In negotiation, the party who makes the first offer often gets the lion’s share of the value. That can be due to the anchoring effect, or the tendency for first offers to “anchor” the bargaining that follows in its direction, even if the offer recipient thinks the offer is out of line.
Yet plenty of times, the person making the first offer fails to capture most of the value in a negotiation. Why might that be the case?
How to use price anchoring successfully
In a study published in the Negotiation Journal, Najung Kim (Kookmin University, Seoul) and Hun-Joon Park (Yonsei University, Seoul) analyzed transcripts of 22 negotiation simulations to identify communication missteps during the early minutes of a conversation. The participants were South Korean students playing the roles of buyer and seller in a multi-issue negotiation involving the sale of a syndicated TV show. In 12 of the simulations, the negotiator who made the first offers got a better deal than his or her counterpart; in 10 of the simulations, the first offeror got a worse deal.
In particular, the researchers found that seeking and sharing pivotal information, such as one’s target price, affects the relative success of first offers. For example, imagine that Party A asks her counterpart, Party B, “How much are you thinking?” When Party B responds with a figure, that figure serves as the de facto first offer in the negotiation, the bargaining continues from there, and Party B receives a worse deal than Party A across issues.
This trend suggests when a counterpart asks you to name your price, you may be tempted to respond with an ill-advised, hastily chosen first offer. By contrast, the researchers found that negotiators who were able to resist sharing information about their target when questioned about it directly made more successful first offers when they were ready to do so.
3 tips for stronger first offers
When it comes to making first offers, here are three general guidelines identified by this research and past work on the topic:
1. Avoid answering questions that won’t serve you well. In general, asking questions and sharing information leads to better deals for all parties in a negotiation by drawing out previously hidden interests and priorities; however, we need to be careful about the kind of information we reveal. Giving away our bottom line or making a hasty first offer based on a vague aspiration can lead the other party to take advantage.
2. Beware of making an overly ambitious first offer. In our attempts to claim value, we risk making a first offer that’s so extreme that the other party is offended and calls off the negotiation. To avoid this trap, before negotiating, try to identify the bargaining range, or zone of possible agreement (ZOPA), based on what you and the other party are likely to be willing to accept. Then make a first offer at the end of the range that favors you.
3. Accept when you don’t know enough to make an informed first offer. Sometimes the other party will have a much better sense of the ZOPA than you will. For example, a recruiter may know much more than you do about the salary range of a particular job.
In this case, to avoid anchoring disadvantageously, you might let the other party make the first offer. Alternatively, you could make a loose but ambitious range offer that hints at flexibility, such as “I may be wrong, but I’ve heard that people with my level of experience earn around $80,000 to $90,000.”
The early minutes can have a significant impact on our negotiations. Plan in advance what information you will reveal, what you will keep under wraps, and whether you are equipped to make a strong first offer.
What is your experience like in making first offers in a negotiation?