Whether
negotiators are engaged in the negotiating process of acquiring a new business,
a revised wage agreement, or buying a property, one of the negotiators has to
make the first offer. The million-dollar questions are:
- who should make the
first offer, and
- How will making or not
making the first offer affect the negotiation process and the result?
The
decision as to who should make the opening move often generates uncertainty and
anxiety amongst negotiators. This is particularly true when they are missing
reliable information about the other party. This will cause them to feel unsure
about what offer that party will accept and what offer is likely to cause the
other party to walk away from the negotiation. Additionally, it is also
possible that the other party could deliberately respond with false information
to gain a negotiation advantage.
Given
that most negotiations are somewhat unclear at the outset, one school of
thought believes that the opening offer should therefore preferably come from
the other party. The basis behind this thinking is that an opening offer
provides valuable information about a party's negotiating position. It also
provides an indication of what type of agreement would be satisfactory.
Although this appears to be good advice, it unfortunately fails to consider the
critical influence first offers have on how negotiators consider the
negotiation process. Reputable psychological research strongly suggests that
negotiators who make first offers often attain better results.
1. Anchoring a Negotiation
Research
has confirmed that the way negotiators perceive the value of any offer made in
a negotiation powerfully correlates to any number affiliated with that offer.
Given that numbers related to an offer tend to have a magnetic influence on the
judgment of negotiators, these numbers are referred to as anchors.
First
offers have a vigorous anchoring impact in situations of great fluidity and
doubt, as in the case with many negotiations. First offers maintain a strong
authority throughout the negotiation. This influence is so powerful that even
negotiators who are aware of the hypnotic allure of anchors in terms of their
judgment are often unable to resist this influence. Therefore, their assessment
of a first offer seldom breaks out of the field of influence of such anchors.
Greg
Northcraft and Margaret Neale researched the phenomenon of anchors. In an
experiment they supplied real estate agents with manipulated price lists for
properties (high and low anchors). These real estate agents were subsequently
asked to inspect these properties and appraise their values and purchase
prices. All participants to some degree or other permitted the list prices to
influence their decisions. The list prices clearly caused them to ignore the
relevant features of the properties.
Thomas
Mussweiler of the Institute of Psychology at the University of Wurzburg in
conjunction with his colleagues performed a similar experiment where they asked
customers to approach German automotive mechanics (professionals that are
well-informed about the true value of cars) with used cars that were in need of
numerous repairs. After offering their own opinion of the value of these cars,
they asked the mechanics for an estimate of their value. Fifty percent of the
mechanics were given a low anchor by the customers stating, “I think that
the car should sell for about 2800." The remaining fifty percent were
provided with a high anchor by the customers sating, "I think that the
car should sell for about 5,000 ". Those mechanics who were given
the high-anchor approximated the value of the cars 1000 above those given the
low-anchor.
Even
people who recognize that they are wise to anchors are invariably influenced by
anchors. This relates to the fact that high anchors selectively direct
attention towards strong, positive attributes, whereas low anchors selectively
direct attention towards weak, negative attributes. In the case of the estate
agents, the high list price pointed their attention towards the positive
features of the properties (spaciousness, a pool, etc.), while at the same time
relegating the negative qualities (a small garden, one garage, etc.) to the
back of their minds. The mechanics who were faced with a low anchor
concentrated on the wear and tear the vehicles exhibited and did not pay heed
to the positive aspects such as low mileage and the immaculate interiors.
2. Making or not making a
first offer
Research
into the affect of anchoring strongly suggests that negotiators who present a
first offer frequently enjoy a substantial negotiation advantage. In many
studies sellers who make the first offer have been found to achieve higher
negotiated prices than buyers making first offers. Making the first offer
anchored the negotiation in the favour of the sellers.
Furthermore,
researchers have also discovered that the likelihood of a first offer being
made powerfully associates to an increase of the negotiator's confidence and
sense of control at the negotiation table. Those who are lacking confidence and
who feel disempowered by the structure of a negotiation or the availability of
alternatives are less apt to make a first offer.There is also a great deal of
evidence that the size of the first offer impacts the outcome of a negotiation
- with higher or more aggressive first offers delivering better outcomes. First
offers predict final settlement prices more so than ensuing concessionary
offers.
Naturally,
there are no hard and fast rules that can be applied to every negotiation
situation. It would obviously give an advantage to a negotiator who makes a
first offer when they have insufficient information regarding the other party.
They should be aware that the other party is better informed about the issues
being negotiated, and possess better market and industry data. Sellers or
buyers of property, who utilize experienced real estate agents, have access to
more and better information than buyers and sellers who act on their own
behalf. The lesson is that negotiators should prepare sufficiently to be on par
or ahead of the other party in terms of their knowledge of the issues at hand,
and of market and industry trends. This allows them the necessary confidence to
propose first offers that will anchor the negotiation in their favour.
3. How a first offer
should be constructed
Although it is apparent that
first offers should be strong, negotiators should always be on guard against
becoming too aggressive. This would push them outside the range of what would
be acceptable to the other party. The fear that many negotiators experience in
this scenario is that aggressive first offers may possibly scare or annoy the
other party to the extent that they break off the negotiation is often highly
exaggerated. It causes most negotiators to err on the side of being
overly-cautious and the resulting consequence that they fail to form the best
possible agreement.
Aggressive first offers work
is advantageous to negotiators for the following reasons:
- Such offers assist sellers to attain higher final
agreements;
- Higher list prices lead to higher final selling
prices, as it causes buyers to concentrate on the positive features of a
purchase; and
- Aggressive first
offers generate leeway for negotiators to give concessions without
exceeding their BATNAs.
First
offers that are timid generally place heavy limitations on the ability of a
negotiator to agree to and extract concessions / counter-concessions, or not to
go beyond their real base (walk away value). On the other hand, aggressive
first offers allow the other party the scope to negotiate concessions. The
ensuing result is that it increases that party's sense of achievement and
satisfaction, and consequently the possibility of a mutually beneficial
outcome.
First
offers provide early insight into the contracting zone (the range between each
party's real bases), and the range of possible agreements. However, such offers
could, if they are absurdly aggressive, create the perception that a mutually
beneficial agreement is impossible, and thus result in a party invoking its
BATNA (Next Best Option).
4. Using an
"Aspiration Base" focus
When negotiators ponder
aggressive first offers, they should make such offers within the context of the
following;
- The strength of their BATNA,
- Their aspiration base (the target at which their
hopes and desires would be fulfilled) and,
- Their real base (the bottom line beyond which
their BATNA kicks in).
Although
a clearly defined real base is an exceedingly important component of any
negotiation, it is important that negotiators concentrate on their aspiration
base when developing a first offer. Research findings reveal that negotiators
who concentrate on their aspiration base when considering first offers are
inclined to make more aggressive first offers. They generally achieve more
beneficial outcomes than negotiators who focus on their real base.
Another
means to ensure that first offers are not so aggressive as to result in the
other party walking away from the negotiation is by focusing on the other
party's BATNA, and real base, and on market trends. John Oesch and Glenn Whyte
have discovered that the best first offers are usually those that fall outside
the contracting zone, but are not sufficiently far beyond the real base of the
other party to cause an extreme reaction.
When
negotiators become too fixated on their aspiration base, they are blinded to
advantageous outcomes that exceed their BATNAs. Their challenge is to focus on
their aspiration base and make an aggressive first offer, but to remain open to
making concessions. This prevents the possibility of rejecting beneficial
agreements which ensures a mutually beneficial agreement.
5. A defense against first
offers
When
a negotiator doesn't have the opportunity to present the first offer, their
protection against anchoring rests in making an forceful counter-offer firmly centered
around the other party's BATNA, real base and aspiration base. The ideal means
to propose such an offer is in a manner that creates a positive climate and
blunts the other party's first offer. The key to protection lies in a
negotiator knowing their aspiration base and the other party's limitations.
Should
the other party propose a first offer that is near to the aspiration base of
its counterpart, the immediate inclination is to agree to that offer and wrap
up the negotiation. Research, however, suggests that immediate acceptance of a
first offer is apt to leave the other party filled with remorse and discontent
about not having made a more extreme first offer. It is also not uncommon for
doubts to arise about the quality of the product or service purchased. A
disgruntled party is less likely to live up to the terms of an agreement and
may start to immediately begin plotting how to amend the agreement, extort
concessions or gain revenge. Even highly acceptable first offers should be met
with a request for concessions. If nothing extra is imminent the other party
would at least have the gratification that it has achieved a significant
victory where both parties have benefited.