Business people negotiating
Ideas for Leaders #153

Precise First Offers in Negotiations Vs Rounding

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Key Concept

Negotiators will typically use round numbers in their first offers. Research from Columbia Business School shows, however, that beginning with precise rather than rounded numbers gives negotiators, whether buyers or sellers, an edge.

Idea Summary

In a typical negotiation process, one of the parties will make an opening or first offer, which is then met by the recipient of that first offer. Prior research has shown that negotiators ‘anchor’ on this first offer, which means that the resulting settlement will be biased toward the first offer. Four academics from Columbia Business School wanted to test whether the preciseness of the first offer ($5,115 or $4,800 versus $5,000) would have an impact in the perceptions and strategies of the offer’s recipients. Would precise numbers prove to be more of an anchor for the negotiations than round numbers?

The researchers - professors Malia Mason and Daniel Ames, along with doctoral students Alice Lee and Elizabeth Wiley - first tested the assumption that negotiators use round numbers more often than precise numbers in their first offers. Both class exercises (using both experienced executives and MBA students) and real world data showed that most first offers are expressed in round numbers. On an online real estate site that covers four American cities, for example, 73 percent of homes listed for less than $100,000 and 71 percent of homes listed under $1 million had at least three trailing zeros in the list price. Across all price ranges, less than 2 percent of sellers’ initial offers were specified to the dollar price.

The researchers now focused on whether round numbers were less effective anchors than precise numbers - that is, the eventual outcome of the negotiation was closer to a precise first offer than a round numbered first offer. In the first series of exercises using a variety of participants, the subjects were placed in imaginary negotiating situations and given first offers to which they were asked to present a counter-offer. In all the exercises, the data revealed that the participants who received round-numbered first offers (for example, $10 as opposed to $9 or $11, or $20 as opposed to $19.85 or $20.15) made greater adjustments to those offers than those who received precise numbers.

When the researchers used live exchanges in their exercises (two participants negotiating back and forth versus one participant responding to prices offered by the researchers), the results were the same. Once again, round offer recipients (whether buyers or sellers) responded with a counter-offer that was further away from the original offer than precise offer recipients. The effect of offer type carried through to the end of the (unscripted) negotiation.

A final study revealed that negotiators who offer round numbers are seen as less informed and reasoned than those who offer precise numbers.

Business Application

The findings, in this research, correlate with other research on the impact of precise versus rounded numbers in prices. For instance, one study showed that participants were willing to pay higher prices for goods with precise versus round price tags. Understanding the power of precise offers give negotiators an edge. As the researchers write, “Negotiators can claim more value in competitive interactions by increasing the precision with which they express their opening offers.” Negotiation theory often focuses on extremity - how low (or high, if you are the seller) of a number should you launch the negotiation with. This research shows that even by conceding on price at the start with a slightly less extreme but precise offer, the negotiator can fare better in the long run.

The different response to precise numbers is, according to the Columbia researchers, due to different perceptions about the person making the first offer. Negotiators should be aware of the power of language, even numerical utterances, in creating a perception in the mind of the opponent. By simply presenting a figure that is precise to the dollar, the negotiator gains the advantage of appearing, in the mind of the other party, as credible, knowledgeable and experienced about the subject of the negotiation.

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Authors

Institutions

Source

Idea conceived

  • 2013

Idea posted

  • June 2013

DOI number

10.13007/153

Subject

Real Time Analytics