The Value of the Contrast Effect in Financial Negotiations

It's not always better to make a deal, than to leave it on the table, during financial negotiations.

By — on / Daily

salary negotiations

In financial negotiations, it’s always better when someone accepts your offer rather than rejecting it, right? Actually, rejection can sometimes be the most effective way to get to “yes.”

Here’s a story about consumer behavior in financial negotiations, as described by Itamar Simonson of Stanford’s Graduate School of Business and the late Amos Tversky in a pivotal 1992 article in the Journal of Marketing Research.

Upscale retailer Williams-Sonoma was selling a bread-making machine priced at $275. Eventually, the company also began selling a similar but larger bread-making machine, this one priced at $429.

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Williams-Sonoma sold few units of the more expensive machine, but after it was on the market, sales of the less-expensive machine almost doubled. Apparently, the $275 model didn’t seem like a bargain until it was sitting next to the $429 model.

Translated to the context of financial negotiations, the contrast effect suggests a strategic move: ask for more than you realistically expect, accept rejection, and then shade your offer downward. Your counterpart in the financial negotiations is likely to find a reasonable offer even more appealing after rejecting an offer that’s out of the question.

Real-estate agents sometimes play on this tendency by taking buyers to see overpriced, run-down homes before showing them ordinary homes that appear stunning by comparison, writes psychologist Robert Cialdini of Arizona State University.

Try putting forth several equivalent offers that aim higher than your counterpart is likely to accept. His reaction to the offers will help you frame a subsequent set that, thanks in part to the contrast effect, are more likely to hit the mark.

What do you think about the contrast effect in financial negotiations? Let us know your opinions in the comments below.

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