As you may have noticed, the first offer made in a negotiation often has a significant influence on the final outcome. In their research, psychologists Daniel Kahneman and Amos Tversky documented that the first number introduced in a negotiation serves as an “anchor” that can be impossible to ignore—no matter how irrelevant, outrageous, or insulting it may be. Due to the anchoring effect, or anchoring bias, making the first offer is one of the most effective negotiation techniques a person can follow.
But it’s not enough to aim high and expect your opening offer to pay off. You also need to carefully consider how precise that offer should be, recent research studies suggest.
The Precision Advantage
Research on price anchoring has found that more precise numerical first offers are more effective than offers that are less precise—those that have been rounded off. For example, a house with a more precise list price of $255,500 is likely to attract higher bids than houses with rounded-off list prices of $256,000 or $255,000.
Why are precise first offers more effective than offers with rounded-off numbers, and how can we further capitalize on their benefits?
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In one experiment, Leuphana University of Lüneberg professor David D. Loschelder and his colleagues had pairs of participants play the roles of seller and buyer in a negotiation simulation involving the sale of a chemical plant. One member of each pair was instructed to make the first offer (sometimes the buyer, sometimes the seller). In addition, those making first offers were encouraged to make either a rounded offer (such as €5 million or €36 million), a moderately precise offer (such as €5,818,600 or €36,181,300), or a highly precise offer (such as €5,818,614.76 or €36,181,385.24).
Like past research, the results showed that more ambitious first offers led to more favorable outcomes for the party who made the first offer. However, those making a highly precise first offer were less ambitious than those whose offers were less precise.
Interestingly, however, those who made the most precise first offers got better deals. Why? First, because offer recipients made less ambitious counteroffers in response to more precise offers; they did so because they judged those who made more precise offers to be more knowledgeable about the value of the commodity. Second, those who made precise first offers made smaller subsequent concessions than those who made rounded first offers as the price haggling continued.
Why did those who aimed for precision make less-ambitious first offers than those who made rounded offers? Because they correctly predicted that they would need to make fewer concessions to meet their goal—that is, they anticipated the anchoring effect of their precise offer.
The study’s results offer advice for professional negotiators. First, strive to make a precise numerical offer, but make sure it’s just as ambitious as it would be if it were rounded-off. An ambitious, precise offer should lead to the best results. Second, if the other party opens with a rounded offer, capitalize on the benefits of precision by responding with a precise counteroffer. Third, beware the tendency to be strongly anchored by precise offers and to assume that precision conveys knowledge, which may not be the case.
When the Precision Advantage Falls Short
Does the precision advantage hold up when a first offer is presented before two parties begin to negotiate? Take the case of someone comparing the prices of homes or used cars on online listing sites.
In their research, Columbia Business School researcher Alice J. Lee found that very precise offers risk scaring away potential negotiators by conveying inflexibility. In one negotiation simulation, for example, online participants playing the role of a landlord perceived participants in the role of renter to be less flexible when they made a precise rent offer for an apartment (such as $2,117.53 per month) versus a rounded offer (such as $2,100 per month). The landlords tended to prefer to negotiate with those who made rounded offers.
The researchers also gathered data from the real estate service Redfin and found that the more precise a property’s listing price was, the more likely the seller was to have relisted the property at a lower price due to lack of interest from buyers.
In short, the results suggest the following effective negotiation techniques: First, before you start negotiating, craft a rounded first offer, which may attract more bidders than a very precise one. Second, once the negotiation is in progress, increase the precision of your offers to get a better deal.
What other effective negotiation techniques do you recommend regarding first offers?