You've found the car you want to buy. Although the negotiation actually began the moment you walked onto the lot (more on that in a moment), now it's time to put it into words.

In this case, you have two choices:

• Summon up your courage and make an offer;
• Take the less confrontational approach by playing the "what's the best you can do?" game.

Which approach is more effective? 

Anchors matter

As my Inc. colleague Justin Bariso says, emotional intelligence ultimately means making your emotions work for you, not against you.

The first relevant number that starts a negotiation – the anchor – is often fraught with emotion.

In this case, the sticker price has set at least something of an anchor; if you decide to make an offer, it's impossible not to at least consider it first.

If the list price is $40,000, then offering $30,000 might feel too aggressive. If the list price is $34,000, then $30,000 feels a lot less adversarial – and therefore more comfortable.

Research shows the final price is typically higher when the seller makes the first offer and emotion is one reason why.  Another reason is bias: We tend to put more weight on the first piece of data we acquire, regardless of the value of that data.

A car priced at $40,000 must be worth close to $40,000, we tells ourselves. A house listed for $500,000 must be worth close to $500,000.

Even anchors that are random can have this effect. One study found that people who wrote down the last two digits of their Social Security numbers bid higher for items if their Social Security numbers were high (say, 76) and lower if their numbers were low (like 15.)

As the researchers write:

"Sure enough, the anchoring effect scrambled their ability to judge the value of the items. People with high social security numbers paid up to 346 percent more than those with low numbers. People with numbers from 80 to 99 paid on average $26 for the (item), while those with 00 to 19 paid around $9."

Another study showed that nearly nine in ten negotiated outcomes were consistent with the first offer, regardless of how justified that first offer might have been. 

All of this does come with one caveat: That study also found the advantageous effect of a first offer is eliminated when people possess information inconsistent with the implications of that first offer.

(Or in non-researcher speak, if I know – through reason or fact – that the fair market value of your house is $350,000, any emotion or bias that might attend your $500,000 anchor goes out the window. Yep: knowledge is power.)

Always set the anchor

Which takes us back to the original question: Make the first offer or let the seller tell you "how low" they can go?

Follow the STA Rule, and Set the Anchor: Summon up your courage and make the first offer, since that anchor strongly influences the rest of the negotiation.

If you're buying, go first and start the bidding relatively low. (If you're selling, start the bidding relatively high).

If, on the other hand, you let the seller give you their "best I can do" price first, then their anchor gets set, along with the resulting bias. That means you'll have to summon up even more courage to make a counter-offer, since you've already heard their "best". (And the seller has to tacitly admit, if they negotiate any further, that their "best" price really wasn't their best price after all).

For either side, that means the negotiation is fraught with emotion.

Which means you'll have to work even harder to make your emotions work for and not against you. 

But what if there is no list price?

Granted, you might hesitate to set an anchor when a list prices doesn't exist.

Say you're a consultant and a potential client asks you to create a marketing strategy. Going first might mean missing out on an opportunity.  "If I set an anchor at $20,000", you might think, "and they would have happily paid $25,000... I will have left money on the table".

In the real world, though, that rarely happens, since most people have a reasonable understanding of the value of the services they wish to receive.

And even if they don't, eventually they will – which means overcharging now will spoil your chances of doing more business later.

So, value your work appropriately and set an anchor based on a price that will make you happy to provide the services requested. 

Final thoughts

Every item, every service, every thing has an intrinsic value, especially to you. Knowing that value before you start is the key to an effective negotiation.

The key is to know what you're willing to pay, what you're willing to do, what you really want, and then sticking to that. Ignore any other cues – emotional or otherwise – that might influence your decision. 

Which takes us back to the moment you walked onto the car lot. Just as onboarding a new employee really starts with the first touch point in the hiring process – the application process, interviews, follow-up, etc. – t he negotiation process starts before one side actually throws out a number.

Say you truly will pay only $32,000 for that $40,000 car. In that case, your $30,000 anchor isn't a ploy in a negotiating game. It's sincere, hopefully based on objective criteria. Maybe $32,000 is what you think the car is worth. Maybe $32,000 is all you can afford.

You'll never negotiate up to, say, $38,000 – so offering $30,000 sets an anchor with a small amount of wriggle room.

If you can only pay $32,000, and the other person won't go that low, fine. If that price works for the seller – maybe they saw the process as a game and set an unrealistically high anchor – then that's great for both sides.

Either way, there's less emotion involved, especially for you.

Because research shows, due to inherent bias and emotion, that being the first to set an anchor should help you get a better deal.

Another benefit of setting the anchor is finding out whether the price you're willing to pay or accept, is in the ballpark. Which will make the rest of the negotiation go a lot more smoothly for both sides. 

 

Inc