Who should put their figure first?

The most frequently asked question in the field of negotiation

There is no conversation on the negotiation topic in which I am not asked: Who should put their figure first? It is the question that generates the most uncertainty among negotiators who are buying or selling a company, a car, real estate, products, services, or even a soccer player. When I ask this question, people usually answer: "The seller always puts the price first" or "it is better to listen to the other party's offer to avoid uncovering your cards and get information about their position".

The correct answer is not simple as there is no infallible magic formula. However, I want to share several thoughts that will help you clarify the answer.

The first thing to keep in mind is that the answer is not whether you are a buyer or a seller. The answer in most situations is: YOU. Whoever you are, you must put your price first. This action is called anchoring your proposal, in negotiation terminology, and the psychology behind it is to start influencing the expectations of the other party quickly and establish your figure as a benchmark. Human beings are influenced more easily than you may think, and when the other party hears your price they will question theirs. There is a high probability that they will change their mind about their price even before they start talking about it. Just think, how many times have you questioned your price after hearing theirs first? If you have never been swayed, then you have the makings of a great negotiator! But it's really difficult and some experts say it's impossible to be immune to such influence.

During the negotiation, your objective should be to make your price the centre of the conversation so it is taken as a reference. If the other party asks you for a discount, you are on the right track because what they are really telling you is that they take your price as a reference and wants you to give them some “satisfaction” by moving it a little. When the other party verbalizes your price to criticize or reject it, you are on the right track, because what they are really doing is anchoring your price in their mind; they stop talking about theirs (unless they make a counteroffer and anchor theirs).

Once you have managed to anchor your number as a reference in thenegotiation, everything becomes relative to that number and the probability that the negotiation will end up close to that number is high. The interesting thing is that studies conducted on the concept of "anchoring" indicate that the negotiating party that makes the first offer will have more leverage in the final outcome. But beware, because people who feel they have less power than the other party will not make the first offer.

The explanation does not end here,

"What if you haven't quite calculated what the other party would be willing to give you, and you've anchored a low figure?"

This is the biggest fear many negotiators have when opening first. The only way to make sure that this doesn't happen to you, is to use another key behavior in competitive negotiation: Open extreme.

To open extreme is to open above the maximum the other party can pay if you are selling. And if you are a buyer, opening below the minimum at which they can sell to you. This type of anchoring gives you room to move and give them satisfaction because you can make them perceive that you are making efforts to reach an agreement.

However, careful when using the extreme aperture in situations such as:

1) Regulated sectors or markets or where there is objective information to calculate the value of what you trade (if your price is far outside the market you will not be considered and you will have damaged your credibility).

2) In collaborative or long-term negotiations where you can damage the relationship if they perceive that you want to take advantage of them.

3) In situations where the other party has better alternatives and can easily ignore you.

The exception

In most buying and selling situations, the prices of the products and services to be negotiated are well known because you have historical information and comparative prices and you can calculate it considering costs ( price of raw materials or labor), margins etc. There are factors that can influence that market price and that must be taken into account, for example:

- The “rush” that one of the parties has, in buying or selling that property, company, car, etc

- The strategic interest that you have and therefore the way of valuing what you are buying or selling.

There are clear examples that fall into these exceptions. For example, the interest that moved Facebook in 2014 when it came to buying WhatsApp. Zuckerberg feared that Google would meddle in the sale (Google had been in previous talks with WhastApp) and ended up offering $19 billion. Another example is the interest that El Corté Ingles had in the land auctioned by Adif in 2015 (it was an open air parking lot) on Paseo de la Castellana in Madrid right in front of El Corte Inglés. ECI surprised the market by submitting a bid of 136.48 million, almost double the bid made by the next player. The strategic interest was clear: It could not afford another company like Ikea or MediaMkt to build its store there.

So when should you NOT put your price first?

When you do not know what the other party's breaking point may be because it is a situation where you do not have the necessary information. These situations tend to be in minority, although in the technological sector they occur more often. For example, during the tech bubble there were many companies that were sold well above their real value and many sellers were shocked to hear the price offered by the potential buyer. I remember phrases like: "thank goodness we didn't put our proposal first, otherwise we would have lost a lot of value".

There are many stories known by the press such as the case of the La Nevera Roja, a food delivery start-up that in 2015 was bought by a foreign company, Rocket Internet. The market and probably the owners of the company were surprised by the offer made by the buyers. The figure that Rocket Int ended up paying of €80 million was well above the valuation. The reasons behind it are fundamentally strategic.

Conclusion

The answer as to who should put their price first is:

You should anchor with your figure in most situations and as long as you have the necessary information: about the market, the alternatives they have, the interests and pressures that may influence that price etc. The more information you have the better you can make your decision. However, if you decide to let them set their figure first, remember to avoid letting them influence your expectations and focus on the figure you want to anchor.

Four interesting truths

1. The psychology behind making the first offer is proven: you influence the expectations of the other party who takes your figure as a reference.

2. The party who makes the first offer will have more leverage in the final outcome.

3. Those who feel they have less power are less likely to make the first offer.

4. The initial figure is a key factor in predicting the final outcome, even outweighing any possible moves or concessions made.

For more interesting studies on the phenomenon of anchoring:

- Tversky & Kahneman, 1974

- Thorsteinson, 2011

- Galinsky & Mussweiler, 2001

- Mussweiler & Strack, 1999b

If you are interested in a specific topic, leave it in comments and we will write about it.

Carolina Kindelan