February 08, 2022 by Clawdia

Don’t Start Negotiating before You Read This!

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In a negotiation, would you rather:

1. Wait to get an offer from your counterpart?
Or
2. Be the first to make an offer?

You probably answered 1, thinking let’s hear what the other side has to offer.

Well, hundreds of studies have delved into this question and it turns out that – even though it may be counterintuitive – your best option is to actually be the first one to present your case and make an offer. Apparently, it will provide you with a superior starting point around which the rest of these negotiations will revolve.

This unexpected finding is attributed to a psychological effect called “The Anchoring Principle.” Basically, it means that people who encounter important information tend to focus on the initial piece(s) of information they receive, assigning them with a certain value. They then assign values to the following pieces of information, in accordance with the initial value.

Since, as I mentioned, this principle isn’t necessarily intuitive, I always like to give a short example to try and simplify it.

Say you were selling something and working your way through negotiations for this sale. The standard price range for a sale such as this would range between $60,000-$100,000.

If your buyer opens negotiations, their proposal would be $60,000.

With an anchor of $60,000, you would counteroffer $80,000, and in the end, would probably compromise and close the deal somewhere around $70,000. The anchor suggested by the buyer pulled the final price towards the lower end of the range.

However, if you went first, we would present an offer of $100,000. The buyer would base their counteroffer on this anchor and set their counter-offer at $80,000, trying to pull down the price. You would probably settle for a final price of somewhere around $90,000, leading to a whopping $20,000 difference between both scenarios.

Sounds simple, doesn’t it?

It actually is, as long as you remember to stay close to the actual standard price range. The further you depart from that range, the less effective the Anchoring principle.


Conclusion

Don’t be afraid to make your case first. If you’re basing your price on a standard price range, you shouldn’t wait to see what the other side offers. Use the Anchoring effect to your benefit and set the playing field before anyone else has a chance to pull it down. Also, keep in mind the tips from my last post to further improve your negotiations.

So be on your way, set sail, and get to anchoring your negotiations!
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Yours truly,
Clawdia