The Impact of Opening Offers on a Negotiation
My friend and former colleague, Max Bazerman, negotiation professor at the Harvard Business School, once reported to me that:
“Opening offers have more impact on outcomes of a negotiation than all counter-offers combined!”
I couldn't agree more, however, I believe to really understand the weight of the impact, it is important to understand the complexity inside that statement. (It is more than you might initially detect!)
For starters, think about these questions:
- What is an opening offer?
- Who made it?
- What was “it” that the opening offer was for?
In negotiation literature, this is called anchoring. Opening offers tend to “anchor” the negotiation. It is said:
“The Anchoring trap leads us to give disproportionate weight to the first information we receive” *
When the team at Think! Inc. audits the skills of negotiators by observing them in a negotiation setting, we see three things that put them at a disadvantage:
- Negotiators are not aware of their own anchors.
- They don't really think through their anchors.
- They do not know how to diagnose the anchors planted by the other party in the negotiation.
The impact of this disadvantage on margin loss and increased risk in deals cannot be understated. Millions in margin are lost every year and tons of risk is shifted back to the seller because of the impact of this. Here is a quick story about how powerful this is.
Many years ago, I was buying a 1955 Chevy Apache Truck. What I learned was that for a completely restored truck the price range was about $10,500-$12,500. Most of them, however, were far away from me. There was one nearby and it was listed at $18,500. I recall sitting on my porch getting ready to call the seller and make an offer as a percentage off the $18,500. Do you see the problem? The value of restored trucks at show quality was $12,500 at the highest end. What I should have done was completely ignore his “anchor.” What I was doing was trying to adjust off of his anchor. The reason I tell this story is that I am acutely aware of this bias, and yet, at the same time, got caught by it!
Once I came to my senses…I printed up all the available 1955 Chevy trucks of this caliber. I then called him and presented all the trucks available. I showed him the range and let him know I would pay $12,500, the top end of the range. The broker told me his seller had turned down an offer of $15,000 a couple weeks ago. I let him know they should have taken this offer as it was way above market value. They could either take my offer or wait for another uneducated buyer to make the same mistake. He took the data to his seller and we closed at $12,500.
The point is to be extremely aware of the offensive use (by both sides) and the defensive reaction to opening offers and other anchors. Think of this as a dart board, where the anchor dart hits the board and all subsequent negotiations tend to form circles, tight circles around that anchor. What we need to do is ignore that first dart like I did with the truck. In my scenario, I politely ignored the seller's anchor by bringing new information to the table. Depending on your scenario, there are many other ways you can be successful doing the same thing.
People often ask if we should counter-offer way higher, in reaction to the other side's unreasonably low opening. No! When we do that we set up an agreement zone that takes into consideration their offer and most often we settle in the middle. If their opening offer was very low, it will have the effect of pulling your price down to unrealistic levels.
In B2B sales we must be aware that there are many types of opening offers that anchor a negotiation.
- Last year’s deal
- An RFP
- What other competitors are doing
- An opening offer from buyer
- An opening offer from seller
Here’s our best advice to make sure you don’t get anchored on an opening offer. When analyzing an opening offer, do not just look at the price, look at the entire “structure” of the deal. Then, bring all the information you have together and respond with the data to the entire offer, not to the anchor.
If you have any questions or reactions, we’d love to hear from you. Give us a call or leave a comment.
* The Hidden Traps in Decision Making
FROM THE JANUARY 2006 ISSUE HBR