Stuart R. Gallant, MD, PhD
There are two reasons that people are hesitant to make the initial offer in a negotiation. First, they may be unsure of the market value of the item they are trying to buy (or sell). They are worried of significantly under or overstating the item’s value. The fear is that the negotiator will telegraph to the other party that they are unprepared for the negotiation—and therefore ripe to be taken advantage of. Second, the negotiator is worried that the other side will talk them down from their offer—that they will be “ground down” during the negotiation process. The fear is that the other party has the power in the negotiation, and as a result, the other party will eventually get what they want. Today’s post addresses the process of making an initial offer, discussing these and other fears.
Preparing to Negotiate
Preparing for a negotiation is a five-step process. The steps include:
- Think about your personal/your organization’s goals—what do you want to achieve in the next few years? Starting with this step puts the negotiation in perspective.
- Think specifically about your goals for the negotiation: what is the best possible outcome you reasonably expect (one end of your range) and what you cannot tolerate (the other limit of your range, “your limit”). This may require some research (i.e., step 3).
- What is the market of the object? You can use many resources to answer this question: internet, the other side’s competitors and customers, your friends and work acquaintances, industry pricelists and databases, comparable sales, etc.
- Does the other party see things differently? Understanding the other side’s motivations is critical to a successful negotiation. Do they have an emotional connection to the object? Does this deal mean that they will be leaving or entering a particular area of business—how will that affect them financially and organizationally? What do you know about what their range might be?
- Talk to your team, a friend, or a spouse about your goals for the negotiation. Studies show that talking about goals helps humans invest in them emotionally and stick with them during difficulty. Talking about the negotiation ahead of time will help you stick with your plan during the hard parts of the negotiation.
Making an Offer
The 2018 film Beirut is a movie about hostage negotiation. In the climactic scene, two characters haggle over a hostage payment. Skiles makes an offer, aware that the price he earlier negotiated is out the window because he is dealing with a new man he has not spoken with previously.
Skiles: This is it. All I got. ($2 million.) I’m topped out. Deal speaks for itself.
Kidnapper: You wouldn’t open with your best offer if your life depended on it.
Skiles: Two point two-five.
Kidnapper: Five million.
Skiles: Three.
Kidnapper: Four and a half is my floor.
Skiles: Point blank, I have $3.9 million exactly.
Kidnapper: Going once.
Skiles: Why should Bashir be the only person to profit?
Kidnapper: Going twice.
Skiles: If you take the three-nine right now, I swear I will tell Bashir you settled for three-five. You can go back to Arafat with your head held high and $400,000 in your pocket.
Kidnapper: Deal.
What is driving Skiles in this scene? First, he is spending someone else’s $4 million—he is willing to go up to that level, but he does not have any more money after that. He has no incentive to spend less (none of the money will end up in his pocket), but he absolutely needs for the negotiation to succeed (he has no backup plan). Starting at $2M allows him the room to negotiation inside of his range. As he reaches his limit, he skillfully offers a consideration to the other negotiator which seals the deal.
So, what are the options for making that first offer? They include:
- Wait for the other side to make an offer. When you really do not know what the stakes are, there are advantages to waiting. If you go first, then you could make a foolish offer—significantly far away from what the other side has in mind. However, by remaining silent, you take a risk. They could low-ball you, and you would have left a lot of money on the table. This is called an anchor. Even if the negotiation continues after the anchor is offered, and the deal improves, the deal can only move so far from the anchor—limiting the value you will receive.
- 60/80/90/Go. When I was younger and traveling with friends in Central and South America, we would keep our money divided in convenient amounts in different pockets in case we had to do any bargaining—we did not want to pull out a big roll of cash. For this method to work, you have to have an idea of a reasonable price for you to pay for an item. First, you offer 60% of your price. The seller reacts. If there is no deal, you can come up to 80%. If you still do not come to a deal, then you can come up to 90% of your reasonable price, but make as if this is really hurting you. You can start to walk away at this point (either literally or rhetorically). Sometimes that stratagem triggers a concession. If not, there is still 100%.
- Focus on something else. This strategy works best in salary negotiations. It is common for an HR person in the initial interview of a job candidate to ask about salary requirements. In spite of the troves of information that is available online, it can be hard to establish a good range when things like hiring bonus, commission, stock options, time off, and benefits start to come into the picture. As a result, answering HR’s question can be hard. Instead of naming a range, come back with, “I would like to be hired with a title of….” Since many companies have salary ranges assigned by position, you have answered their question—at least within their company.
- Start off small. I frequently negotiate agreements for contract manufacturing of pharmaceuticals. Particularly, if both parties are new to each other, constructing a large manufacturing deal can be a challenge. There are so many variables and so much risk—in order to have drug ready for shipping, there must be: transfer of manufacturing procedure at small scale, transfer of analytical methods, scale up to full scale, the manufacturing run itself, packaging and labeling, and testing of the pharmaceutical. Often, starting off with the first steps (small scale process and analytical method transfer) allows both parties to feel comfortable with each other before committing to the higher cost of full-scale manufacturing. However, if you go with this approach, there is a significant risk—to prevent a bad deal down the road, you must have a fallback plan. For example, in the pharmaceutical manufacturing world, you must have an alternative manufacturer lined up. This allows you to walk away if the later negotiation with your initial manufacturer goes poorly.
Make Your Offer Look Good
Frequently, there are aspects of a deal that cost you little or nothing but provide reassurance to the other party. One way of making a successful deal more likely is to play up these aspects of your offer. You have financing already in place. Your offer is all cash. Your side is prepared to sign as soon as certain details are clarified.
This strategy requires empathy on your part. What is the other side looking for? How can you make your deal look as much like what they want as possible?
Also, if you are looking at their initial offer, beware of hidden unpleasantries. As an example, in the pharmaceutical contract manufacturing business, the sponsor needs the raw data from the manufacturer. Usually, raw data is supplied free or at some nominal charge. An illustration of a hidden unpleasantry would be significant add-on charges for the raw data to be supplied by the manufacturer. These kinds of concealed penalties need to be neutralized as they appear in the negotiation.
Conclusions
The negotiation process involves four steps: 1) preparation, 2) initial offer, 3) bargaining, 4) closing. Ideally, you would perform all four steps with precision and skill, but that is not always how things go. For example, perhaps you allow the other side to open, and you realize that they have anchored at a value that is very disadvantageous to you. You can correct this by addressing the issue directly. You say something like, “Clearly, we are very far apart,” or “This is a premium service. Our clients pay significantly more than that.” You have neutralized their anchor, and now it is your turn to place your anchor.
All of this should be done directly, with good humor, and a clear intention to resolve problems in the negotiation.
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