Most negotiations have an opening bid. That bid becomes the anchor that the rest of the negotiation centers upon. If you’re good at setting anchors – and at avoiding being anchored to a number you won’t like – you’ll get more out of your negotiations.
There’s an interesting dynamic that can happen in negotiations. It’s called anchoring. Anchors are initial points from which you are going to negotiate. They can lock you into a position and unfair anchors can kill a deal. If you’re presented with an unfair anchor, consider walking away. Also understand if you give the other party an unfair anchor, they may walk away.
When you got to set an anchor, base it in reality with data or assumptions. If I tell you I want to sell you a car and it’s $75,000, that can come across as an unrealistic price. If instead I tell you “the Blue Book value of this car is $100,000 because it’s a one-of-a-kind limited edition but I’ll start the negotiation at $75,000” my initial anchor seems a lot more reasonable.
Many times the final offer in a deal will end up within a reasonable distance from that initial anchor. For example, if you anchor your deal at $100 upfront and that’s your first offer, more often than not, you’ll end up between $80 and $100. If instead, that first anchor was $500, you’ll end up between $400 and $500. That anchor can drive the final deal price a great deal.
Now understand that anchor also has to be based in reality. You can’t just throw a huge number out there without some basis in fact. If you receive an anchor from the other party and you don’t like it, change it! Go from one metric to another and that’s an easy way to switch the anchor. For example, I know a software company that was going to launch a platform. The customer wanted to pay them $10,000 for the software but they also wanted unlimited use of the software – forever.
The start-up would have lost out on significant long term revenue if they went with this single purchase price. That initial $10,000 anchor was not a tenable position. The start-up didn’t argue with that anchor. Instead they changed it and they said “well, we don’t look at it as an initial purchase price. We’d rather look at it as a subscription model and we’ll only charge you $100 per user per year for a seat license to our software.”
They set this anchor based on comparable software sales in the market and they were able to show their customer what comparable software cost. They ended up, ultimately, with a fee structure of $100 per year for the first 1,000 users, $90 per year for the next 1,000 and the $75 a year for any users over that. By changing the metric the negotiation was anchored upon, they went from a one-time fee to an ongoing revenue stream. The start-up captured significantly more value over time because they were able to change the anchor from that initial one-time purchase to an ongoing subscription.
As you look at the deals you’re entering into, be very aware of what those anchors are and how they can shape the final outcome of your negotiation. Be deliberate about putting an anchor out there and offering facts and data to support your ingoing point. Because, ultimately, that starting point is going to have a huge effect on the final negotiating price.
To learn more about anchoring and negotiating, check out our training course Everything is Negotiable. We’ll teach you how to get the most out of every negotiation you enter. You can also watch my new course Strategic Negotiation on lynda.com, which includes a free chapter on defining the context of your negotiation. Watch the course introduction here:
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