Have you ever heard the saying “She who speaks first is lost”?
If you were like about 80% of my students (MBA graduate students or executives) you probably think this is true. That is, that you are in a better competitive position when you are able to get the other party to make the first offer. After all, if you do, you obviously have an information advantage because you now know what your counterparts want but you have not yet revealed what you want. And your counterparts may value the issues over which you and they are negotiating quite differently. But before you get too comfortable with that reasoning, you need to consider not only the benefits of receiving the first offer but also the potential benefits of making the first offer.
When you make the first offer you get to set the starting point for the negotiation. When making a counteroffer, the other party will be anchored by where you choose to start the negotiation. But making the first offer does more than set the anchor for where the negotiation will begin. Making the first offer also subtly pushes your counterparts to think about that first offer in relationship to their bottom lines. In fact, they are likely to be thinking – just how will I even get to my bottom line? In addition, you – as the one who makes the first offer – are thinking about the best possible deal that you could get: that first offer. These natural responses of directing your counterparts’ thoughts to their bottom line and you to your aspiration cleverly reinforce your (or their) expectations for the outcome. Because expectations drive behavior – the higher your expectations, the better your performance.
When you make the first offer you get to set the starting point for the negotiation.
To determine whether you should make or receive the first offer, you need to assess which benefit – the informational advantage from receiving the first offer or the anchoring effect of making the first offer – will give you the greatest advantage. While it is sometimes the case that the role you play in the negotiation may influence who makes the first offer, when you have the choice, an important consideration is the level of preparation of your counterpart. Because you are well-prepared for your negotiations (if not, don’t start a negotiation until you are!), the level of your counterparts’ preparation is an important consideration. If they have historically not been well-prepared for their negotiations, then it might be in your interest to let them make the first offer. Even if they choose to make an extremely aggressive first offer, you will be protected in large measure from the anchoring effect because of your preparation. What you are betting on is that they may value the issues over which you are negotiating much differently – and advantageously to you – than you do. If they too are well-prepared, then you are going to be better off making the first offer. They are not likely to make a big mistake in valuing the issues but even with excellent preparation, there is still some uncertainty as to exactly where the deal will settle. Making the first offer allows you to benefit from this uncertainty. You can set the anchor and increase the likelihood that you can harvest the benefit of their uncertainty.
Along with the choice to make or receive the first offer, there are a number of other important considerations.
- If you receive the first offer, be very careful about simply saying yes. Empirical research as well as lots of anecdotes suggest that accepting a negotiator’s first offer often results in that negotiator being less satisfied with the outcome than had you negotiated – and they received less. This makes little sense from a rational perspective; after all, your counterparts made the first offer; if you accept the offer, they should be happy. Have you ever had your first offer in a negotiation accepted? Were you happy? Probably not! The reason for this unhappiness is that most negotiators make an extremely favorable first offer (to them). If you agree to accept that offer, you are – by your behavior – showing them that their offer was not extreme at all. Now they are wondering what is it that they missed. They are also more likely to try to get out of the deal if they can because they don’t understand why you said yes.
- When you make the first offer, you should consider providing a justification to your counterparts, explaining how you came to that offer. The more objective your justification, the better. That is, simply explaining to your counterpart that your low offer is because you are the buyer – and paying less is better than paying more – is unlikely to move them in your direction. However, accompanying your offer with an explanation that appears unrelated to your own interests not only may make the offer look more reasonable but also thinking about your justification may solidify the anchor in their minds.
So when you are deciding whether to make the first offer or not, consider the results of recent research in negotiation:
- On average those who make the first offer get more than those who receive the first offer
- Making the first offer influences how much value you claim but does not influence how much value you create
- Making the first offer results in getting more even when you have less power than your counterpart
The bottom line: Make more first offers. Powerful negotiators are more likely to make first offers – and those who make first offers are more likely to claim more value!