If you’re a business professional or owner, chances are you negotiate often. Similarly, as a lawyer for over 25 years, virtually 100% of my cases are settled out of court. And I’ve learned some key tips along the way that I now share when coaching business clients. This post offers those tips on making the first offer in negotiations.
Perhaps you’re aware of the widespread assumption that making the first offer is a huge mistake – that you’d risk “showing your cards” too early and leave money on the table. In reality, however, the opposite is true. Those who make first offers in business negotiations generally have the advantage and come out ahead.
This is because the first offer “anchors” the direction of the negotiation. Anchoring is a well-documented cognitive bias. It describes the human tendency to rely too heavily on the first piece of information offered when making decisions. In addition, the first offer influences the other side’s counteroffer against their favor. You’ll generally want your first offer to be the absolute best terms you can reasonably expect to get. Here’s how to go about it.
Back it up.
If you’re the seller, for instance, your first offer would be the highest possible figure you can justify. This means you’ll be able to back up your figure with facts if the other side questions it.
Ideally, before making the first offer, you should have sufficient information about the other side’s willingness to pay and the applicable market trends. This will avoid your first offer being so aggressive that it drives the other party away.
Knowing a bit about how much the other side is willing to pay will help determine what their best alternative is to this deal and what they will likely pay or accept. Keep this in mind when crafting your first offer. Likewise, in making the first offer, it’s important to focus on your ideal outcome (or “target price”) while knowing your bottom line.
Make the figure precise instead of offered as a range. A precise figure is more likely to have an anchoring effect and lead to a less ambitious counteroffer by the other side.
Negotiation really is an art that takes strategic agility and lots of practice. You can start with the above tips when making the first offer in your next business negotiation and set yourself up for success. For more tips, check out The Art of Negotiation by Michael Wheeler.
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