How To Use Anchoring For Maximum Effect In A Negotiation

We need to know how to get our next negotiation off to a good start
We need to know how to get our next negotiation off to a good start Image Credit: Stefanie Seskin

One of the key things that negotiators need to understand is that how we start a negotiation can play a big role in how the negotiation turns out. What this means is that we need to use our negotiation styles and negotiating techniques to convince the other side to see things our way from the start. Most of us know that the anchoring technique is a powerful way to make this happen. However, what we many not know is how best to use this negotiating tool.

How To Start A Negotiation

Negotiators know that in a negotiation you never get a second chance to make a great first impression. Things like a weak handshake or a gruff demeanor can color how we see someone for a very long time. Likewise if we make an unambitious or poorly worded first offer then we’re much less likely to reach our goals. The question is why are first offers so influential in negotiation? It has been shown that when we’re asked to make a judgment in the face of uncertainty, we are easily swayed by the first figure that’s introduced into the conversation, however irrelevant, outrageous, or insulting it may seem. This first number tends to serve as an “anchor” that’s almost impossible to forget. It is not surprisingly that negotiation research consistently shows that the person who makes the first offer typically comes out ahead, pricewise. This anchoring heuristic highlights the importance of crafting first offers with care. The results of two studies suggest two new and somewhat surprising ways for us to do so.

Just How Precise Should We Be?

When we are making an opening offer in a negotiation, our main focus is typically how high or low it should be: a $450,000 sale price for our house, or maybe $460,000? By contrast, the precision of that offer – that is, should the listing price be $450,000, $449,900, or maybe $449,999? – is often an afterthought. It turns out that people perceive that the fewer zeros there are at the end of your price offer, the more precise the offer is said to be. And, generally speaking, the more precise you make your offer, the stronger an anchor it will be the researchers have found. Precise offers convey to the other side that that you have a solid sense of the item’s value and are unlikely to be flexible on price. The other side tends to cave in accordingly.

Negotiators need to realize that there’s a catch. The studies have demonstrated that you can get the precision advantage assuming that the involved parties have already decided to negotiate. Alternatively, in many real-world negotiations, first offers are presented before the parties begin to negotiate. As an example take the case of someone comparing the prices of homes or used cars on online listing sites. What the researchers found was that very precise offers risk scaring away potential negotiators by conveying inflexibility.

In one negotiation scenario online participants playing the role of a landlord renting out an apartment perceived “renters” who made precise rent offers (such as $2,102.73 per month) as less flexible than those who made round offers (such as $2,200 per month). The landlords tended to prefer to negotiate with those negotiators who made round offers. Similarly, gathering real estate data the researchers found that the more precise the listing price on a property was, the more likely the seller was to have relisted the property at a lower price due to lack of interest from prospective buyers. The takeaway from this is that the results suggest that past advice advocating precise offers needs to be modified. A round first offer is likely to entice more bidders to make offers. However, once the negotiation is in progress, you might increase the precision of your counteroffers to convey to the other side that you don’t have a lot of wiggle room on price.

Should A Negotiator Try A “Phantom Anchor”?

It turns out that precision is just one factor to consider when crafting your first offer using the anchoring heuristic. Another thing to consider is whether to frame it in terms of a so-called phantom anchor – a figure that is not actually being offered. Here’s an example based on a car seller: “I was going to ask $8,000 for my car, but I can let you have it for $6,500.” In this example, $8,000 is what is called a phantom anchor. It’s not an actual offer that you are making but may carry the weight of one.

Given past research showing that even irrelevant or arbitrary numbers can serve as powerful anchors during a negotiation, researchers looked at using the anchoring heuristic and whether accompanying an offer with a phantom offer can lend an advantage in negotiation. The answer was found to be a resounding yes: Across several experiments, negotiators who framed their offer relative to a phantom anchor (for example, $12,000 rather than $9,000 for a car) achieved better outcomes than negotiators who made the same offer ($9,000) without referencing a phantom anchor. Even though it’s not on the table, the phantom anchor tends to pull bidders’ expectations of how well they can do in its direction. We are easily swayed by the first figure that’s introduced into the negotiation, however irrelevant, outrageous, or insulting it may seem.

However, this benefit does have a downside: Negotiators perceived those who dropped phantom anchors as being more manipulative than those who did not. Such perceptions could deter you from building trust with the other side and creating value. It turns out that there may be a way around this pitfall: supporting the phantom anchor with an objective standard. In another experiment, researchers asked participants to imagine they were being considered for a job and told them that similar positions had been advertised on employment websites for about $55,000. Those in the phantom-anchor condition were then told that “We were planning on offering you $55,000, but we can do $60,000.” Those in the no-phantom- anchor condition were simply told that “We can offer you $60,000.” Thanks to the objective standard, this phantom anchor was viewed as less manipulative, but it was just as effective. Overall, suggesting that you are opening a negotiation with a concession from a tougher offer can help you get a better deal in negotiation. However, because this tactic can rightly be viewed as being manipulative, it’s wise to use it with care. As always, keep your own ethical code at the forefront, and beware the risk of incurring the other side’s distrust.

What All Of This Means For You

In any principled negotiation that we participate in, our goal is to find a way to get the best deal possible. Most negotiators know about a negotiating technique called “anchoring”. Although this technique can allow us to control how a negotiation plays out, it turns out that there are some ways that we should go about using it. Understanding the right way to use anchoring can allow us to use this negotiating technique to get the most out of our next negotiation.

Negotiators need to understand that in a negotiation our first offer can set the tone for the rest of the negotiation. One of the big questions is just how specific should our first offer be? Studies have shown that a more specific first offer will tell the other side that we are not willing to negotiate. However, if we include more zeros in our first offer, we’ll be telling them that we are open to negotiating. We may also consider using a “phantom anchor” in our negotiations. We do this when we mention a starting price, but we start things out at a lower offer. This sets the higher offer in the other side’s mind. We need to be careful to not come across as being manipulative.

During a negotiation we would like to be able to lead the other side to the deal that we would like to be able to reach with them. In order to make this happen, we can use the anchoring technique. However, when we use this technique we need to understand how to go about using it. There may be some side effects of using it and we need to be aware of them and how to deal with them. If we go into our next negotiation with this knowledge, then we will be well positioned to get the deal that we want.

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

Question For You: Do you think that it is possible to use a anchor value that is to outlandish?

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

Let’s face it – not all of our negotiations go the way that we want them to go. We can easily become upset, angry, or frustrated with the way that things are going. Although these reactions are fairly standard reactions to things that can happen during a negotiation, we need to understand that both our actions and our reactions can conspire against our ability to create win-win negotiating outcomes. We need a way to solve this problem and it turns out that a self-examination might be the way that we can do it.