Dear Negotiation Coach: Will Your First Offer Be in the Right Ballpark?

The first offer in a negotiation is a powerful anchor, but it also sends a message, and negotiators need to ensure it's the right message.

By — on / Dealmaking

first offer

The first offer in a negotiation often acts as an anchor upon which subsequent offers are generally based. Making the first offer can give you a strong starting point in a negotiation. As we’ll see, however, that opening number can also send a message about how much you value the other party’s involvement.

A recent question highlights the importance of making a first offer with care.

Q: I am trying to decide if I should make the first offer in an important upcoming renegotiation with a longtime client. On the one hand, I feel that I’m within my rights to push hard for a better deal. On the other hand, we have established a good relationship, and I don’t want to antagonize the client. Do you have any tips?

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How to make a first offer that shows appreciation for your counterpart

A: Making the first offer can yield numerous benefits both with new and ongoing partners. When you are well educated about the relevant facts and figures, for example, you may be able to anchor the discussion around a number that favors your side. But as you seem to appreciate, making the first offer can be complicated by several factors, such as your power in the negotiation and the nature of the relationship.

Your question brings to mind a renegotiation involving a first offer that can only be described as a significant failure. This botched first offer set a negative tone that cast a pall on the rest of the discussions.

The negotiation involved an accomplished Major League Baseball pitcher, Jon Lester, and the team he’d played for since 2006, the Boston Red Sox. With Lester’s contract expiring at the end of 2014, the parties began contract renegotiations before the start of the 2014 season. A win-win deal seemed likely. After all, 31-year-old Lester had helped lead the Sox to three championship seasons, even as he overcame significant personal challenges, including a bout with lymphoma. Moreover, Lester publicly stated that he wanted to stay in Boston and was willing to take a “hometown discount” to do so. That made the collapse of the negotiations and subsequent trading of Lester to the Oakland Athletics in July all the more surprising.

To understand what went wrong, we need only revisit the Red Sox’s opening offer of $70 million dollars over four years ($17.5 million per year). The figure might sound high, but it wasn’t even close to the deals reached by other pitchers of Lester’s caliber in recent years (such as Justin Verlander’s five-year, $180 million deal with the Detroit Tigers).

Lester’s representatives dismissed the offer and asked the team to try again, but the Sox apparently failed to follow up in a reasonable amount of time. At that point, Lester and his agents cut off talks with the Red Sox, a decision that led to his eventual trade. As a free agent in the current off-season, Lester was courted by the Chicago Cubs, the San Francisco Giants, and the Los Angeles Dodgers, as well as the Red Sox. Although the Red Sox reportedly nearly doubled their initial offer, the Cubs bid a bit higher and won Lester over with a six-year, $155 million deal with a vesting option for a seventh year.

“What we did was throw a number out to get the negotiations started,” Red Sox president and CEO Larry Lucchino later said. But the opening offer apparently didn’t seem arbitrary to Lester. Rather, it signaled that the team didn’t view him as being in the same ballpark as the other elite pitchers in the game. The overly aggressive opening offer also suggests the Sox read too much into Lester’s expressed willingness to take a “hometown discount.” By relying too much on this suggestion instead of probing to explore Lester’s interests, the Red Sox drove the negotiations to a place from which they could not recover.

As Lester’s story suggests, you are wise to think through the decision of whether to make a first offer carefully, for several reasons. First, a first offer serves as an anchor that can set the tone for the rest of the negotiation. Second, first offers in renegotiations make a statement about how much the party making the offer values the relationship. Third, when parties approach a negotiation with different mind-sets, they may misinterpret one another’s intentions. As you push for a better deal, don’t forget to stress the value you place on all you have achieved in the past.

Have you encountered first offers that failed to account for the value of both parties in the negotiation?

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