Negotiation is the process of bargaining, or give and take, between two parties who seek to reach a mutual agreement. But how can they get the best of what they want when both sides are determined? It is here that people can influence the final outcome by applying or bypassing a trick called anchoring.
To set an anchor is to set an initial reference point. Anchoring works by distorting our judgement by setting that initial reference point.
In the form of a numerical value, a ‘Price Anchor’, is the first price verbalized that will have an effect on the perception and relative value of all following prices. You hear the first offer in a discussion, it becomes the starting point in your mind, and now any price you had previously had is compared to that first number. For example, the first items salespeople will usually show a customer are the highest priced. This makes all of the following items marked at lower prices seem less expensive – even if they are priced higher than the actual value.
The mind has difficulty adjusting back to the reality of price verse value you had when you had walked into the store. Perhaps a $20 t-shirt is a good buy, but after the salesperson has shown you $200+ items a $40 t-shirt becomes a good bargain. Another example is when a $10,000 watch is placed next to a $100 watch. The $100 watch will seem cheap in comparison – even if when you first walked in your personal financial value of the $100 watch was $50. Here the $10,000 is a high anchor that tricks your mind into perceiving the lower number as a bargain.
It is important to either give the first offer or protect yourself from the anchor of the first offer. The initial price offered in a negotiation may be ludicrously high or low, but it sets the height of the numerical value in the mind of the second party. We fixate on that initial number, the ‘anchor’, whether or not we intend to.
Beware of Price Anchors
– The opening offer can strongly influence price negotiations. Even if random numbers are used, the anchoring effect can dramatically effect and impact the subsequent judgements and decisions of people.
– To be aware of the price anchoring effect can help us respond to first offers efficiently and not get influenced away from our target.
– When the bargaining zone is unclear, the price anchoring works well to distort our numbers because it is not clear what the expected price is of each side on the negotiation table.
How to Manage a Price Anchor
Bypass the effects of someone else’s anchor
– Do your research. Assess where both sides in terms of possible agreement or zone of possible agreement or ZOPA. Research what is the bargaining zone, what price to expect from them, and of course what your price is. This helps to be aware of the reality of the numbers, recognize and bypass an extreme first offer.
– Dismantle and defuse an anchor. Ask how the number is justified and state it upfront if it is a ludicrous price. You want to take apart the anchor so it does not influence your subconscious and counteroffer.
– Take time to think before you counter. By breaking down the anchor, you allow yourself to respond to the first offer effectively. A fast counteroffer can be led by the influence of the anchor even if you are aware of the anchoring bias, so take a moment to think about it and propose an offer grounded in your knowledge.
Use Anchoring to Your Advantage
– It is generally recognized that the negotiated final price will fall somewhere in the middle-point between the first and last legitimate numerical offers. If the anchor to start with is high, you have an advantage to get the final price above the mid-point number. This allows negotiators to use or defuse the anchor to surpass the mid-point rule to land on a better number.
– Make a precise numerical offer. A precise numerical offer gives the impression of being more knowledgeable about the value of the commodity. People will make less ambitious counteroffers against an expert, or perceived expert with the knowledge of the specifics. For example, offer a price anchor of $18,875 instead of $19,000.
– Use caution when opening with the first offer. By now you are aware that you can set the playing field with an anchor if you go first. Just don’t give away too much of a detailed justification of how you’ve priced because it can also lead to more aggressive low counters by giving leeway to points of discussion, concessions, and easy counters. The easier it is to counter the tougher the counteroffers become.