Should you make the first offer, or get your counterpart to take the first step? In many negotiations, this can be the most critical strategic decision you make.
Early in my career, I heard that you should never make the first offer. Frankly, this is unrealistic.
Sometimes, this decision is out of your control. If you’re selling your house, tradition dictates that sellers make the first offer. If you decide not to make it, you might be waiting a long time to sell.
So, how should you decide? Weigh its advantages and disadvantages.
As I have described in a previous column (“Know the value of your product to your customer,” The Business Journal, June 18, 1999), advantages include:
• Setting expectations. First offers, like first impressions, have a disproportionately large impact on the receiving party.
• Eliciting a genuine reaction. If your counterpart says your initial offer “sounds reasonable,” it may be your first and last offer.
• Strategic advantages, like your leverage is getting weaker by the day.
Of course, the disadvantages may outweigh the advantages.
Disadvantages include:
• You lack sufficient information to start. (You just invented a new device and have no idea what a buyer might pay.)
• Providing the other side with strategic information. (Your counterpart may get a sense of your weak leverage if you start.)
• Bracketing. (The party going second usually creates the center of the two parties’ initial moves — which often is viewed as inherently reasonable). If I start at 1 and you start at 10, going second you create the midpoint at 5.5.
“Wait,” you might say, “these factors sound good. But I’m still not sure what to do.”
Fair enough. Here are three circumstances where you should strongly consider making the first offer:
1. Situations involving sophisticated parties with substantial access to information.
It often makes sense to make first offers in situations with equally knowledgeable sophisticated parties on both sides who have thoroughly researched each side’s goals, interests, expectations, leverage and standards.
When both sides fully understand the leverage equation and the independent standards involved, the range of mutually beneficial options tends to be more limited.
The downside of making a first offer here — lack of information and providing information to the other side — is relatively minimal. The upside — setting expectations and controlling the offer-concession dynamic — often outweighs it.
One example might be a merger where each company already has thoroughly investigated the other’s financial and strategic position.
2. Situations involving complex non-price issues and technically detailed agreements.
Parties often find it advantageous to make first offers when negotiating complex non-price issues in which the initial offer includes a detailed written document or proposal.
If you lease commercial office space, you will benefit by making a first offer that includes your “standard” lease. You want your document, not the lessee’s, to be the working draft of the agreement.
3. Situations where you have more information, defined standards and strong leverage.
Finally, seriously consider making the first offer when you have substantially more information than the other side, enjoy strong leverage, and want to signal intransigence on certain issues, based on specific standards. Prices listed by retail stores and hotels fall into this category.
Of course, even after evaluating these factors, you still might be unsure whether to start. If so, don’t. Your strategic gut likely is telling you that you don’t have sufficient information to begin.
If that’s true, remember: When in doubt, don’t start out.
Published September 1, 2006 The Business Journal