For some reason, negotiation tends to be considered a specialised professional skill instead of a basic life one. Business school students and salespeople learn tons about how to work out deals, but most of the rest of us never learn much about how to negotiate. That’s one reason why buying a major asset like a house or car is so stressful for regular folks — negotiating is mysterious to us.
But everyone negotiates on a constant basis, and learning some of the fundamentals of banging out a mutually-beneficial deal is a crucial skill we should all acquire. The challenges of learning how to bargain is often the mixture of emotion, psychology, and maths. Leverage can swing back and forth between parties, and emotions can play as much of a role as finances (as anyone who has overpaid for a house because they “fell in love with it” can attest). That’s why learning some basic negotiation skills is essential — starting with why you should always seriously consider making the first offer.
The Anchoring Effect
You’ve probably heard that you should always make the first offer when negotiating, possibly with some vague explanation about setting the terms. This is, in fact, generally good advice — because of something called the Anchoring Effect.
The Anchoring Effect is all about bias — it’s an irrational tendency in human beings to rely on the first piece of data they acquire, regardless of its value. We all have this bias — study after study has confirmed that the first number you hear will influence how you value something. When sellers make the first offer, the final price is usually higher, and one study found that 85% of negotiated outcomes generally aligned with the first offer.
The crazy part is, even when we know the first piece of data shouldn’t affect us, it does. In one experiment, people were asked to write down the last two digits of their own social security number and then asked if they would pay that much for various items. Then, they were asked to bid for the same things, and despite the fact that the “seed” number they’d been given was completely unrelated to anything, folks with higher social security numbers bid much higher for everything.
Dropping the anchor
The irrational power of the Anchoring Effect is why making the first offer (sometimes called “dropping the anchor”) is a powerful tool in a negotiation. But that doesn’t mean it always works — you need to know how to use it in order to get the full benefit of the effect.
Here are some things to consider when planning to drop an anchor into a negotiation:
- Be aggressive. People often worry that being overly aggressive with an opening offer or price will insult or scare off the other party. But an aggressive first offer is your best strategy. An aggressive first offer leaves you room to “compromise,” while still getting a better deal in the end (a form of the “Door in the Face” technique).
- Don’t be absurd. Keep in mind that “aggressive” doesn’t mean “insane.” While an aggressive first offer can set the goalposts in your favour, throwing out an offer that is completely out of line with reality can make the other side wonder if you’re serious, competent, or credible.
- Be specific. The more precise your first offer is, the more effective it will be in anchoring your opposition. The classic example is pricing a house: A list price of $255,500 will get higher bids than a list price of $255,000 — or $256,000.
By putting some thought into the specifics of your first offer, you can most benefit from the irrational power of the Anchoring Effect.
Other negotiating success factors
As powerful as the Anchoring Effect can be in a negotiation, it’s not a magic spell. The first thing to keep in mind is that if you’re dealing with an experienced and trained business or sales professional, chances are they know all about it and have been trained in ways to “defuse” the anchor, which is often as simple as ignoring it and pivoting to details, or offering an immediate “counter-anchor” in an effort to redefine the terms.
The key to a successful anchoring first offer is information, really. The ideal scenario for dropping an anchor is when you know more than the other side. When the other party has access to more information than you do, it’s very difficult to drop an anchor. For example, if a homeowner knows the real estate market in their area well, they know how much their property is worth, and your aggressive anchor will simply seem absurd. Or consider interviewing for a job — the interviewer knows what the budgeted salary for a position is, and you don’t. If your first salary ask is way outside that budget, it’s not going to have the intended effect.
On the other hand, if you both know the same amount of information, your anchor will be predictable and expected, making it easier to defuse. And if you’re both in the dark, a first offer will be pretty much a guess, making it impossible to know whether you’re actually helping yourself with your shot in the dark anchor.
All that being said, making the first offer has been proven to have a beneficial psychological effect on the other side of a negotiation. So use this power. Just do your research first
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