[Pricing Nugget #049] Being Precise with Round Anchors

You are about to enter a negotiation.

You take your "Negotiation 101" handbook, and you find out: "Hey, you should make the first offer." Is this really true?

And if you make an offer, should your offer be precise or round?

We will find out today.

In negotiations, should you make the first offer?

Very much every negotiation handbook will tell you: "Yes, you should make the first offer."

And the question is, is it a myth or well-researched?

The answer is, "Yes, it is well-researched."

Multiple studies since the 60s confirm that the first offer has an anchoring effect on the final agreed price, which means the final agreed price is closer to the first offer. That is why it makes sense that you make the first offer.

The more interesting question is, should your first offer be precise or round?

And the answer is... it depends.

In this study, they negotiated house prices, and the researchers compared round versus precise offers.

In this study, they negotiated house prices, and the researchers compared round versus precise offers.

The situation was: after a couple of rounds of negotiation, there was a last offer. And this last offer was either precise or round. For example, for house number one, in the precise conditions, it was $324,599 or $325,499 (i.e., about $500 below or above the precise price to account for “level effects”). In the round condition, it was $325,000.

The question is, what is the counteroffer?

If the last offer was round, the counteroffer was lower. It means the anchoring effect is stronger with precise offers. Okay, then the answer is actually a question: Why does it depend, then? Make a precise offer.

However, the likelihood that your last offer will be accepted is higher if your last offer is round. Therefore, you have to make a trade-off here between a precise offer, which gives you a higher counteroffer, and a round offer, which gives you a higher likelihood that your last offer will be accepted.

And this doesn't only hold for negotiations about houses but also for conditions when a hotel manager is negotiating with a vendor about coffee for a hotel or if people are negotiating about jewelry in a Turkish bazaar.

In either case, the likelihood that the last offer will be accepted is higher in the round condition. But, if it's not accepted, the counteroffer will be higher in a precise condition.

When do you offer a precise offer, and when do you present a round offer? You have to make a call.

What did we learn today?

Today we learned, first, we should make the first offer.

And second, we need to decide whether it is precise or round. If it is precise, your customer might give you a higher counteroffer. But if it is round, your customer is more likely to accept it.

Why is that?

If you make a precise offer, customers conclude this might be the correct price, and it has more credibility. Hence, your customer is less likely to deviate too much from your offer.

But if your offer is round, you give your customer a hint, a clue, the concept of roundness and completeness. Therefore, a round price gives a subtle cue that this is a settled price. That explains why customers are more likely to accept it.

Overall, you have to decide at which point in your negotiation process you come up with a precise - first or intermediate - offer or a round offer that you think should be very much the last offer, and that's the one to be accepted.