Opening offers have a strong effect on price negotiations. The first offer typically serves as an anchor that strongly influences the discussion that follows. In research documenting this price anchoring effect, psychologists Daniel Kahneman and Amos Tversky found that even random numbers can have a dramatic impact on people’s subsequent judgments and decisions.
Research on the price anchoring effect has strong implications for price anchoring in negotiation. For example, if you enter a job interview hoping for a salary of $75,000, but the interviewer only offers you $50,000, you may find yourself making a counteroffer of $55,000—far less than the $80,000 you would have asked for if you had made the first offer.
The following three guidelines can help you deal with the other party’s price anchoring and engage in effective price anchoring yourself.
1. Assess Both Parties’ Knowledge of the Bargaining Zone
To decide whether it’s a wise idea to make the first offer in a negotiation, you need to assess your best alternative to a negotiated agreement, or BATNA; your target; and your reservation point—your point of indifference between accepting a deal and pursuing your BATNA. Next, estimate your counterpart’s BATNA, target, and reservation point. This analysis will tell you how much you know about the zone of possible agreement, or ZOPA—the range of options that would be acceptable to both sides.
The decision of whether to make the first offer should be based on two factors: your own knowledge of the ZOPA and your assessment of the other side’s knowledge of the ZOPA.
When the other party seems to know more than you do about the size of the ZOPA, you will have trouble anchoring effectively. In the typical job negotiation, for example, the interviewer knows more about the possible salary range than the job candidate does. By contrast, when you are negotiating over an asset that you know a great deal about, you should take advantage of your superior knowledge and make an aggressive first offer.
If you decide to engage in price anchoring, how aggressively should you bid? A smart guideline is to anchor at the end of the ZOPA that favors you, but not outside of the bargaining range.
2. Consider Making a Range Offer
Suppose you are about to negotiate the price of your used car with a potential buyer. You know that the fair market value of the car is about $5,000–$6,000. You want to make an opening offer that is aggressive but not offensive. Should you name a specific price—say, $7,000—or suggest a price range, such as “I could sell the car to you for about $6,500 to $7,500”?
In a 2015 study in the Journal of Personality and Social Psychology, Columbia University professors Daniel R. Ames and Malia F. Mason find that expressing offers in a range can help you claim more value in financial negotiations.
They find value in delivering a so-called bolstering range offer, one that includes the single-figure offer you might plan to make at one end and a more ambitious number at the other end. For example, a seller might ask $7,000–$7,500 rather than $7,000 for her car.
Bolstering-range offers appear to lead to better outcomes in single-issue negotiations. In addition, because ranges appear to convey flexibility and accommodation, they may offset the assertiveness conveyed by price anchoring.
3. Try Very Precise Price Anchoring
Negotiation researchers have found that precise numerical first offers are more effective than rounder offers. For example, a house with a list price of $255,500 is likely to attract higher bids than houses with list prices of $256,000 or $255,000.
Leuphana University of Lüneberg professor David D. Loschelder and his colleagues found in a 2017 study 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 who were less precise—but still came out ahead.
Why? First, offer recipients made less ambitious counteroffers in response to more precise offers, judging 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 round first offers as the price haggling continued.
The takeaway? When anchoring in negotiation, strive to make a precise numerical offer, but make sure it’s no less ambitious than it would be if it were round. Ambitious, precise price anchoring should lead to the best results.
What strategies do you follow when engaging in price anchoring?
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