Resolving the "First Offer" Quandary
By James A. (Jim) Baker

It is right up there with the “chicken and the egg” debate: Who should make the first offer during a negotiation process? To a large degree, this dilemma is rooted in a fear of the unknown. You simply don’t yet know what the other party is expecting or is willing to accept, or what his capabilities are. So, at this stage in a negotiation, you may be afraid to make an offer that is too weak, because you could end up leaving a lot of money on the table. However, if you open with an offer that is too strong, the other side might bolt from the table altogether.

Because of the intense level of anxiety this choice usually produces, many negotiators are content – and relieved – to wait for the other side to make the first offer. This is best, so the thinking goes, because by waiting you will receive valuable information about the expectations your negotiating partner has, so that you will instantly have a better feel for the character and direction the negotiation is likely to take from here. Some authorities in the field of negotiation technique affirm the value of this strategy, but is it always the best strategy? Maybe not, given recent psychological research indicating that negotiators who make the first offer generally achieve a result that is more favorable to their side than do those who wait. Why is this?

Dropping Anchor

The answer is pretty obvious, once you stop and think about it. The first offer on the table, assuming it is not patently absurd and insulting, serves to identify -- or anchor -- the range around which the negotiation will revolve from that point forward It may not exactly reflect the final agreement (and certainly, it shouldn’t or otherwise why call it a negotiation?), but the chances are that the final agreement will stay somewhere in the neighborhood of that opening offer.

This is true for at least a couple of reasons. To start with, the first offer automatically requires that the response from the other party must come toward the direction of the first offer. If party A makes the first offer -- $1000 for a case of widgets, what effect will that have on party B, who was hoping to ask $2000? Most likely, party B is now forced to counter at $1500, to which party A responds with $1250, and then party B is stuck settling for something like $1350, which is almost 70% less than he had hoped to ask! Of course, there are a few defenses against getting dragged this far down, but there is no doubt that the one making the first offer has anchored the negotiation to his terms, and that is difficult to completely overcome.

Another reason that the opening offer tends to be closest to the final agreement is because the very fact that one party is willing to make the first offer may indicate that he or she is a more experienced and confidant negotiator. Such a person is less hesitant and confused, and more focused on what he or she really wants. Experience and confidence count for a lot in negotiation, and they make it more likely that the one who offers first gets more of what they wanted at the end.

Motto for Success: Be Prepared

Of course, this only holds true if the one making the first offer has done their homework. In order for your first offer to be strong and effective, without driving the other side away from the table, you need to well versed in the data pertinent to your deal – real values, market conditions, etc. It also helps to learn as much as you can about the other side – their needs, their personality or negotiating style, and their financial position, among others. Information is power to an experienced negotiator. Given enough information, any seasoned negotiator will almost always come away with an agreement that is clearly in his favor, while at the same time, leave the other side with a sense that they received something of genuine value as well. With that in mind, let’s take a quick look at how to plan your first offer.

Know What You Want, (And Make an Educated Guess About the Other Side)

The most important single aspect of a successful negotiation is to clearly understand what you want – and don’t want – before the negotiation even starts. Most of the time this involves clarifying your Wish, your Aspiration and your Bottom Line. The Wish is that homerun you might achieve if everything goes perfectly in your favor. The Aspiration is what you honestly believe to be fair and reachable, if you do your job well. The Bottom Line defines the territory into which you will not cross: if you can’t achieve at least X, then it is time to walk away. Focusing on your Aspiration, and being committed to your bottom line BEFORE the negotiation begins, will provide you with a strong sense of security as the negotiation unfolds.

One important aspect of planning your Wish, Aspiration and Bottom Line is to also do as good a job as you can of estimating what the other side’s Wish, Aspiration and Bottom Line will be as well. The art of making a strong first offer involves aiming high enough in the beginning so that you can “land” in the area of your real Aspiration as the negotiation progresses, but not aiming so high that it will push the other side so far below the edge of their Bottom Line that they walk away before the real negotiating begins. Ideally, your first offer should create enough room above your Aspiration to allow you to move down but still stay close to your aspiration, while allowing the other side the opportunity to regain enough territory by the end of the negotiation that they can close comfortably above their bottom line. You still end up with the more successful outcome, because you held all or most of your Aspiration, but they also feel satisfied because they leveraged you back toward a better position for themselves.

What If You Didn’t Offer First?

Even if you didn’t make the first offer, you still have a defense, though it takes a good poker player to execute it. If you did your homework, and feel you have a good handle on what the other side’s Aspiration and Bottom Line ought to be, counter with an offer that is aimed at slightly below what you think their Bottom Line is, instead of trying to split the difference on the first offer (splitting the difference is usually never a good idea). This aggressive response, played with confidence, should start a chain of concessions that will get both sides moving to a mutually satisfying agreement.