The Surprising Secret Behind Negotiating to Win

Forget what you thought you knew. Letting the other party make the first offer doesn’t always pay.

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You’ve heard it applied to salaries, real estate, and flea markets: let the other party name a price first.

Turns out that letting the other side throw out a first figure often doesn’t pay – even when you’re negotiating with someone from a less contentious culture or you are in the less powerful bargaining position.

“A first offer serves as a powerful anchor,” says Adam Galinsky, the Vikram S. Pandit Professor of Business and chair of the management division at Columbia Business School. Because the first offer signals a particular value and functions as a starting point for other offers, the price is often higher when the seller makes the first offer than when the buyer offers first.

Even in Asia

A recent paper that Galinsky wrote with several colleagues, “The Remarkable Robustness of the First-Offer Effect: Across Culture, Power, and Issues,” included four studies and establishes just how potent first offers can be.

In one study, buyers and sellers in Thailand negotiated the price of a pharmaceutical plant. Even in the prototypically Eastern culture of Thailand, the party who made the first offer walked away with a more favorable agreement, according to the paper.

The first-mover advantage occurred even when the negotiation involved multiple issues and in situations where one negotiator was in a much weaker position. “Low-power negotiators were able to overcome their lack of power by putting a first offer on the table,” Galinsky says.

The Case of Missing Information

But be forewarned: going first is most effective when you have lots of information. In a follow-up paper entitled “When Going First Leaves You With Less,” he and his coauthors stress that offers need to be based in knowledge. You need to know three things, he says:

  • how much the market values the negotiated item,
  • how much the other side values the negotiated item,
  • and how much you value the negotiated item.

In some cases, due diligence provides only partial information. Take, for example, the blue-book value of a used car. One of the studies from this second paper involved the sale of a 1970 Ford Thunderbird. Although the negotiator assigned the role of seller felt lucky to get $300 for the clunker, the buyer was a classic car buff looking for parts. Knowing that buying the parts piecemeal on the market would cost at least $2,000, the buyer was willing to pay a great deal more than the blue-book price.

In this case, a first mover disadvantage can surface.

So where does that leave a negotiator with insufficient data? Take the example of a seller. The first thing you need to do is find out why the buyer wants the negotiated item. Consider simple questions like, “Can you tell me what you are looking for in a car?” or “What drew you to this car?” These question can provide valuable information which will allow you to make an ambitious and effective first offer.

Now take the example of a seller who may not know the value of the item he or she is selling. Here, it can be advisable to let the other side make the initial offer. “In one study, an economist found the majority of pawn brokers go second,” says Galinsky. This is because these pawn brokers have more knowledge about the value of objects and suspect the seller may severely undervalue what they possess.

Simple observation can also help you get the information you need to make the right first offer. In a bazaar, for example, “before you negotiate for a scarf, go to four to five stalls and listen to get an idea of what multiple sellers consider a fair deal,” he says.

Protect Yourself

What do you do when you can’t make the first offer? “The best way to protect yourself from being anchored by the other side’s first offer is to write down what you’re willing to pay before you’re exposed to an offer,’ says Galinsky.

The need for protection is particularly important when the other side offers a ludicrously extreme offer, What should you do if the other side begins the bidding at an unreasonable price point? Retaliating with an equally stratospheric number counteracts the anchor, says Galinsky. He points to a light-blue Oriental carpet in his office, noting he bought it (along with a second rug) at a bazaar. “The buyer asked $10,000 for two rugs,” he recalls. “I knew a little about the inherent value of rugs and what they would cost in the United States, and this offer was absurdly high for the given market. So I countered with an equally absurd $100. His next offer was $5,000 which quickly established how absurd the first offer was. Eventually we settled on $1,500 for the two rugs, and I walked away with a great deal.”

When you make first offers you want to be aggressive but not so extreme that the other side simply walks away. “You want to consider whether the offer would make you lose face in front of a third party.” Push to the limit but don’t go past it.

The upshot? Make the first offer as long as you:

  • Know your optimal price point.
  • Know how the other side and the market value the deal.
  • Manage the extremity of first offers.
  • Make aggressive but not ludicrous offers.
  • Counter ludicrous first offers with a ludicrous offer of your own.
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