Anchoring in Negotiations
Anchoring, in negotiation, is a reference point which forces us to rely heavily on that starting reference (the “anchor”) when making sense of an agreement or proposal. It is a cognitive bias that affects our subsequent decision making, whether it’s a starting price derived from a valid calculation or a number pulled out of a hat.
You need to be very careful where you start in any negotiation because that starting point will have a great bearing on where you finish.
For example, let’s say you wish to purchase a case of widgets from W&A Manufacturing. John (a sales rep from W&A) tells you that a case of widgets costs $100 retail, but because you are ordering a whole case he is authorised to sell it to you at a price of $90. You feel $90 is a good price because anything less than the anchor price of $100 looks like a good deal. The lesson here is that the first offered price is a very powerful anchor. Watch out for that.
Even if you manage to negotiate a better price than the $90 offered by John, your reference point is still $100 (the anchor).
Anchor points can creep into your judgement so you need to be careful about them. For example, when starting to negotiate the Terms & Conditions of a contract, who’s “standard form” do you use? “Standard form” is just another anchor which forms your starting point.
How do you protect yourself from inadvertent anchoring?
- Ask where the starting point comes from. How did the other side come up with that number?
- Do your research before you negotiate. Found out the cost of the item or get a hold of the “standard form” before you begin.
- Come up with your own “anchor” to start.
Avoiding the anchor may seem difficult at first, but over time it will become easier.
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Happy negotiating!