When will making the first offer help your negotiations, and when will it hurt?

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iStock_000015867912SmallBy:  Steve Martin, CMCT

Recognizing the Chicago Bulls managing partner’s reputation as a ruthless negotiator, in 1996 Michael Jordan’s agent made a decision to ‘take the Bulls by the horns’ and table an audacious $52 million salary request. The parties settled at $33.14 million, a record that remains the single highest annual salary in NBA history. For Jordan and his agent, making the opening offer was a strategy that clearly paid dividends.

By way of contrast when the sportswear manufacturer Lacoste adopted a similar strategy in their negotiations with tennis star Andy Roddick the result was disastrous. They tabled an opening offer which included a clause reducing the value of the contract by 75 per cent if Roddick were to fall below 15th in the world rankings. Unbeknownst to Lacoste, Roddick had already made the decision to retire if he fell in the world standings and so Roddick’s agent ‘reluctantly agreed’ to Lacoste’s terms in return for a larger annual guaranteed sum. In this example submitting the first offer did nothing to help the Lacoste bottom line.

In previous INSIDE INFLUENCE REPORTS we have written about the First Offer Advantage – the idea that the side that tables the opening offer in a negotiation typically gains a bargaining advantage primarily because first offers act as an anchor that influences subsequent counter-offers. Lots of research supports the robustness of making the first offer not just in value-based Westernized cultures like the US, but across multiple other cultures and in varying power structures too.

The message would appear to be a clear one. When bargaining for advantage be sure to get your offer in first.

But when Lacoste went first they were disadvantaged, prompting a question. Are there any situations when making the first offer, rather than serve as an advantage can actually undermine your negotiation outcomes? It turns out that there are.

Competition

In a new series of studies recently published in the journal Psychological Science, researchers David Loschelder, Roderick Swaab, Roman Trötschel and Adam Galinsky thought that in situations where negotiating parties held diametrically opposed views (for example a seller wants the highest possible price but the buyer wishes to pay the lowest possible one) the party making the opening offer would gain advantage. However in situations where negotiating parties revealed compatible views (for example they perhaps shared a preference on delivery dates) then the first offer advantage could backfire.

In one experiment managers with a minimum of 5 years’ experience were told that they would be negotiating on the sale of a factory plant and would be assigned the role of either buyer or seller. Those in the role of buyer were additionally told that they could reasonably expect to build a new plant for $25m. Sellers were told that they could dismantle the plant and sell the components and equipment for $17m, leaving an $8m bargaining zone for the parties to haggle over.

Additionally the parties were informed that the date for completion of the factory sale was also up for negotiation. Sellers were told that they should argue for a later date because of lucrative projects that still needed to be completed in their current plant which would provide them with additional profits. Additionally, half the buyers were told that it was in their financial interests to negotiate an earlier sale date but the other half told that a later date would be preferable. As a result of this manipulation half the parties held diametrically opposed views to each other (in that they wanted the best deal and different completion dates) but the other half unknowingly held a compatible view (at least with regards to completion dates).            

A subsequent analysis of the negotiations conducted between those who were diametrically opposed clearly showed that the negotiator who made the opening offer, on average, benefitted to the tune of $5.60 million more than his opponent. A clear First-Mover Advantage. However the opposite was the case for the negotiation parties who shared compatible views. In these situations the party making the opening offer ended up with significantly less value. What the authors coined a First Mover Disadvantage.

factory

The researchers also conducted another study where some negotiators held diametrically opposing views; some held compatible views and others a combination of both. In every case outcomes always favored the First Mover when the negotiators held diametrically opposed views. However in cases where the parties held compatible views making the first offer led to less valuable outcomes.

Why? The authors argue that when an opening offer discloses compatible preferences then a shrewd operator will potentially be better placed to extract more concessions. Recall that Lacoste’s opening offer was made on the condition that Roddick also accept a reduction in fees paid should he fall below 15th in the world rankings. Remember also that Roddick had already made a decision to retire should that happen. Noting that Lacoste’s demands were compatible with Roddick’s, his agent was able to gain advantage.

So what are the implications for you and your deal making challenges? Two emerge.

Firstly, and despite the insistence of certain practitioners to the contrary, the science advocates that it is still wise to table the first offer in a negotiation, providing that your first offer includes only issues that the other side holds diametrically opposed views on. Second, in order to be able to do that effectively, it would be prudent to spend the necessary time identifying issues and matters that feature high on your negotiating opponent’s list of importance. Although this might incur an additional investment in terms of time and effort, you might find failure to do so comes at an even larger cost.  

 

Leave your comments below:

When did tabling the opening offer in a negotiation work out well for you (or not so well)?

 

Source:

Loschelder, D. D., Swaab, R. I., Trötschel, R., & Galinsky, A. D. (2014). The First-Mover Disadvantage The Folly of Revealing Compatible Preferences. Psychological science, Vol 25, 4, 954 – 962

  • Intuitive Influence

    I’d be most interested in understanding how a prestated, publicised, ‘offer’ impacts on this theory. e.g. vehicle and property sales where a price is already advertised (i.e. the first offer)

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