other side’s “lowball” price.
The deciding factor on whether to go first in a negotiation is how much information you have regarding the other side’s willingness to pay. If you believe you have sufficient information about the other side’s willingness to pay, then go first to avoid being anchored. If you suspect that you have relatively minimal information about the other side’s willingness to pay, let the other side open the negotiations and collect more information.
In many cases, based on your lack of information regarding the other side’s willingness to pay, the conventional wisdom is correct: don’t make the first offer. The risk, however, is that you may fall for the effects of anchoring. Here are a five counter negotiation tactics that you can use to help protect yourself from the worst effects of a buyer’s anchor:
Tactic 1: Ignore the Anchor
When confronted with an aggressive opening position the best thing is to deflect it and not to respond directly by suggesting you either agree or disagree. Obviously, you have to acknowledge hearing their opening. Here’s an example of how you can respond:
“… I think we may be looking at this contract renewal in very different ways. Let’s try and find some common ground by discussing…..”
In this way, you shift away from this topic and allow you get back some control of the negotiation.
Tactic 2: Counter-Anchor
Alternatively, you can counter-offer quickly to offset the anchoring effect of the buyer’s first offer.
For example:
“Ten percent discount? Actually, we just implemented a five percent price increase on all contract renewals based on our increased costs”
Tactic 3: Separate Leverage from Information
Every buyer’s opening includes attempts to use “leverage” and provides “information”. The buyer tells you what they want (information) and why you should accept it (leverage). In cases where the buyer takes an extreme position, it is easy to let the buyer’s attempt to use leverage distract you from the information they are providing. The key here is to carefully listen for what is information and what is leverage.
For example:
“XYZ Corp has offered the same thing for 20% less.”
In this case, you should not dwell on the buyer’s implicit demand for a discount to match the competitor but rather focus on how to best differentiate your offering from the competition. If you are unsure test your understanding. For example, “Could you go over that again?” “I am not sure what it is you are asking for...” or “ What commitment have you made to XYZ Corp?”
Tactic 4: Clarify
Sometimes the best response to a buyer’s attempt to anchor is to ask clarifying questions rather than to counter-anchor. Probing for more information regarding the buyer’s position and motivations behind it can help you develop creative options that you can offer later in the discussions. After asking clarifying questions, it is essential that you don’t dwell on the buyer’s anchor and change the subject. Why? Their anchor will be doing its job – keeping you on their agenda, not yours.
Tactic 5: Reject the Anchor
Finally, if the buyer’s position is so extreme that it is far outside your planned positions. Here, you have to be prepared to say that this opening position is not even a basis to negotiate. In other words, you are telling the buyer that you reject their anchor. Naturally, you have to back this position up with one or two reasons and propose what would be an acceptable basis to negotiate (Counter-Anchor).
In any negotiation thorough preparation and research are essential to determining when to make the first offer. In order to avoid the effects of anchoring or using them to your advantage, you must first understand your buyer and his or her willingness to pay. If you let the buyer go first and make the first offer, it is essential that you manage the effects of anchoring.
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