The data speaks for itself: whoever makes the first offer typically wins the negotiation
When students in my MBA class finish their negotiation exercise and compare their own deal with those of their classmates, they can’t believe their eyes. The data, however, speaks for itself: whoever makes the first offer typically wins the negotiation.
Before presenting students with their own data, I ask them, whether it’s better to make the first offer or to wait and receive the first offer. Half of them prefer to move first and half of them prefer to wait. First-offer effects have been extensively demonstrated in various negotiation settings, including negotiations for real estate, used cars and legal verdicts, and they work on both experts and laymen.
Daniel Kahneman’s Nobel Prize-winning work on the anchoring-and-adjustment heuristic explains why negotiators should make the first offer. When asked whether the average price of a German car is more or less than £100,000, most people would consider that price to be too high. The cars that they have in mind when answering this question are luxurious vehicles from marques such as Mercedes, BMW and Porsche.
Making the first offer anchors the negotiation at a point that is favourable to the offerer.
When asked whether the average price of a German car is more or less than £20,000 most people would consider that price to be too low, but the cars they are thinking about now are from less-prestigious brands such as Volkswagen and Opel. First offers therefore help you influence whether the recipient thinks about low- or high-quality aspects of the product over which you are negotiating.
In addition, people don’t adjust sufficiently from initial judgements, so first offers anchor the negotiation at a point that is favourable to the offerer. A buyer’s low offer therefore results in a low final prize and a seller’s high offer results in a high final prize.
To fully benefit from the first-offer effect you should use some of the latest research in your next negotiation. First, make precise, rather than round, first offers. Two recent studies by David Loschelder (Loschelder, Stuppi & Trötschel, 2013) and Malia Mason (Mason, Lee, Wiley & Ames, 2013) demonstrate that precise offers strengthen the anchoring effect. Sellers can achieve higher final prices when they make a precise first offer of €983 than when they make a round first offer of €1000. Why? Precise first offers signal special knowledge about the negotiation situation. Recipients of precise first offers believe the offerer must have good reasons to make a precise offer and therefore give in more.
Second, you should not overdo it. Our own research (Schweinsberg, Ku, Wang & Pillutla, 2012) shows that overly aggressive first offers can be offensive and cause an impasse, even if negotiators might be better off with a deal. Negotiation is both art and science. Part of the art is to make a first offer that anchors the negotiation in your favour without offending the recipient and risking a stalemate.
The next time that you are negotiating – for an expanded marketing budget within your organisation, for example – remember to tap into these benefits of the first-offer effect.
Martin Schweinsberg is assistant professor of organisational behaviour at INSEAD.