How to Master Anchoring & Improve Your Negotiation Skills
Anchoring happens all the time. Learn to recognize it and use it to your advantage.
If you don’t know what anchoring is, I have a fun survey for you. Please only take the quiz if you don’t know what anchoring is, and only before reading the article.
Think about a chore on your to-do list but just haven’t had time to complete. Now, imagine I have a tool that can do it for you; you never have to worry about it again. It costs $500. Would you buy it? If not, what would your counteroffer be?
What I just described is a situation where I used anchoring to my advantage. While anchoring is an effective negotiation tactic, it derives from a grander tendency of human minds — we tend to build our decisions and next steps around the most recent information. When it comes to negotiation, it’s like exerting a psychological gravity, pulling your counterpart towards your way of thinking.
The implications of anchoring imply that negotiation is a human process. A human process doesn’t necessarily mean a logical one; i.e., it is limited by human tendencies cand can be influenced to drive the conversation and results to your favor. Recognizing the impact of anchoring is essential because it protects you in your decision-making process during negotiations. Furthermore, you can take action to mitigate the effects of anchoring on you and use it to your negotiation advantage.
The Effects of Anchoring
Anchoring happens all the time — we do it, see it, and fall victim to it (myself included), regardless of whether we know what it’s called. A prevalent example of this occurs when a store offers a sale on items. Many consumers think a $3,000 bag (yes, that bag in the quiz is $3,000) is too expensive. When it goes on sale for 20% off, though, some might jump at the opportunity to buy it even if it still unaffordable. Take a look at the illustrations of Scenario 1 and 2 below for a different view of anchoring.
In Scenario 1, the seller takes the opportunity to set the anchor at a very high price. The buyer might have initially wanted to pay much less. Unfortunately, after hearing the anchor, the buyer has second thoughts — maybe giving such a low counteroffer would be offensive, or perhaps it would scare the seller away — it could be any number of reasons. In any case, the buyer responds with a counteroffer that’s higher than what he or she would have said initially. As a result, the buyer will likely end up paying more than if he or she counteracted the anchor.
In scenario 2 depicts a reversed situation. The buyer makes the first offer, and the seller offers a lower counteroffer than what he or she would have provided initially. In this case, the seller would likely be selling the service for less than if he or she counteracted the anchor.
Mitigating the Effects of Anchoring
Tip 1: Anchor First
A common fallacy in negotiation is to wait for your counterpart to make the first offer, especially if you are not comfortable enough with negotiating. By taking a responsive rather than proactive position, you will play a defensive game. That could lead to an entire negotiation of defensive play from you. Rather than wait, you should make the first offer and anchor your counterparty. At best, that will pull your counterparty into your trajectory, and you can play offensively; at worst, they will recognize the anchor, dismiss it, and you can plan your next move.
In negotiation, I’ve found that it’s usually best to make the first offer. By doing this, you put down the anchor, rather than your counterpart. In some instances, though, you might not have the opportunity to do that. When your counterpart anchors, you’ll have to react to try to avoid it. If you aren’t aware of the anchor, you’ll start negotiating on their trajectory.
Tip 2: Respond with Your Anchor
While awareness is essential, you’ll still be tempted to follow the course that your counterpart has laid out for you. To do that, you ignore the anchor and put yours out as well. To effectively do this, you should structure your statement as an independent statement, rather than one that is linked to your counterpart’s offer.
A linked statement sounds reactionary, and may lead to a conversation that keeps you defensive:
“Would you take $400?”
Instead, use a statement that’s independent of the previous offer:
“I’m willing to spend around $150.”
Another thing you might have noticed is that, in the former statement, there is a consideration of the counterpart. In the second statement, you only spoke about what you can offer. There’s no hard rule for including acknowledgment of the counterparty; one rule negotiators tend to follow around this is to mimic the other person’s tone (mimicking others is a common tactic used in negotiation and other forms of communication that increases the likelihood of persuasion). If their first offer is aggressive and doesn’t acknowledge the negotiator, they may also choose to offer a bold anchor.
As an example, Marco and Sally might be negotiating over the price of lawn mowing services. In a warm opening situation, Marco may anchor by saying, “Sally, I will do this work for $150 per hour — would that work for you?” In mimicking response, Sally may say, “I understand. I’ll be honest, I wasn’t expecting it to be so high — I was prepared to spend $50 per hour. Do you think you or someone you know would be able to do something more in that range?”
In this situation, both Marco and Sally are warm. Sally took a queue from Marco’s language; instead of reacting shocked at the price that was 3x her expectation, she also provided a friendly, inviting anchor. On the other hand, if Sally’s response were, “I’m willing to spend $50,” it would be cold and uninviting compared to Marco’s tone.
Scenario 3 illustrates the possibilities with a double anchor negotiation. Both the seller and the buyer reveal their anchors. Both of their offers are on opposite ends of price but within reason. Now, the room for negotiating on a favorable price is much larger.
Tip 3: Provide a Reasonable Anchor
Nothing in negotiation (or communication in general) is isolated to one principle. Everything is tied together, and when you try to pull one string, other strings move as well. That is important to remember whether you’re anchoring or trying to lead with other persuasion principles.
When it comes to providing a reasonable anchor, your credibility and reputation are linked with your anchor offer. If Rob tried to sell Satish a normal, unspecial pen for $50,000, Satish would unlikely even entertain the rest of the conversation. Instead, Satish would question the credibility of Rob’s sales experience and integrity, and Rob’s reputation as someone who knows what he’s doing is blown away. The negotiation is over before it even started.
Of course, it’s another one of my contrived examples, since most of you reading this wouldn’t be so crazy as to sell a normal pen for $50,000. The moral of this story, though, is that your anchor is most likely to work within a reasonable price range. There’s no magical formula that draws the line between reasonable and unreasonable, but it starts with research.
Tip 4: Repeat Your Anchor
After dropping your anchor, your counterpart may respond in many ways. Regardless of how they respond, it would help if you continued to remind them of your anchor as appropriate. As I mentioned before, relevancy affects a person’s decision-making. Furthermore, you want to continue pulling them towards you, rather than the other way around.
Don’t confuse this tip with the idea that you must remain firm at your anchor. You’re within the power to move from your original price to accommodate your counterparty. Repeating your anchor (or your new offer) is a good practice if you notice your counterparty trying to steer the conversation in another direction.
For example, after offering their price, they may begin listing reasons why their price is a reasonable ask. Before you know it, the conversation is now covering why their ask is reasonable or unreasonable. Even if it’s unreasonable, the conversation is still about their price, not yours. This would be a moment to bring up your price again.
Tip 5: Treat It Longterm
Another common fallacy of negotiation is to consider it a zero-sum game. In reality, negotiations are often just the beginning of a longer-term relationship — one where you want to remain on good terms with your counterparty. Rather than a zero-sum game, it’s mostly about expanding the pie — how do you turn this conversation into an even more significant opportunity for each person?
That means discussing things outside of pricing and focusing on understanding what each side is requesting. More often than not, it’s not only about price. For example, a company trying out a new service for the full time might want a ramp-up period, so they don’t have to spend all their money on day one and risk receiving a poor service. Adding the ramp-up consideration into the package would influence the purchase decision, but won’t affect the long-term recurring revenue once the company builds full trust in the service.
Even seemingly short-term negotiations that you treated as a zero-sum negotiation may unexpectedly come back to bite you. I’ve heard about stories where the counterparties left their company, found a better position at a new one and the negotiator needed to broker a deal with the new company. The new negotiations were led by none other than the original counterparty, who remembered the selfish tactics of the negotiator from the previous experience. The deal was not brokered.
I hope this has been a helpful introductory piece around the idea of anchoring bias, how you can identify it, avoid it, or even use it to your advantage in negotiations. Apart from those concepts, two other vital take-aways from this piece are: 1) negotiation strategies are often a combination of different practices that work together rather than in isolation, and 2) negotiations are most likely long-term, and you should take that thinking to focus on building a mutually beneficial relationship with your counterparty, rather than trying to take as much as possible in the short term.