Negotiation Strategy: Utilize the Anchoring Effect

Let’s talk negotiation strategy. Peep the scenario. You’re starting a podcast to help promote your new consulting business. In your search for the necessary tools, you come across a used microphone that’s within your budget. You reach out to the seller to ask a few questions, and it turns out the mic fits your needs perfectly. Now, it’s time to talk price 😬.

“How much do you want for it?” you ask.

“What are you offering?” the seller responds.

Negotiation strategy

Now what? Many of us are naturally uncomfortable making the first offer in a negotiation. This is particularly true when negotiating over something with which we are unfamiliar. If our offer is accepted right away, we wonder whether we made a bad deal. On the flip side, if the seller is offended by our offer we’ve just put ourselves in an uncomfortable situation. Therefore, we often feel more comfortable making the second move. However, there is one reason we shouldn’t hesitate to take the first move. We call it the Anchoring Effect.

What is the Anchoring Effect?

Seasoned negotiators understand that making the first move in a negotiation can give you greater control over the outcome. By making the first move you can take advantage of the anchoring effect. The anchoring effect is a psychological phenomenon that occurs when the first offer in a negotiation is used as a reference point moving forward. In short, the initial offer serves as a starting point for the negotiations. The reasonableness of any counteroffers will naturally be determined with that initial offer in mind. Therefore, by making the initial offer, you can largely determine where things will end up.

Here’s an example..

Imagine you’ve been at a job for a few years. You’ve performed well and you are thinking it’s time for a promotion. On cue, your supervisor leaves for a new job, so there’s an opening right above you. You apply and (of course) you get the job. You are hoping for a 10% pay bump. But when the conversation about salary comes up, they only offer you a 5% pay bump. All of the sudden, that 10% raise feels like a stretch, and now you’re talking yourself into asking for 7.5%.

Now put yourself in the same scenario. However, this time your employer offers a 10% bump out the gate 🤑. Now you’re seeing green. You would have been happy with 10% a minute ago. Now, you’re thinking you should ask for 15%.

See how the anchoring effect works? In both scenarios you had an idea of what you wanted. However, your employer’s initial offer had a significant impact on what you felt you ultimately deserved. That is the anchoring effect at work.

The anchoring effect is not only an effective tool in negotiating numbers. You can use it in negotiating contract language as well. For example, it is often advantageous to be the one who provides the first draft of a written contract. Why? Because your first draft, in which you give yourself every advantage, is now being used as the baseline document to create your agreement. As a result, the other side has to convince you to make any changes in their favor, and they will be more likely to accept the agreement on your terms.

When to Use the Anchoring Effect as a Negotiation Strategy

In order to utilize the anchoring effect, two things have to be true. First, you have to know what a reasonable initial offer looks like. As I mentioned earlier, the risk of taking the lead in negotiations is setting your price too high or too low. Do either of these things and you’ll end up regretting taking the initiative. Knowledge of what a reasonable offer looks like is what helps you avoid making either of these mistakes. Likewise, it helps you counter the anchoring effect when the other side attempts to use it against you.

For example, let’s revisit the promotion situation. Let’s say your employer offers you a 5% raise. However, you now that people in similar positions make an average of 15% more than your previous salary. Furthermore, you know the person before you was making 25% more and had the same level of experience. Armed with this knowledge your employer’s initial offer doesn’t matter much. You’ll be prepared to counter with a number that is based in fact. (This is part of the reason employers don’t like their employees to discuss their wages with one another.)

Second, in order to take advantage of the anchoring effect you have to have at least decent leverage. For those who aren’t familiar, leverage in the context of negotiations is the power to influence the other side to do what you want. It comes from having something that the other side needs. If you don’t have any leverage, it won’t matter whether you take the lead in negotiations or not. The other side is going to dictate the terms of the agreement and tell you to take it or leave it.

Successful Negotiation Requires Planning and Strategy

Regardless of what you’re negotiating for, utilizing a negotiation strategy such as the anchoring effect requires planning. What are both side’s needs? How will you address potential conflicts? Can either side afford to walk away? What expectations do both sides have about the negotiation process? You should know the answers to these questions, and use them to prepare a negotiation strategy that gives you better odds for success.

If you need help developing such a strategy, M. Zane {+} Associates is prepared to assist. We’ve helped dozens of entrepreneurs better understand their circumstances and craft successful negotiation strategies. If you need help preparing for an upcoming negotiation schedule a consultation or give us a call today!