Who Should Make the First Offer in a Negotiation?
One of the most common questions concerning negotiation is whether it is in one’s best interests to make the first offer.
Generally speaking, it is.
That is, of course, that the offer is “reasonable”. And, what qualifies an offer as “reasonable” is that it falls within a zone of possible agreements (ZOPA) – a conceptual range of common ground among the negotiating parties.
For example, imagine that two people are contemplating the sale/purchase of a used car. The seller would like to receive $20,000 for the car, but would be willing to accept as little as $18,000. Meanwhile, the buyer would prefer to pay no more than $17,000, but would be willing to go as high as $19,000. The ZOPA is the intersection of the parties’ acceptable price ranges, namely “$18,000-$19,000”. Accordingly, it would be in the buyer’s best interest to make the first offer, as long as the offer were in the $18,000-$19,000 range.
Research shows that agreement terms are “anchored” by the first offer – they more closely approximate that original offer than the counteroffer. So, if the buyer were to submit the first offer at $18,000, the odds are that deal would be done closer to $18,000 than to $19,000. Similarly, if the seller were to put out a first offer of $19,000, the deal would more likely be done at a price closer to $19,000.
The Danger of Extreme Offers
However, making an exaggerated offer outside of the ZOPA (e.g. a purchase offer of $16,000) could have adverse effects. Unfortunately, too many people incorrectly assume that doing so will shift the ZOPA in their favor. Evidence shows that it actually provokes the other side, and leads to (1) an exaggerated response couple by the counterpart’s unwillingness to concede or (2) the other side’s willingness to walk away from the negotiation leaving the offeror to negotiate against themselves by submitting more attractive offers.
Extreme offers (i.e., outside of a ZOPA) can work to some degree in cultures in which haggling is expected, as well as when the offeror has much more information than the other side regarding the matter being contemplated and the landscape. Still, employing this approach is highly inefficient, and often involves deception and dishonesty – that, in turn, undermines trust, and diminishes potential for repeat business.
So, when thinking about making an offer, start by knowing your own limits – the point at which you would walk away, as well as the limit to what you would agree to – before entering the negotiation. Then, make the first offer by anchoring at the extreme end of the range that you think your counterpart might accept.
For even better results, consider sharing the reasoning behind your offer when you make it (e.g., this is what Kelly’s Blue Book says it’s worth, this is all I have in my account [evidenced by this bank statement], etc.) – even before they respond. Doing so communicates that you are honest, principled, and closed to coercion.