The party that makes the first offer in a negotiation generally gets the best deal, multiple studies on negotiation and price anchoring suggest. The first offer presented serves to draw subsequent offers in its direction.
Negotiation researchers also have found that price anchoring is more effective with precise numerical first offers rather than rounder offers. For example, a house with a list price of $255,500 is likely to attract higher bids than houses with list prices of $256,000 or $255,000.
Why are precise first offers more effective than rounder ones, and how can we further capitalize on their benefits? Leuphana University of Lüneberg professor David D. Loschelder and his colleagues examined this question.
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Here’s how precision works in price anchoring
In one of their experiments, the researchers had pairs of participants play the roles of seller and buyer in a negotiation simulation involving the sale of a chemical plant. One member of each pair was instructed to make the first offer (sometimes the buyer, sometimes the seller). In addition, those making first offers were encouraged to make either a round offer (such as €5 million or €36 million), a moderately precise offer (such as €5,818,600 or €36,181,300), or a highly precise offer (such as €5,818,614.76 or €36,181,385.24).
Like past research, the results showed that more ambitious first offers led to more favorable outcomes for the party who made the first offer. However, those making a highly precise first offer were less ambitious than those who were less precise.
This difference didn’t translate into better deals for those with rounder first offers, though; on the contrary, those who made the most precise first offers came out ahead. Why? First, because offer recipients made less ambitious counteroffers in response to more precise offers, which they did because they judged those who made more precise offers to be more knowledgeable about the value of the commodity; precise offers tend to convey expertise. Second, those who made precise first offers made smaller subsequent concessions than those who made round first offers as the price haggling continued.
Why did those who aimed for precision make less-ambitious first offers than those who made rounder offers? Because they correctly predicted that they would need to make fewer concessions to meet their goal—that is, they anticipated the stronger price anchoring effect of their precise offer.
Capitalize on the precision effect
The study’s results lead to the following recommendations:
- Strive to make a precise numerical offer, but make sure it’s no less ambitious than it would be if it were round. An ambitious, precise offer should lead to the best results. Note, however, that precision may not be as effective with experts, who are less likely than amateurs to be anchored by very precise offers when making assessments in their field, Loschelder has found.
- If the other party opens with a round offer, try to capitalize on the benefits of precision by responding with a precise counteroffer.
- Beware the tendency to be strongly anchored by precise offers and to assume that precision conveys knowledge, as that may not be the case.
Have you had experience with making precise offers in a negotiation? How did it turn out?
