Negotiation Opening Offer

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:

1. who should make the first offer, and
2. 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.

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 judgement 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.

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.

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 are 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).

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.

A defence 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 centred 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.

Article compiled with reference to material in: www.crnhq.org