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Negotiating Better Deals: Aim High. Then, Aim Higher.

May 15, 2018

Results follow expectations, in negotiations as in much else. As teachers, advisers, and coaches to negotiators, we see that rule proven constantly. Negotiators who ask for more (within reason) tend to get more, resulting in better deals over time. Most people understand this idea intuitively and agree, in theory, that setting higher expectations for the negotiation will generate better results. But it’s easier said than done, and in practice, too few negotiators use this approach effectively. So let’s consider exactly why this is such a productive approach and how to use it most effectively.

 

 

 

Aspirational First Offers

 

Every negotiation is a low-information environment because neither party knows exactly where it’s going to end up. That can make negotiators reluctant to open the discussion with a big ask because, without knowing the other side’s limits and expectations, they worry that they’re going to be too aggressive. But while that can happen, worrying about it can keep negotiators from making the right opening moves.

 

Say, for example, that you want to hire me to paint your portrait. We know that the rates for that service range from $1,000 to $10,000, depending on the skill of the artist. If I’m modest or worried about scaring you off, I might target a price of $4,000 even if I think I might be able to get more. I might open with a request for $4,500, to give myself room to negotiate.

 

But you probably don’t know what the painting is really worth, either; after all, that’s what we’re negotiating. If I open at $4,500, I’m telling you that I think it’s worth less than that (because you should assume my target is less than my opening offer). What if I began higher? Let’s say I begin at $8,500 because another artist in the area recently sold a portrait for that much. That gives me a benchmark, so I can make the offer with a lot of confidence. It signals to you that I believe the service is more valuable. Even if your budget can’t accommodate that price, telling you that the painting is worth it supports my position in the negotiation and makes it more likely we’ll settle at the top of your range. And if your budget does cover that price, I’m probably going to double what I would have made in the first scenario.

 

In other words, one of the primary benefits of opening with an aspirational offer is to give yourself lots of room to negotiate—that much is obvious. But another very important benefit is that it’s a signal. It indicates to the other side that the negotiation should end up relatively close to your position. As a tactic, this kind of signal is most useful at the beginning of the negotiation. If I wait until we’ve been negotiating for a while, you’ll have more information about what prices would be reasonable to both parties. But at the beginning of the conversation, when there’s a minimum amount of information available, your signals are more likely to influence the other side’s understanding of the possible outcomes.

 

Avoiding the Winner’s Curse

 

When we tell clients that they should make an aspirational opening offer, it’s very common to hear one or two related objections: “I don’t know what to offer,” and “What if I offer too little?” They’re worried that they might make an aspirational offer that turns out to be less than the buyer is willing to pay (or more than the seller would be willing to settle for, depending on the context of the negotiation). This is a variation of what’s called the “winner’s curse,” which is what auctioneers call it when a bidder pays more than an object is actually worth.

 

The winner’s curse is a real phenomenon. In our example above, what if you didn’t know the price range for a painting in the marketplace? If you thought the price would be much higher than it actually is, your opening offer would be heavily distorted—you might come in with an offer of $15,000 instead of $5,000. I’d negotiate for a bit for the sake of appearances, if nothing else, then gleefully accept. In that case, your opening offer was a mistake.

 

But the winner’s curse shouldn’t deter you from making smart opening offers. It’s mostly a problem when there’s an information imbalance—when the other side knows more about the likely end-point of the negotiation than you do. When information is low on both sides, which is extremely common, it’s much easier to identify the right opening.

 

So what’s the right opening? The most aspirational position that you can rationally, persuasively justify. In our example, I opened at $8,000 because there was a recent comparable deal on the marketplace. I might be able to go a little higher if I could explain why I should get paid more than that artist. But I couldn’t open with a request for $10,000 without being able to explain why that was the right price. Similarly, the buyer could come in with a much lower offer, but only if they were able to justify that offer with specific, persuasive reasons.

 

Results follow expectations, in negotiations as in much else. As teachers, advisers, and coaches to negotiators, we see that rule proven constantly. Negotiators who ask for more (within reason) tend to get more, resulting in better deals over time. Most people understand this idea intuitively and agree, in theory, that setting higher expectations for the negotiation will generate better results. But it’s easier said than done, and in practice, too few negotiators use this approach effectively. So let’s consider exactly why this is such a productive approach and how to use it most effectively.

 

Aspirational First Offers

 

Every negotiation is a low-information environment because neither party knows exactly where it’s going to end up. That can make negotiators reluctant to open the discussion with a big ask because, without knowing the other side’s limits and expectations, they worry that they’re going to be too aggressive. But while that can happen, worrying about it can keep negotiators from making the right opening moves.

 

Say, for example, that you want to hire me to paint your portrait. We know that the rates for that service range from $1,000 to $10,000, depending on the skill of the artist. If I’m modest or worried about scaring you off, I might target a price of $4,000 even if I think I might be able to get more. I might open with a request for $4,500, to give myself room to negotiate.

 

But you probably don’t know what the painting is really worth, either; after all, that’s what we’re negotiating. If I open at $4,500, I’m telling you that I think it’s worth less than that (because you should assume my target is less than my opening offer). What if I began higher? Let’s say I begin at $8,500 because another artist in the area recently sold a portrait for that much. That gives me a benchmark, so I can make the offer with a lot of confidence. It signals to you that I believe the service is more valuable. Even if your budget can’t accommodate that price, telling you that the painting is worth it supports my position in the negotiation and makes it more likely we’ll settle at the top of your range. And if your budget does cover that price, I’m probably going to double what I would have made in the first scenario.

 

In other words, one of the primary benefits of opening with an aspirational offer is to give yourself lots of room to negotiate—that much is obvious. But another very important benefit is that it’s a signal. It indicates to the other side that the negotiation should end up relatively close to your position. As a tactic, this kind of signal is most useful at the beginning of the negotiation. If I wait until we’ve been negotiating for a while, you’ll have more information about what prices would be reasonable to both parties. But at the beginning of the conversation, when there’s a minimum amount of information available, your signals are more likely to influence the other side’s understanding of the possible outcomes.

 

Avoiding the Winner’s Curse

 

When we tell clients that they should make an aspirational opening offer, it’s very common to hear one or two related objections: “I don’t know what to offer,” and “What if I offer too little?” They’re worried that they might make an aspirational offer that turns out to be less than the buyer is willing to pay (or more than the seller would be willing to settle for, depending on the context of the negotiation). This is a variation of what’s called the “winner’s curse,” which is what auctioneers call it when a bidder pays more than an object is actually worth.

 

The winner’s curse is a real phenomenon. In our example above, what if you didn’t know the price range for a painting in the marketplace? If you thought the price would be much higher than it actually is, your opening offer would be heavily distorted—you might come in with an offer of $15,000 instead of $5,000. I’d negotiate for a bit for the sake of appearances, if nothing else, then gleefully accept. In that case, your opening offer was a mistake.

 

But the winner’s curse shouldn’t deter you from making smart opening offers. It’s mostly a problem when there’s an information imbalance—when the other side knows more about the likely end-point of the negotiation than you do. When information is low on both sides, which is extremely common, it’s much easier to identify the right opening.

 

So what’s the right opening? The most aspirational position that you can rationally, persuasively justify. In our example, I opened at $8,000 because there was a recent comparable deal on the marketplace. I might be able to go a little higher if I could explain why I should get paid more than that artist. But I couldn’t open with a request for $10,000 without being able to explain why that was the right price. Similarly, the buyer could come in with a much lower offer, but only if they were able to justify that offer with specific, persuasive reasons.

 

Practical First Offers

 

Most negotiators know that they need to open with offers that give them room to negotiate. But few realize the value of using that offer as a signal to the other side about what the final agreement should be, or the need to carefully tie those offers to specific, articulable rationales. 

 

In your next negotiation, plan ahead. Before you sit down at the table, determine the most aspirational opening offer you could make. Figure out the specific rationale for that particular offer. When the negotiation begins, make the offer and give the reasons for it. Do it confidently, because it’s been prepared in advance. And see the difference it makes in your negotiations.

 

Most negotiators know that they need to open with offers that give them room to negotiate. But few realize the value of using that offer as a signal to the other side about what the final agreement should be, or the need to carefully tie those offers to specific, articulable rationales. 

 

In your next negotiation, plan ahead. Before you sit down at the table, determine the most aspirational opening offer you could make. Figure out the specific rationale for that particular offer. When the negotiation begins, make the offer and give the reasons for it. Do it confidently, because it’s been prepared in advance. And see the difference it makes in your negotiations.

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