Do you know how to negotiate price? Is there a better way to approach this type of negotiation that differs from other negotiation strategies? In this week’s Dear Negotiation Coach column, we answer the question.
I’m trying to decide whether to make the first offer in a price negotiation. I’ve heard arguments in favor of both points of view—that is, going first versus sitting back and waiting for the other side to go first. Which tends to be the more effective strategy in how to negotiate price?
Negotiation is often a balancing act between learning about the other side’s interests and alternatives on the one hand and persuading the other party to agree with your view of the world on the other. Striking the right balance becomes an issue when negotiators are thinking about whether to make the first numerical offer or let their counterpart go first.
Those in the “learning mind-set” camp would say that letting the other side go first can give you valuable information about her interests, alternatives, and approach. By contrast, the “go first” camp would focus on the benefits of the anchoring effect, or the fact that the first number mentioned in any uncertain situation has an outsize influence on our judgment, as psychologists Amos Tversky and Daniel Kahneman documented. The first number mentioned powerfully influences negotiators even when they are aware that it should not.
Most negotiation advisers suggest that the benefits of the anchoring effect outweigh the advantages of learning more if you have a good sense of the likely zone of possible agreement, or ZOPA. If you aren’t sure about the likely ZOPA, however, and lack information about your counterpart and his alternatives, then perhaps it would be best to ask more questions and possibly allow your counterpart to offer the first number.
How to Negotiate Price
If it does seem wise to go first, here’s how to negotiate price with four guidelines in mind:
1. Justification. Be prepared to justify your offer with as strong a rationale as you can muster, and include objective data if possible. Research by Harvard psychologist Ellen Langer and her colleagues shows that an offer accompanied by a justification is more likely to be successful than an offer alone. My experience with offers to buy a minority share of an entrepreneur’s business has shown me that justifying the offer by referring to publicly available valuation metrics for comparable companies at least keeps the entrepreneur at the table.
2. Targets. You probably already know the importance of assessing your best alternative to a negotiated agreement, or BATNA, so that you won’t accept a worse deal than what you can achieve away from the table. But a single-minded focus on BATNAs often leads negotiators to emerge with “victories” that are only a little bit superior to their best outside alternative. Based on data collected in several of their MBA classes, my Harvard Business School colleagues Andy Wasynczuk and James Sebenius found that those who wrote down aspirational targets, often justified with objective data from similar transactions, achieved better outcomes, on average, than students who wrote down more modest targets. We now advise negotiators to set aggressive, justifiable targets, in addition to determining their BATNA, as part of their preparation.
3. Bargaining. Most people think that negotiation should involve haggling, compromise, and give-and-take. They typically will not accept your first offer. We therefore advise negotiators to build in some room for concessions when making a first offer.
4. Setting a “meta-anchor.” You can also try to anchor your first offer in a more expansive manner, a strategy that David Lax and James Sebenius refer to as “meta-anchoring” in their book 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals (Harvard Business School Press, 2006). For example, you might choose among comparables to find those that would be most favorable to you. If you are selling a technology-distribution business, you might cite the most relevant technology companies (which trade for higher prices) instead of distribution businesses (which trade for lower prices) when making your first offer. There’s a good chance your counterpart will start negotiating within the framework you’ve established.
But do you know how to negotiate price if your counterpart makes the first offer? To avoid being anchored, try to focus on the analysis you prepared on your own, including your BATNA and target. Finally, be aware of the midpoint effect, or the common tendency for negotiations to end up near the midpoint between the first offer and the first counteroffer. If you’re going second, think about picking a justifiable number that might lead, after some hard bargaining, to a satisfactory end result midway between the opening offer and your counter.
Kevin P. Mohan
Harvard Business School
Do you understand how to negotiate price better? What other questions do you have?