Anchor Price Negotiations … be first!

NegotiationIn a negotiation, an ‘anchor’ is the first offer made by each side. It could be a specific price, payment terms, or a bundle of equipment or services. It is called an anchor because it ‘anchors’ the negotiation around a specific point similar to what a boat anchor does. Most of us are not even aware of anchors in our daily lives.

Anyone who’s shopped for a car or a house has been ‘anchored’ by the window sticker on the car or the listing price on the house. We know the price on these items is rarely firm, and will often be adjusted based on our skill in handling the negotiation, the relative scarcity of the item, and how badly we need the item.

Every item under negotiation (whether it’s a company, a property or a car) has both positive and negative qualities – qualities that suggest a higher price and qualities that suggest a lower price. High anchors selectively direct our attention toward an item’s positive attributes; low anchors direct our attention to its flaws.

Why anchor first?
It is desirable to anchor first in many negotiations, for several reasons. In many negotiation, you are trying to learn about the zone of possible agreement (ZOPA) and influence the other side’s perception of the ZOPA. While advanced research can help you reduce your uncertainty about the ZOPA, you typically will have more to learn about the ZOPA once talks begin. As such, you will be vulnerable to being anchored. Therefore, anchoring first in price-oriented negotiations can be both good offense and good defense.

Research into human behavior has found that how we perceive a particular offer’s value is highly influenced by any relevant number that enters the negotiation environment. Because they pull judgments toward themselves, these numerical values are known as anchors. In situations of great ambiguity and uncertainty, first offers have a strong anchoring effect – they exert a strong pull throughout the rest of the negotiation.

Don’t be afraid to be aggressive
How extreme should your first offer be? Research suggests that first offers should be quite aggressive, but not absurdly so. Many negotiators fear that an aggressive first offer will scare or annoy the other side and perhaps even cause stalemate, deadlock or walk away from the negotiation. If we have negotiated a deal and the buyer or seller “jumped” on the offer, most of us believe that the offer was not aggressive enough. In fact, most negotiators make first offers that are not aggressive enough.

When is it wise not to make the first offer?
There is one situation in which making the first offer is not to your advantage: when the other side has much more information than you do about the item to be negotiated or about the relevant market or industry. For example, recruiters and employers typically have more information than job candidates do; likewise, buyers and sellers represented by a real estate agent often are privy to more information than unrepresented buyers and sellers are. This doesn’t mean you should sit back and let the other side make the first offer. Rather, this is your opportunity to level the playing field by gathering more information about the item, the industry, or your opponent’s alternatives to the negotiation.

How to avoid the power of anchors
First, research comparable sales data, either for deals that have been done within your company or for comparable deals done by your competitors. Then decide, based on the data (not your emotions) what you believe is a reasonable price for your solution, regardless of where the buyer has set their anchor.

Second, as a seller, if you are faced with an anchor price that seems too low, ask the buyer what the basis is for their price. We often find that the buyer has very little factual basis for their offer, and they simply picked the lowest possible number they can imagine someone paying. They might say “this is all we want to pay” or “the economy is hurting, and we just want to pay less”. While these are probably true statements, they are not nearly as persuasive as true market data-based offers.

If the buyer cannot provide a plausible, market data-based reason for their price, consider making your counter offer as high as you possibly can, and base your offer on verifiable, comparable data. Then, ask the buyer “why should I sell my product for less?” Or, you can ask them “would you sell my product for less if you were me, based on this data?”

Whether you’re a project manager negotiating for time and resources, an HR manager navigating the details of an employment contract, a procurement manager negotiating terms with suppliers, or a salesperson negotiating a deal, effective negotiation skills training can help you be more successful.

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James E. McClain is the author of Successful Career Development: A Game Plan, the book upon which some of our training programs are based. He has over 30 years' experience as a corporate HR executive, small business owner with ongoing experience in career development and as a college instructor. His educational background includes a B.S. and Masters degrees Education and Certification in Financial Planning. Our promise is that "you can pay more for training but you can not buy better training." The mission is to deliver the most effective and cost effective training and development programs.

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