ANCHORING

In sales negotiations, there are two types of anchors—opening offers and other items—both of which can have an enormous impact on the outcome of a negotiation. On a very basic level, opening offers can be defined as the first offer put on the table by either party. It could be your saying, “We always sell our Gizmos for $15 per unit,” or your customer’s saying, “We never pay more than $12 per unit for Gizmos.” In reality, though, it’s not quite that simple. For example, if a customer sends out a request for a proposal (RFP) and asks you to respond in a certain way, they have, in a sense at least, made an opening offer and anchored the negotiation. Regardless of the form the offer takes, however, the most important thing to bear in mind is that opening offers have a greater effect on outcomes than all of the subsequent trades combined. In the next two chapters I provide a great deal of information on preparing and presenting what we consider to be the ultimate opening offers.

Nonopening-offer anchors, which I discuss in this chapter, can be just as important, and both sellers and buyers use a wide range of such anchors—either intentionally or otherwise—in negotiations. Nonopening-offer anchors almost invariably concern individual items rather than multiple ones and range anywhere from a customer deciding, arbitrarily, that they want a 12 percent discount in price this year to a customer insisting that they won’t pay more than they did ten years ago for a product whose price has since doubled. Although some nonopening-offer anchors are appropriate, the vast majority are either untrue or inappropriate, if not simply irrational. Some other examples include:

• Customers who anchor on the statement “I can get the same thing cheaper elsewhere.” This may or may not be true, but buyers use this argument for one very good reason—it works. In this case, it tends to anchor the negotiation on “I need to get a better price to beat the competition” rather than “I need to sell more value.”

• Customers who anchor the negotiation by saying that a particular price is “beyond their budget.” This may be true, but it’s actually an inappropriate anchor because, in fact, the customer’s budget has nothing to do with the price you set for your products or services— or, at least, it shouldn’t. Even so, it works as an anchor and, more often than not, to your detriment.

• Reps who give huge discounts in the fourth quarter or push overly hard on price and then move on, leaving their replacements with a customer who is already anchored on past negotiation behaviors. Although this is also an inappropriate anchor, such behaviors in these situations influence both the tone and direction of the replacements’ first negotiation with the customer.

• Salesforces that publish price lists. Although this serves as a way of communicating pricing to customers, it’s also inappropriate as an anchor for those firms that wish to sell value propositions or solutions, because reps still tend to be surprised when, as a result, a customer wants to anchor on price at the same time the rep is trying to anchor on value.

But such anchors are by no means limited to price—they can come from a wide variety of sources. One of the many ways that a negotiation can be intentionally or unwittingly anchored is through the sales process. For example, if in the sales process you’ve done a great job of anchoring on selling the total value of your company’s solution to the customer, in all likelihood that’s the kind of package you’ll end up negotiating. On the other hand, if in the sales process you’ve only called on the lowest-level purchasing agent, and she’s been pushing hard for you to offer them the lowest price, price is most likely what you’ll end up negotiating. The old adage “You negotiate what you sell” is true. The quality of the sales process does have an impact on how easy or difficult the negotiation is.

You and your customer can also become anchored, intentionally or otherwise, on a particular way of negotiating, which can have an impact on future negotiations. For example, we once worked with a buying organization that loved to use the old school tactic of “nibbling,” coming back after the negotiation had apparently ended to ask for a little bit more. They loved this tactic and for a very good reason—it always seemed to work for them. But when I asked them to think about it from the suppliers’ perspective and how the suppliers reacted to it, they realized that what they’d actually been doing was teaching their suppliers to lie to them. Because the suppliers had learned over time to expect the buyer to use this tactic, they would always hold something back. Then, when the buyer began nibbling, the suppliers would appear to be giving the buyer something more, even though they really weren’t. If you’ve been anchored in a situation like that, it can easily take multiple negotiations to enable you and your customer to reanchor on trust, share information, trade, and ultimately create value.

The Effects of Anchoring

Although it’s probably easy for you to see how anchors like those described can have an impact on a negotiation, here’s an example of exactly how it happens. Think! runs Strategic Negotiation Process workshops in companies all around the world, part of which include practice negotiations based on real-life conditions in those companies’ industries. What we do, essentially, is take all the people in the workshop, typically about 20, and divide them into teams, half being the buyers and the other half the sellers. All of the buyers, and all of the sellers, receive identical sets of facts about themselves and the other side. They read them, meet one-on-one to negotiate, and, when they’re finished, share the financial results of the negotiation with the group.

We then debrief both sides, in the process going over their goals for the negotiation, the CNAs for both sides, a power and Agreement Zone analysis, and their Wish Lists and subsequent trades. We then look at two aspects of each team’s results: (1) the size of the pie, or the amount of value being divided, and (2) who claimed what percentage of that value. When we do, we usually find that in some pairs the buyer opened/anchored first, and in some the seller did. We also find that some of the opening offers were focused only on the price of the product or service for sale, while others took into account multiple trading variables, such as price, volume, length of contract, service, and so on. What’s most important, though, is that we found, more often than not, that the teams that opened on just price and product were actually dividing a significantly smaller amount of money than those that anchored on numerous trades. Sometimes, in fact, those who opened the negotiation on a variety of items were actually creating and dividing as much as 50 percent more money than those who didn’t.

When we subsequently analyze who got how much of a larger pie, we invariably find that it depends not only on how many items are included in the opening offers but on where those offers anchor the negotiation. In those instances in which either side anchored on one item and close to its own CNA, not only was the pie smaller than it could have been but the team also got less of the pie than those on the other side. When, instead, one side anchored closer to the other side’s CNA, that side got more of the pie, but the pie still wasn’t as large as it could have been. On the other hand, in those instances in which either side anchored on multiple items but still close to its own CNA, that side enlarged the pie but still got less of it. Finally, in those cases in which either side anchored on multiple items and close to the other side’s CNA, not only was the pie larger but that side also got a bigger share of it. Thus, both what they anchored on and where they anchored affected the subsequent negotiation. This does not, however, just happen in our workshops. It happens in real life as well.

Here’s another example of how anchoring can influence a negotiation. A few years ago, Margaret Neale, a professor at Stanford University and coauthor with Max Bazerman of Negotiating Rationally (Free Press, 1992), decided to test how the listing price of a house affected Realtors’ estimations of its value. Selecting a house in Phoenix, Arizona, she first had it appraised to arrive at a listing price, then asked four groups of real estate brokers to evaluate the house. Each broker received a packet containing all the information brokers usually have to make such evaluations, including data on the house itself, the price of similar houses in the area, price per square foot, and so on and so on. There were, however, two differences in the packets the brokers received. In two of the groups’ packets the listing price and the price per square foot were lower than the original appraisal, and in the other two groups’ packets they were higher.

All the Realtors conducted walk-throughs of the house, did their calculations, and then presented the results. Although they all claimed, both before and after their presentations, that the listing price had little or no impact on their calculations, Professor Neale found, when the evaluations were presented, a direct correlation between the listing price and the Realtors’ evaluations. The more money the Realtors thought the owner wanted for the house, the higher they assessed its worth. The point here is that anchoring—in this case on a price—can affect someone’s thinking about the value of what’s being negotiated and, accordingly, the subsequent negotiation.

Setting an Appropriate Anchor

For all of these reasons, it’s extremely important for you to anchor the negotiation to your mutual advantage. During the validation meeting you should accordingly be looking for ways to provide anchors in two areas: (1) in trades that include items beyond just price and (2) in CNAs that include elements other than price. You can do this by asking carefully worded questions based on your estimations that enable you to shift and broaden the discussion beyond price alone.

If, for example, you think your customer is focused primarily on price, you might say something like: “I understand that price, warranties, service, and length of contract are important to you. How would you rank them most to least important?” By doing so, you can subtly set the tone for multiple trading items. Similarly, in regard to CNA, you might say to the customer: “In addition to a good price, how important is it to you that suppliers have the capacity to service you globally?” Assuming that you have a better global solution than your competitor (the customer’s CNA), by raising this question you can find out how the customer feels and begin to subtly hint at the gap between what you and your competitor have to offer.

In our business, for example, many customers like to simply solicit a request for a proposal for negotiation training and ask us for our “price per person.” In an effort to broaden the discussion beyond price, in our validation meetings we ask the client such anchoring questions as these:

• “How important is it to you to have custom case studies written specifically for your business?”

• “In addition to negotiation skills training, do you also want a negotiation ‘strategy’ or guidelines written at the corporate level that include individual negotiation parameters?”

• “Do you want individual coaching by our consultants to be available after the course is completed?”

• “Would you like to have your managers trained as in-house coaches for your salespeople?”

• “Would you like us to provide return on investment (ROI) information for the people who go through the course?”

• “Would you like to have a database that manages implementation of this negotiation initiative?”

Every one of these questions is directly related to items we want to include in a final deal—our Wish List. They are also all related to aspects of our value proposition that are typically not offered by our competition and therefore probably not included in the client’s CNA Estimation. So by asking these questions, we can not only broaden the discussion beyond the zero-sum, single, price-per-head issue but also change the customer’s CNA Estimation to the point where our offer is seen as radically different from our competitor’s. In the process we also collect great data from our clients on how much they value each of these services, which provides us with information on potential trades. We also, of course, ask questions related to other elements of the deal, including length of contract, number of workshops, pricing, and so on.

But asking questions like these doesn’t only enable you to start anchoring the negotiation. Based on your customer’s responses, it also enables you to determine any untrue or inappropriate anchors, figure out where they are, and use that information to prepare your offers and prepare yourself for face-to-face trading in the final step of the process. Let’s say, for example, that you’re in a validation meeting with a buyer who tells you that his number one priority is a short-term, low purchase price. However, you’ve already met with the CFO, who told you that she’s more concerned about the long-term, total cost of ownership. In that case, you know that either the buyer is bluffing or he’s not aware of the larger and more strategic initiatives at the firm and is, accordingly, using an inappropriate and strategically useless anchor.

But the inappropriate anchor can be on your side as well. Let’s say that you want to use a 50 percent gross margin as an anchor. Your cost is $25,000, so you try to sell your solution to a customer for $50,000. The only problem is that the client can build his own or buy the same solution from one of your competitor’s for $35,000. In that case, your anchor is meaningless, unless you get lucky with an uneducated buyer. But even if you do, eventually they’ll figure it out, and it will greatly damage your relationship.

Now, before I go on to discuss the operational aspects of the validation meeting itself, you should think about the live negotiation that you’ve been focusing on throughout the book and try to determine if you and your customer have already become anchored in a way that might be either a hindrance or a help in this negotiation. Again, remember that anchors can exist in a wide variety of areas, including price, contract clauses, product-service mix, and the like. Remember, too, that your industry may be anchored in some way. For example, it might be standard practice in your business for sellers to give away a variety of customer services, so it would be a good idea to note any such anchors below so that you’ll be able to keep them in mind when you conduct your validation meeting:

1. ________________________________________________________

2. ________________________________________________________

3. ________________________________________________________

4. ________________________________________________________