Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.
Source: Wikipedia - http://en.wikipedia.org/wiki/Anchoring
If you observe carefully, you will see anchoring at work in everyday activities. Few tactics are as powerful as anchoring as an effective negotiation technique.
Wherever you see a printed price, someone is anchoring your mind to that price for the object such as MSRP for a car, the billboard price for gasoline, average flight ticket prices to your favorite destination, etc.
You also associate (or expect to pay) a higher price for Macy’s when compared to Wal-Mart.
When asking for someone’s time you feel less guilt asking for an hour or two, than for a day.
When reviewing an effort estimate for a certain project task, or when you negotiate fees from a supplier, you intuitively feel you can only ask for a certain level of discount. You dare not ask for too much.
In these examples, your mind has already been anchored to a certain price point.
In order to effectively negotiate the best deal for a transaction in your favor, you can use the following techniques related to anchoring:
1. Take the opportunity to quote the initial offer boldly and largely in your favor. Border it on the extreme to the point where you feel that the other party would even get angry. Know (but do not disclose) that the final transaction value will drop from this point.
2. Don’t change the price or shift from this position until there is a counter-offer. Base your arguments for your position, or counter-arguments for the counter-offer solely on the merits of the case and not on individual or personal interests.
3. Know the final price or offer that you are willing to accept (which would be a good deal). Basically you are making an offer way more than what you are willing to accept.
4. Indicate your willingness to walk away. As soon as you indicate any level of desperation or desire to close the deal, the other party will not have an incentive to bring down their counter-offer. Most online pricing algorithms are increasingly basing the offer price on signals that indicate desperation.A classic example is prime booking window for flight tickets.
Notice how the price increases as soon as you enter the 30-day window. So if you are trying to book a flight six months in advance, you can negotiate a lower price. Conversely, if you are within the 30-day window, then the online system senses desperation and a much higher price is quoted.
5. Use anchoring to provide relative discount. For example let’s assume you saw a suit for $1200 and the JosA Bank salesman mentioned that it is on sale for $400. Then in another store you saw a similar suit which had a 10% discount on a list price of $440.While either suit costs the same, the 66% discount would weigh more in your mind and feel like a much better deal than the 10% discount.
For sheer boldness and asking for a LOT more than one is willing to accept, check out the volunteer example, among others, in this post.
Right off the bat, a group of people are asked if they would be willing to volunteer 2 hours a week for 2 full years. They all said no. Then half of them willingly said yes for a single 2-hour volunteering stint
Without the initial 2-year commitment, only 17% agreed to volunteer for a single 2-hour stint.
6. Where you have no idea of the price or offer, you have no option but to wait for the other person to make the offer. In that situation, you should not make the first offer. Now that you know the concept of anchoring, use that initial number to then make your counter-offer. You should accept the fact that that is the only number you have to work with, and that you mind is already anchored to that number.Seek out a few more data-points, and do more research. That is one way out of de-anchoring yourself, comparing the options, and coming back with an offer that is much more favorable to you.
7. Sometimes folks gets angry, have an emotional outburst and pretty much break the negotiation process down. Be aware of this, and allow some wiggle-room. Terms such as “negotiable”, “or best offer”, “open to a better offer”, etc. can help prevent such a break-down. After all keeping an open communication line is important to successfully close a deal.
Happy to hear your comments on this power negotiation tactic. Please share and leave your comments below.
Post image: (c) Microsoft. Source: Microsoft Word Clip-Art
Prime flight booking window chart: (c) Cheapair.com – http://www.cheapair.com/blog/travel-tips/when-should-you-buy-your-airline-ticket-heres-what-our-data-has-to-say/