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Want a Leg Up in Negotiations?

The truth about the first offer.
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Conventional wisdom has long held that during negotiations you don’t want to be the one to make the first offer. You let the other party go first and respond accordingly, with the advantage of knowing what he or she wants. More than three quarters of executives polled by Wharton School professor Adam Grant say they believe this strategy works, Grant writes on LinkedIn.

But it turns out that the person who goes first is the one who has the advantage. The concept is called anchoring, and the concept has gained traction in the academic world over the last decade, debunking common negotiation myths . Among the things kiddos have been learning in business school: “Every dollar higher in the first offer translates into about 50 cents more in the final agreement,” Grant writes, citing 2006 research out of Vanderbilt.

Grant (@AdamMGrant) points to another experiment in which real estate agents were shown a home and then one of two different list prices, $119,900 or $149,900; afterward, each was asked to estimate an appraisal price. The agents who were shown the lower list price predicted the home would appraise for about $114,000, while those who saw the higher price forecast more than $128,000.

“The listing price should have been irrelevant. The agents had seen the house, so who cares what list price the seller chose?” Grant asks. “But the agents couldn’t escape the pull of the anchor.”

The takeaway: You need to be willing, prepared, and even eager to make the first offer. You should also be aware of anchoring as a tactic when negotiations start, just in case someone tries to use it on you.

“One strategy is to make your counteroffer equally extreme, knowing that the final agreement will usually be near the midpoint of the first two offers,” Grant writes. “But this approach comes with a downside: Because anchoring can be powerful, you might not adjust enough, making your counteroffer insufficiently extreme. Also, by countering, you’re sending a message that the first offer was an acceptable launching point for the negotiation. . . .

“My favorite response is to follow one of [sales and marketing expert Neil] Rackham’s tips: Test your understanding and summarize. The idea here is to sum up what has just happened, and show that you’re wise to it. In Rackham’s study, of all behavior in a negotiation, testing understanding and summarizing made up less than 9 percent of the communications of average negotiators, versus more than 17 percent for skilled negotiators.

“I had a chance to test this strategy when negotiating with a car dealer. He made an initial offer that was hardly better than the sticker price, and I saw an opportunity. ‘It sounds like you’re using a technique called anchoring,’ I said, ‘where you open with an extreme offer to start the negotiation at the most favorable point for you. That’s not what you’re doing, is it?’

“When I labeled the behavior, he saw that I couldn’t be easily duped. And when I asked the question, I gave him an escape hatch. He took it: ‘I knew I couldn’t fool you.’”

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IMAGE: Getty Images
Last updated: Sep 6, 2013

THE BUILD NETWORK STAFF

The Build Network staff curates provocative, actionable leadership advice for executive teams running sustained-growth companies.




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