Negotiations are an integral part of business. Negotiating successfully means learning critical foundation techniques to optimise the outcome. One of these foundation techniques is anchoring, which involves setting the initial offer, or target price, to influence the outcome of the negotiation. Anchoring is a powerful tool in your negotiation toolbox, however, used badly, it can destroy a negotiation before you even get started.
Anchoring techniques are vital for sales people during the whole sales cycle, not just at the contract negotiation stage. In this guide to anchoring, we look at what the technique is and how it can be used to achieve better deals.
What are Anchor Points, Target Points and Reservation Values
Let’s get some terminology straight before we start. Here are our definitions:
- Anchor Point: The starting point for your negotiations
- Target Point: Where you’d ideally like to end up
- Reservation Value: Your “least acceptable outcome”
An Anchor Point is typically the starting point of a negotiation. From the Anchor, there is then a negotiation process to land at the end-point for a commercial structure that works for both parties.
A Target Point, also known as the “most desirable outcome”, is not revealed to your counterparty. It’s your ideal outcome if everything went your way. For example, a salesperson may have an ideal price in mind (for a given scope) that they would like to obtain for their products or services.
Your Reservation Value is your end-stop, your line-in-the-sand. You also don’t reveal your reservation value until the end of the negotiation cycle, when it will naturally reveal itself. For example, “this is my best and final offer, we can’t go beyond this point”. If your counterparty tries to push beyond this point, you should exercise your BATNA.
How is an Anchor Point used in a Negotiation?
Anchoring is an attempt to establish the main reference points that negotiations will revolve around. This anchor point can, and often is, used as a point to make negotiation adjustments – this can be things such as price points, timescales, the output provided, scope, payment terms, contract length, etc. An Anchor point is usually presented early in the sales cycle/negotiations.
There’s been a lot of research into anchoring, and not just in the context of negotiations. All the findings point towards the fact that human beings are psychologically influenced by first anchors.
Therefore, the initial price presented in a negotiation can significantly impact the decision-making process of the customer. This initial figure, or anchor point, serves as your reference point for the customer to consider when determining the value of the deal.
However, be careful. When planning your initial offer, in order to effectively utilise anchoring bias in the negotiation, it must be realistic. So, what constitutes a realistic anchor? This is a complex topic, but here’s some principles we think you should adhere to:
- As a seller, you should anchor-high, but be realistic. What this means is, buyers aren’t fools. They can easily research the market for value points, and may have bought something similar before.
- Have a justification for when the buyer says “wow, that’s a lot more than I expected”. You need to be able to explain, logically, why your products/services attract a premium.
- Be prepared for the buyer to counter-anchor – see below! You need to be flexible, and ensure that the buyer is in the right psychological mindset to negotiate around your anchor.
Challenges of Anchoring in Negotiation
There are a number of challenges with anchoring which you need to understand before using this powerful technique:
- In a sales situation, you can’t simply throw down a random high-ball number. You’ll get found out really quickly, which will damage your credibility.
- Buyers are savvy, you have to do more research than them to deliver a realistic high-anchor. There has to be a Zone of Possible Agreement (ZOPA).
- Negotiation around the anchor point in order to reach agreement needs to be carefully planned. As you start to negotiate, you’re signalling psychologically with every counter-offer.
- Experienced buyers are trained in counter-anchoring techniques.
- If the buyer is experienced with a seller’s offerings, they’ll immediately start negotiations with their anchor.
If the two parties have wildly different expectations from the beginning, it can lead to breakdowns in communication and early aborted deals. If the customer makes the first offer (anchor) with a much lower price than the seller has in mind, it can be extremely difficult to persuade them to accept a higher price.
How to Make an Effective First Anchor as a Seller
Here’s our 3 step process to making an effective, credible, opening anchor as a seller:
- Do your research and get your positioning right
Talk to your sales manager/director. Make sure that your proposition pricing strategy has option-trade-offs embedded into it. Check your proposition’s positioning against your close competitors. Make sure you have an ROI argument. Scan the web for recent news articles about your prospect that could impact this deal.
- Design your Anchor and ZOPA
Based on your research, design your anchor(s) at the top of the market. Make sure there’s room for negotiations and trade-offs. Understand the ZOPA (as far as you can). Work out the negotiation trade-off rounds. Each round of negotiations (ideally a max of 2-3) should signal to your counterparty, psychologically, that you’re getting closer to your best and final offer for those sets of negotiation variables. This is a more advanced technique.
- Deliver the anchor and defences
Confidence plays a significant part in any negotiation. And confidence, for most of us, is aided significantly by preparation. Take all your preparation, meet with your counterparty, set the scene, then lay out your anchor(s) with the rationale. Note: this doesn’t mean “justifying your anchor” which can be seen as defensive and weakens your position. Again, this is a more advanced technique.
How to Counter-Anchor your Prospect’s Initial Offer
So what happens if your prospect makes the first offer (anchor)? There are proven techniques for overcoming initial anchors from your prospects. Here’s our top 3 tips:
- Do Your Research in anticipation of their anchor
Effective preparation is crucial for any negotiation. Conducting thorough research on the customer’s background, needs, and budget helps ensure that a selling price can be proposed that is high, yet realistic. Prepare various solutions that address the customer’s needs with different commercial models/price-points. Research the prices and services offered by competitors in order to anticipate and address any references the customer may make during the negotiation.
- Defuse/refute the anchor point
It’s tempting to go straight to a counter-anchor when faced with an “outrageous” starting anchor from your counterparty – don’t! First, gather your thoughts, calm the mind, and then point out, logically, why their initial anchor isn’t acceptable. Use market data/research to refute the anchor, explain why it’s absolutely not acceptable, and dis-arm your counterparty.
- Propose A Counter-Anchor
Once you’ve refuted their anchor, provide your own counter-anchor (with a justification). For example:
- A prospect indicates a budget of $35,000 with a poorly defined scope and target outcomes.
- Your minimum price (reservation value) is $40,000 for your well defined scope/value proposition. You know the comparable market price range is $40,000 to $50,000.
- You refute the $35,000 initial anchor as unacceptable,you point to some independent market data/research validating why, you explain the value created by your product/service
- You counter-anchor at $49,000, explaining your offer and illustrating the ROI.
Be prepared to exercise your BATNA if the prospect won’t respond to your counter-anchor. Avoid bad-deals by preparing well, knowing how to counter-anchor, and knowing your value.
What appears at first sight to be a simple technique is in fact far more complex. Use the techniques above to:
- Understand the foundations, and the differences between anchoring, targets and reservation values.
- Plan for making an effective, credible anchor(s), with confidence.
- Know what to do when your prospect makes the first offer instead, in order to get yourself back on track.
For more negotiation tips and training, visit our advice section at Piscari.com