Making First Offers - the pros and cons

Whether negotiators are busy negotiating the acquisition of a new business, a revised wage agreement, or the purchase of a property, one of the negotiators needs to make the first offer. The million - dollar questions are: 1) who should make the first offer, and 2) how will making or not making the first offer influence the negotiation process and the outcome?

The decision as to who should make the opening move frequently causes great uncertainty and anxiety amongst negotiators. This is especially true when they lack reliable information about the other party, as they are then unsure about what offer that party will accept and what offer is likely to cause the other party to walk away from the negotiation. It is furthermore also possible that the other party could deliberately respond with misleading information to gain a negotiation advantage.

Given that most negotiations initially are somewhat vague, a school of thought believes that the opening offer should therefore preferably come from the other party. The rationale being that an opening offer provides valuable information about a party's negotiating position and gives an indication of what type of agreement would be acceptable. Although this seems to be good advice, it unfortunately fails to take account of the critical effect first offers have on how negotiators think about the negotiation process. Reputable psychological research tends to strongly suggests that negotiators who make first offers often achieve better results.

Anchoring a negotiation

Research has established that the way negotiators perceive the value of any offer made in a negotiation strongly correlates to any relevant number related to that offer. Given that numbers related to an offer tend to have a magnetic effect on the judgment of negotiators, these numbers are referred to as anchors.

First offers have a strong anchoring effect in situations of great fluidity and uncertainty, as in the case with many negotiations. First offers maintain a strong influence throughout the negotiation. This influence is so strong that even negotiators who are aware of the magnetic effect of anchors in terms of their judgement are often unable to resist this influence. Therefore, their valuations of a first offer seldom break out of the field of influence of such anchors.

Greg Northcraft and Margaret Neale researched the phenomenon of anchors. In an experiment they provided real estate agents with manipulated price lists for properties (high and low anchors). These real estate agents were thereafter asked to inspect these properties and appraise their values and purchase prices. All participants to some degree or other allowed the list prices to influence their decisions. The list prices clearly caused them to disregard the important features of the properties.

Thomas Mussweiler of the Institute of Psychology at the University of Wurzburg together with his colleagues conducted a similar experiment where they asked customers to approach German automotive mechanics (professionals that are knowledgeable about the true value of cars) with used cars that required numerous repairs. After offering their own opinion of the value of these cars, they asked the mechanics for an estimate of the value. Fifty percent of the mechanics were provided a low anchor by the customers stating, "I think that the car should sell for about 2800." The other fifty percent were given a high anchor by the customers sating, "I think that the car should sell for about 5,000 ". Those mechanics provided the high - anchor estimated the value of the value of the cars 1000 above those given the low - anchor.

Even people who profess that they are wise to anchors are invariable affected by anchors. This relates to the fact that high anchors selectively direct attention towards strong, positive attributes, whereas low anchors selectively direct attention towards weak, negative attributes. In the case of the estate agents, the high list price directed their attention towards the positive features of the properties (spaciousness, a pool, etc.), while at the same time relegating the negative qualities (a small garden, one garage, etc.) to the back of their minds. The mechanics confronted with a low anchor focused on the wear and tear the vehicles exhibited and did not pay attention to the positive aspects such as low mileage and the impeccable interiors.

Making or not making a first offer

Research into the influence of anchoring strongly suggests that negotiators making a first offer usually enjoy a substantial negotiation advantage. In numerous studies sellers making a first offer have been found to achieve higher negotiated prices than buyers making first offers. Making the first offer anchored the negotiation in the favour of the sellers.

Furthermore, researchers have also found that the likelihood of a first offer being made strongly correlates to a negotiator's confidence and sense of control at the negotiation table. Those with a lack confidence and who feel disempowered by the structure of a negotiation or the availability of alternatives are less inclined to make a first offer.

There is also strong evidence that the size of the first offer influences the outcome of a negotiation - with higher or more aggressive first offers delivering better outcomes.

First offers predict final settlement prices better than subsequent concessionary offers.

Naturally, there are no hard and fast rules that apply in every negotiation situation. It would clearly not be advantageous for a negotiator to make a first offer when he/she has inadequate information regarding the other party, and is aware that the other party is better informed about the issues being negotiated, and possess better market and industry data. Sellers or buyers of property, who make use of experienced real estate agents, have access to more and better information than buyers and sellers who act on their own behalf. The lesson to be learned is that negotiators should prepare well enough to be on par or ahead of the other party in terms of their knowledge of the issues at hand, and of market and industry trends. This affords them the necessary confidence to make first offers that will anchor the negotiation in their favour.

How a first offer should be constructed

Although it is clear that first offers should be strong, negotiators should always guard against becoming so aggressive that they move outside the range of what would be acceptable to the other party. The fear that many negotiators have concerning the possibility that aggressive first offers may scare or annoy the other party to the extent that it would break off the negotiation is often highly exaggerated. It causes most negotiators to err on the side of being overly - cautious and therefore to forgo optimal agreements.

Aggressive first offers work in the favour of negotiators for the following reasons:

• Such offers assist sellers to achieve higher final agreements;
• Higher list prices lead to higher final selling prices, as it focuses buyers on the positive aspects of a purchase; and
• Aggressive first offers create leeway for negotiators to make concessions without exceeding their BATNAs.

First offers that are meek generally place heavy limitations on the ability of a negotiator to grant and extract concessions / counter - concessions, or not to go beyond their real base (walk away value). Conversely, aggressive first offers afford the other party the scope to negotiate concessions, thereby increasing that party's sense of achievement and satisfaction, and consequently the possibility of a mutually beneficial outcome.

Given that first offers provide early insight into the contracting zone (the range between each party's real bases), and the range of possible agreements - such offers could, if they are absurdly aggressive, create the impression that a mutually beneficial agreement is impossible, thus leading to a party invoking its BATNA (Next Best Option).

Using an "Aspiration Base" focus

When negotiators contemplate aggressive first offers, they should make such offers within the context of the strength of their BATNA, their aspiration base (the target at which their hopes and desires would be fulfilled) and their real base (the bottom line beyond which their BATNA kicks in).

Although a clearly defined real base is an extremely important aspect of any negotiation, it is crucial that negotiators focus their attention on their aspiration base when developing a first offer. Research findings reveal that negotiators who focus on their aspiration base when considering first offers tend to make more aggressive first offers and achieve more beneficial outcomes than negotiators who focus on their real base.

Another way of ensuring that first offers are not so aggressive as to cause the other party to walk away from the negotiation is by focusing on the other party's BATNA, and real base, and on market trends. John Oesch and Glenn Whyte have found that the best first offers tend to be those that fall outside the contracting zone, but are not sufficiently far beyond the real base of the other party to cause an extreme reaction.

When negotiators become strongly fixated on their aspiration base, they are blinded to beneficial outcomes that exceed their BATNAs. Their challenge is to focus on their aspiration base and make an aggressive first offer, but to remain open to conceding, thereby preventing the possibility of rejecting beneficial agreements. This ensures a mutually beneficial agreement.

A defense against first offers

When a negotiator does not have the opportunity to make the first offer, their protection against anchoring lies in making an aggressive counter - offer firmly based on the other party's BATNA, real base and aspiration base. The best way to present such an offer is in a way that creates a positive climate and blunts the other party's first offer. The key to protection lies in a negotiator knowing his / her aspiration base and the limitations of the other party.

Where the other party makes a first offer that is close to the aspiration base of its counterpart, the immediate inclination is to accept that offer and conclude the negotiation. Research, however, indicates that immediate acceptance of a first offer is likely to leave the other party filled with regret and discontent about not having made a more extreme first offer. It is also likely that doubts may arise about the quality of the product or service purchased. A dissatisfied party is less likely to live up to the terms of an agreement and may consequently immediately start plotting how to amend the agreement, extort concessions or gain revenge. Even highly acceptable first offers should therefore be met with a request for concessions. If nothing extra is forthcoming the other party would at least have the satisfaction that it has achieved a meaningful victory where both parties have benefited .