Jumping the Gun: Why Premature First-Offers May Prevent Finding Creative Solutions

Posted By Graham Hoerauf, Jan 8, 2014

Several key pieces of research indicate that making the first offer in a negotiation can provide the negotiator with distributive advantages, such as gaining a more favorable purchase price during a transaction at the expense of the other party. Many experts now recognize the importance of “anchoring” and consider it a key part of any negotiation as it can have lasting effects throughout the negotiation, noting a strong positive correlation between the original anchor and the final result agreed upon by the parties. Except in extremely rare situations --such as when an initial offer is so outrageous the other party finds it offensive or they are prepared with counter arguments -- it is generally recommended to make the first offer if possible. However, this research is really only the tip of the iceberg as it addresses the what to do regarding first offers, but fails to tackle the idea of when such an offer should be made during a negotiation.

The Early Bird Doesn’t Always Get the Worm

Take a simple transactional scenario as an example. I recently purchased a bicycle from a person on the internet to replace my stolen bike. This was a “distributive negotiation” where the issues are fixed - price is really the only issue being negotiated, and the more money he gets for the bike means less money I keep. Let’s say I pull up, hop out of my car, and without saying anything else walk up and make my first offer. Research shows that making an aggressive first offer in this context can lead to better results, explaining up to half of the eventual outcome. But by making an early initial offer, whether it is on the part of the seller or the buyer, it may limit the negotiators’ focus to only address the fixed issue of price and potentially misses the opportunity to discover mutual underlying interests that may be present that would be an even better outcome for both parties.

Let’s say that the gentleman selling the bike actually ran a business out of his garage repairing and selling bikes. While he’s quite good at what he does, gaining exposure and new customers occasionally is an issue for him because the internet isn’t always a reliable source of customers. He is also hosting a cocktail party at his home next weekend and was going to start looking through the phone book to hire a piano player to entertain his guests. It just so happens that I am a student at a local university that has many friends who ride bikes and periodically need repairs, and have played piano since kindergarten. By delaying the point at which I make my first offer until later in the negotiation when I have engaged in rapport building and some information gathering, we now have a better opportunity to discover creative solutions to the transaction that meet both of our underlying interests. I can play at his party at a lower rate than someone he calls from the phone book, and I can also act as a referral and bring him more business from the university in exchange for a better price on the bike purchase. If I had just rushed up and made an early first offer, maybe I could have talked him down a few dollars from his initial listing price. But by employing a strategy of a late first offer I was able to gain additional information that led to a more collaborative, integrative approach resulting in a creative solution to the problem.

Bridging the Gap of a Negative Bargaining Zone

Late offers are likely to be more efficient because they come at a point in the negotiations where the parties have their guard down and are likely to be more open to sharing information. Right at the beginning of our transaction, I was still “some random guy from the internet” so it would be reasonable for the seller to still have his guard up a little bit. But after discovery of underlying interests, it became possible for both sides to walk away with a much better deal and value than if a price only focus of the negotiations was taken. Further, the effectiveness of a late first offer can be used not only to enhance an otherwise straightforward transaction, but can even be used to avoid an impasse where a “negative bargaining zone” may exist.

A negative bargaining zone exists when a seller’s reservation point exceeds the buyer’s maximum purchase price. So if the bike seller listed the bike for sale on the internet for $70 and I know I have only $40 dollars left after paying all my other bills (an entirely realistic scenario as a starving student), it doesn’t make a lot of sense for me to drive all the way over to his house unless I’m just SUCH a good negotiator I know I could talk the ice off an igloo. Under a fixed issue approach, it is very unlikely I’m leaving with a bike. But by employing a late first offer and engaging in additional information gathering, I am able to identify his underlying interests of needing more advertising and customers and also having a need for a piano player, thus coming up with a creative solution allowing us to bridge the negative bargaining zone and having everyone walking away from the transaction satisfied.

Limits and Takeaway

Thus, it becomes clear that the effectiveness of a late first-offer approach is more involved than just timing. For instance if the parties in a negotiation are in a truly adversarial context, just hate each other, and cooperation at any point is unlikely, simply delaying a first offer is probably not going to facilitate any additional information gather or identification of underlying interests. But in most cases, there is likely room to discover a little more about the party you are negotiating with and at least fish a little bit to see if there may be some creative solution that could help sweeten the deal for everyone involved.

Such concepts are applicable to the legal sector as well. Whether in a transactional scenario similar to the example above, or perhaps in settlement negotiations, both parties are likely to benefit from increased information gathering and creative solutions. By all means still make the first offer when appropriate, but remember that there is definitely some value to not rushing things. Make sure all avenues are adequately explored before pulling the trigger and “dropping the anchor”.

For further reading on the importance of timing with regards to first offers, see Marwan Sinaceur et al., Good Things Come to Those Who Wait: Late First Offers Facilitate Creative Agreements in Negotiation, 39 PERSONALITY & SOC. PSYCHOL. BULL. 814, 814-25 (2013).