Go on, make that offer FIRST…

One concept I’ve slowly learnt from business is that contrary to the commonly held wisdom, people who make the opening offer in a negotiation have the upper hand.

I’m currently looking for a house, overseas. And when I come to view places, typically there is a price indicated.  Although I may disagree with it, that price certainly puts a value perception in my mind about the house.

The advantage of setting out an initial value or price is related to something psychologists call the anchoring principle. It’s a cognitive bias where people rely too much on the first piece of information they have.

In a salary negotiation, for example, whoever makes the first offer establishes the range of possible variation from that anchor. If you start high, the hiring manager may adjust the figure down slightly. But that’s typically a stronger position than the hiring manager starting low and you struggling to negotiate up.

“Most people come with the very strong belief they should never make an opening offer,” says Northwestern University management professor Leigh Thompson. “Our research and lots of corroborating research shows that’s completely backwards. The person who makes a first offer is better off as they have dropped the anchor as a basis for further discussion.”

Take for example the house again, the price 4.5 million, try to offer 2.9 million and the agent will look at you as though you have no idea.

We marketers often use the anchoring principle to persuade consumers into thinking something is cheaper than it actually is. A “discount” tag that still shows the original price on a pair of pants is a prime example, since you tend to focus on the deal you’re getting rather than the price you’re paying. (Wow, 70% off, its a bargain!)

In a negotiation, you can use that bias to your advantage. “Whoever makes the first offer essentially drops an anchor on the table,” Thompson says. “I might say that your opening offer is ridiculous, but nevertheless, unconsciously, I’ve been anchored.”

What’s more, the opening offer helps orient the other person’s perception of the value of what’s being negotiated for. An aggressive opening offer makes people consider the positive qualities of an object, since it forces them to decide whether it’s worth the cost. On the other hand, a low opening offer makes people consider what might go wrong, since lower prices are associated with negative qualities.

“Research suggests that first offers should be quite aggressive but not absurdly so,” Harvard Professor Adam Galinsky says. “Many negotiators fear that an aggressive first offer will scare or annoy the other side and perhaps even cause him to walk away in disgust. However, research shows that this fear is typically exaggerated. In fact, most negotiators make first offers that are not aggressive enough.”

To start with a high but not overly aggressive offer, you could just introduce a number — rather than explicitly ask for it such as in this scenario where risk is reduced because, rather than placing firm offers on the table, they merely introduce relevant numbers. So how can that work?

For example rather than stating that you would like a salary of $9,000 per month, you could state your belief that people with your level of  qualifications tend to be paid between $8,500 and $9,000, or you might mention that a former colleague just received an offer of $9,200 for a similar role. These assertions are not offers; it’s an anchor that affects the other side’s perceptions of the zone of possible agreement.”

The next time you enter a negotiation, don’t be shy. Put your offer on the table first.

And that house, i’m putting in 2.9 million as my first offer… I’ve seen it advertised on websites for 4.5, 4.3, 4.2 and 4.0 million… which signals to me that it may not be worth what they suggest.

3 Replies to “Go on, make that offer FIRST…”

  1. It’s funny that I have always thought that you should wait for the other person to make the offer, so you could base your strategy around responding.
    I’ll take this advice and be more forward in making offers, in the end its up to them to take the offer, or to counter offer.
    The suggestion about doing this indirectly for salaries is a good idea.

  2. Agree that this idea works in its own wonder ways and I achieved amazing results two years back adopting this strategy. However, for the case of employment and not house shopping, I would suggest avoiding this move if one is sure that the receiver’s style or characteristics appear to be a non open-minded and ultra conservative one.

    1. yes, fair point in seeking to understand behaviour characteristics, especially within an Asian context.

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