The Best Way To Do Price Anchoring

Price anchoring can determine if your next negotiation is a success
Price anchoring can determine if your next negotiation is a success
Image Credit: raynfree1

When we enter into a negotiation, more often than not we have a goal in mind – there is something that we want to get out of the negotiation. That goal often has to do with a price. Perhaps it’s how much we want to sell something for or perhaps it’s how much we want to pay for something. No matter which type of price we are dealing with, we’d like to use our negotiation styles and negotiating techniques to be in control of the discussion surrounding it. It turns out that there is a way to make this happen: price anchoring.

What’s The Best Way To Use Price Anchoring?

It turns out that opening offers have a strong effect on price negotiations during a negotiation. Your first offer typically serves as an anchor that strongly influences the discussion that follows. In research documenting this price anchoring effect it was found that even random numbers can have a dramatic impact on people’s subsequent judgments and decisions.

The research on the price anchoring effect has strong implications for your price anchoring in a negotiation. As an example, if you were to enter a job interview hoping for a salary of $75,000, but the company only offers you $50,000, you may find yourself making a counteroffer of $55,000—far less than the $80,000 you could have asked for if you had made the first offer.

How Can You Deal With And Use Price Anchoring?

Take the time to assess both parties’ knowledge of the Bargaining Zone. To decide whether it’s a wise idea to make the first offer in your next negotiation, you need to assess your best alternative to a negotiated agreement (BATNA); your target; and your reservation point—your point of indifference between accepting a deal and pursuing your BATNA. Your next steps needs to be to estimate your counterpart’s BATNA, target, and reservation point. This analysis will let you know how much you know about the zone of possible agreement, or ZOPA—the range of options that would be acceptable to both sides.

The decision of whether to make the first offer or not should be based on two factors: your own knowledge of the ZOPA and your assessment of the other side’s knowledge of the ZOPA. When the other party seems to know more than you do about the size of the ZOPA, you may have trouble anchoring effectively. If you decide to engage in price anchoring, how aggressively should you bid? A smart guideline is to anchor at the end of the ZOPA that favors you, but not outside of the bargaining range.

During your next negotiation, you should consider making a range offer. As an example, if you were negotiating the price of your used car with a potential buyer. You know that the fair market value of the car is between $5,000 – $6,000. You want to make an opening offer that is aggressive but not to offensive. You have the decision of naming a specific price—say, $7,000—or suggesting a price range, such as “I could sell the car to you for about $6,500 to $7,500”?

Research shows that expressing offers in a range can help you claim more value in financial negotiations. Research finds value in delivering a so-called bolstering range offer, one that includes the single-figure offer you might plan to make at one end and a more ambitious number at the other end. For example, a seller might ask $7,000–$7,500 rather than $7,000 for her car. Bolstering-range offers seem to lead to better outcomes in single-issue negotiations. In addition, because ranges appear to convey flexibility and accommodation, they may offset the assertiveness conveyed by your price anchoring.

You can also try very precise price anchoring. Researchers have found that precise numerical first offers are more effective than general offers. 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. A study found 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—but still came out ahead.

Why is this? First, the offer recipients made less ambitious counteroffers in response to more precise offers, judging those who made more precise offers to be more knowledgeable about the value of the commodity. Second, those who made precise first offers made smaller subsequent concessions than those who made round first offers as the price haggling continued in the negotiation.

What is the takeaway from all of this? When anchoring in negotiation, strive to make a precise numerical offer, but make sure it’s no less ambitious than it would be if it were general. Ambitious, precise price anchoring should lead to the best results.

What All Of This Means For You

The next time that you enter into a principled negotiation where price will play a key role, you need to understand that you have the ability to drive the negotiation. If you choose to use price anchoring then you can be in control of the prices that will be discussed from the start of the negotiation. However, the trick is that you need to know how to go about anchoring your prices.

What you need to do before you get involved in the negotiations is to take the time to make sure that you understand both parties’ knowledge of the Bargaining Zone. Your decision to make a first offer will be based on your knowledge of the negotiation’s ZOPA. You may also consider making a range offer in order to get more value out of your negotiation. Finally, making a very precise first offer often turns out to be more effective than making a more general offer.

The key point to understand is that you don’t have to go into your next negotiation and just hope for the best when it comes to the negotiation price. Instead, you can take control and make the first price offer. By doing so you’ll be harnessing the power of price anchoring and moving yourself closer to getting the deal that you want.

– Dr. Jim Anderson Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™

Question For You: What should you do if you make a first price offer and the other side pushes back?

Click here to get automatic updates when The Accidental Negotiator Blog is updated.
P.S.: Free subscriptions to The Accidental Negotiator Newsletter are now available. Learn what you need to know to do the job. Subscribe now: Click Here!

What We’ll Be Talking About Next Time