Never Make the First Offer?
A quick word first
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The case for not making the first offer
Donald Dell’s classic Never Make the First Offer/Except When You Should builds on his remarkable career as a sports agent, promoter, and entrepreneur. The book belongs on the desk of anyone who’s serious about enhancing their negotiation skills.
The wry contradiction between its title and subtitle underscores the principle that negotiation can’t be scripted. What you do and say depends on the particular circumstances and who it is you’re dealing with. As Dell explained when I recently spoke with him, the key to successful negotiation is listening and learning, and then adjusting your approach accordingly.
His book covers trust-building, personalities, persuasive language, and leverage. When it comes to initial offers, Dell tilts toward trying to get the other party to put the first proposal on the table because, as he writes:
“You are really not seeking an offer at all: you are seeking information. The first offer gives you an insight into their thought process. It crystalizes all their thinking up to that point and boils it down to a single number or a series of deal points. It also tells you what their primary issues are.”
Here’s another reason for getting your counterpart to go first: Even if you make a bold demand, you might be underselling yourself.
Jim Levine, my literary agent, told me a story from years ago when he was in the academic world. He and his colleagues had developed some innovative educational software but were in no position to market it. A major tech company had heard about their product and invited the trio to meet with its president to talk about a possible deal. Jim says that they were hoping to get $5,000 apiece—$15,000 in all.
But here’s what happened:
“We're sitting across from the desk of the president. I'm in the middle, my two partners are on either side of me. We make some small talk, and he asks are we willing to sell. I said, ‘Yeah, we're willing to listen to your offer. Let us know what you have in mind.’
“And he leans across and he says a million dollars. I can feel my partners about to leap out of their chairs. I literally put my hands, my left hand on one thigh to my left, my right hand on my other partner's, to hold them down in their chairs. I leaned forward, look at the guy and say, ‘I think that's a little low, don't you?’”
Jim’s team asked for a caucus break out of sight, where they jumped up and down in delight. They ended up getting $1,500,000, one-hundred times what they were looking for. And that’s entirely due to Jim’s asking the company president to make the first offer.1
The case for making the first offer
The standard argument for putting the first number on the table is the so-called anchoring effect. Lots of psychological experiments show that people who make bold demands (or stingy offers) tend to get better deals, at least if price is the only issue under discussion.2
When somebody does this, you may recognize the tactic and realize the number is ridiculous, but subconsciously it can anchor your expectations. Small concessions then feel like victories even though the other side’s proposal is still unreasonable.
Dell offers a strategic argument for going first:
“If you suspect you’re going to get lowballed and the offer will be much lower than what you hope to get, make the first offer. The idea here is that you’ll raise the bar and close the distance between the two of you. You’ll never have to entertain the insulting first offer, because you anticipated it coming and simply skipped right over it.”
I’ll add another reason for making the first offer, this one thanks to Mike McIlwrath who has decades of experience in law, international business, and dispute resolution. He has found that senior managers and outside counsel often have a “huge reluctance to be the first to make an offer.” He believes that’s because they often are not fully prepared.
“Once people gain confidence over what their goal is, and they feel that that's a good number for them to have, you take away a lot of that reluctance. It's going to be north or south depending on where they wind up, but they've thought that through. The reluctance to make an opening offer, we find, is very often driven by a lack of understanding of what people really hope to achieve in a negotiation.”3
Sometimes who makes the first offer is determined by social norms or market practices. Realtors put an asking price on homes (as in the Time to Play Hardball? article earlier this month). Car dealerships put sticker prices on vehicles in their lots—low enough to get you to take a look, but high enough to give them wiggle room to make “concessions” that seemingly sweeten the deal for us.
Those are just starting numbers, of course. They can wander all over the map, up and down. They don’t bracket the bargaining range. In today’s hot real estate market, houses sell above the asking price. And with cars, there’s the shell game about trade-in values, plus hidden costs like delivery and document fees to haggle over.
A final thought. With people purchasing houses online, sight unseen, and buying cars without taking a test drive, I’m curious about how the back-and-forth of offers and counteroffers plays out. If you have experience doing this, please share your insights via a comment here.
Thanks! Mike
Housekeeping
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Jim recounts a more complete version of this story (and he makes other appearances, as well) in my eight week HBS Online Negotiation Mastery course.
Yes, psych lab studies show that anchoring aggressively can produce better payoffs. What’s overlooked, though, it also makes stalemates more likely.
Mike likewise appears several times in my HBS Online Negotiation Mastery course. I’m grateful to him, Jim Levine, and the other expert negotiators who have made it such a success. As of this month, it has now been taken by managers, officials, and students from 153 countries around the globe.