Anchoring in negotiation: What is means and how to overcome it
When you are buying something, do you automatically obsess about how much it costs?
Most buyers do. They get caught up in the price of the item. Before they even speak to a sales rep, they've decided in their minds what they're willing to pay for it.
This is called the anchoring effect in negotiation ⚓
It can be tough for even the most experienced sales rep to convince a prospect that a product is worth it in a sales scenario like this. The key to overcoming anchoring in negotiation is learning how to open up the dialogue, counter the prospect's bias, and reach an agreement they're happy with. And best of all: you, the seller, can use anchoring to your own advantage.
In this guide, we're going to walk through:
- What is anchoring in negotiation?
- Common ways that prospects introduce anchors into negotiations
- 5 ways to counter anchoring in negotiation to close a deal
Let's get selling!
What is anchoring in negotiation?
Anchoring in negotiation is when a buyer creates an "anchor" in their decision-making process about what they expect from a sale and what the parameters they're willing to negotiate. It's a cognitive bias which serves as context, an inner reference point to which they will compare the actual offer you give them.
The anchors are usually a price that the client is happy to pay, the initial offer, but it may also be things like product features and contract terms.
As Columbia Business School professor Adam D. Galinsky put it: "In situations of great ambiguity and uncertainty, first offers have a strong anchoring effect—they exert a strong pull throughout the rest of the negotiation. Even when people know that a particular anchor should not influence their judgments, they are often incapable of resisting its influence."
For sales reps, it gives them an insight into their prospect's thought process. It'll tell you what is in the back of their mind as you're discussing your product or service and allow you to shape the discussion into a positive solution around their anchor.
How prospects introduce anchors into negotiations
Once the anchor has been dropped, both sides will feel it's pull—from the price they're willing to pay to the number of extras they're willing to throw in to close the deal.
This anchor is usually dropped when someone makes the first offer in the negotiation process of a deal.
If a salesperson is trying to close a deal with an Enterprise client for their software product, this is the sound of an anchor dropping:
"Our budget is $100/seat a month for this product."
Splash. The anchor is dropped. The first move is made. Your product is $90/seat a month and within their budget.
Happy days, right?
Now, it's natural for sales reps to remember this and focus the entire negotiation around this number from that point forward. This is known as anchoring bias—sales reps will rely on what they now consider the client's anchor (their ultimatum) and try to work the rest of the negotiation around it.
But what if the next words out of the client's mouth are these:
"We're looking at one of your competitors who charge $80/seat every month."
Not only do you have the anchor (their budget), but you also have a baseline of what they may be willing to pay. This is called leverage—the prospect is testing the waters to see if you will drop your prices to match your competitors by putting out a low anchor.
They've made it clear that they are willing to walk from the deal and go to the competitors, and as their budget is their main anchor, there's a real possibility they'll do just that.
Once you hear that they're talking to competitors, you might be swayed to relax your goal ($90/seat a month) and negotiate with them around their anchor (budget).
You can get ahead of anchoring bias by offering a deal that meets your goals and their parameters early in the negotiation. If you can make your price point work, it'll help you close the deal and still come out profitable on the other side.
This is just one of the ways you can overcome anchoring in negotiation to close a deal. Let's look at 5 other negotiation strategies 👇
5 ways to counter anchoring in negotiation to close a deal
Tactic #1: Figure out how much room you have to move
You should enter every negotiation with a prospect wondering when—not if—they'll drop their anchor.
Be realistic about what this will be. As we've already talked about, prospects will usually pick an anchor tied to price, contracts or product features.
Figure out how much room you have to move from your original stance (e.g. a 12-month contract that brings in $100,000) to their anchor (e.g., a 6-month contract with a budget of $90,000).
Go into a negotiation already knowing how much wiggle room you have and what you can offer as a counter to the prospect's anchor. It'll keep the conversation flowing and the discussion positive.
One of the best ways to do this is to calculate "ranges" for each possible anchor that will allow you to negotiate while still meeting your sales goals.
Here's an example:
In this scenario, there are five different ways to negotiate around a pricing anchor.
The backdown and bracketing range is defensive counter-offers that the sales rep can use to negotiate within the prospect's budget while still meeting profit goals.
But if the sales rep wants to put their anchor down first, the bolstering and bumped up ranges give them an idea of what their starting point or opening offer should be, and what the bargaining zone is.
No matter what road tactic they choose, the sales rep has tied goals to each of them (e.g., better relationship with the prospect or higher profits) to remind them about which one they should pursue first.
Tactic #2: Reject the prospect's anchor
Sometimes prospects are like bulls in a china shop.
They will come in with an aggressive anchor that only suits them and forget that they're entering into a negotiation instead of a done deal. This aggression will look something like this:
"We only have the budget for the standard software, but the features are so poor. You have to put us on the Enterprise plan at the same price otherwise, I'll walk."
"You told me that your standard contract is 12 months, but that's not how we work. I either want a monthly contract, or I'm out."
See? They show up pretty aggressive at the bargaining table.
Instead of snapping back, hear the prospect out so you can get a better understanding of the anchor they're dropping. You want a friendly but strong negotiation style.
If the prospect has a problem with the length of the contract, you can latch onto this anchor and respond by saying something like:
“I understand that the length of the contract may be a little longer than what you're used to. The reason it's longer than a month is that our onboarding is so hands-on—you'll have your own onboarding manager and tech support to make sure your team is up and running within 90 days, which is a lot shorter than the standard ramp-up time for this type of system. Let's try and find some common ground here so we can meet our onboarding benchmarks and you can be comfortable with the contract…"
This way, you subtly reject their anchor without them realizing it and bring the negotiation back onto an even playing field.
Tactic #3: Know your competitors inside and out
Every prospect will come to a business negotiation prepared with information, whether it's knowing your pricing packages or your competitors' rates.
They will use this information as leverage to try and convince you that their anchor is reasonable and acceptable. If they do use it in negotiation, it'll sound something like:
"Your competitor Acme has a product with very similar features, but their contract is shorter and it's 10% cheaper."
The prospect has done their homework.
What they're trying to do here is tie several different pieces of leverage to the anchor (the price they're willing to pay.)
In this scenario, instead of immediately slashing your price point to match your competitors, it's best to unpick what the prospect has been offered. And you can only do this by knowing your competitors inside and out. Ask your prospect some questions like:
- Can you explain to me what Acme has offered you in a little more detail?
- What features do they include for the reduced price?
- What restrictions does the shorter contract lock you into?
Start to poke holes in your competitor's offer by showing the prospect what's wrong with it (e.g., fewer features, diminished support or a restrictive contract). Then, you can start to work your way back in by explaining that they will get a better negotiation outcome with your slightly higher price point. If possible, show them that your solution actually offers more value, and that for them to get equal value from the competitor's solution would cost more—thus establishing a high anchor.
Tactic #4: Ask your prospect what they really want
What does your prospect want from your negotiation? Are they negotiating in good faith? Are they ready to buy your product at all or are they tire kickers?
Rather than trying to drop your price or add in features for your prospect, try to get a better understanding of why they are interested in your product in the first place.
They may come to you haggling about your Enterprise plan and setting anchors around the price point that you are unwilling to meet.
But after asking some clarifying questions about their pain points and goals, you may find that all of the features they need are included in your product's Standard plan—they don't need the more expensive Enterprise plan after all.
Not only do they get a cheaper product, but you get to keep your price point where it is and meet your profit goals. It's a win-win.
Tactic #5: Say thanks, but no thanks
If all else fails and the only way to close the deal is by making the prospect 100% happy (and leaving you with nothing)—it's okay to walk away.
Sales reps can be scared to tell a prospect, thanks… but no thanks.
But the reality is that if their negotiation anchor is so strict that it doesn't leave any room for discussion, they were never going to negotiate at all.
Before you pull the plug completely, try getting the prospect to move their anchor one last time by:
- Asking for another meeting and rethinking your counter-offer to their anchor
- Negotiating around price if their anchor is unrealistically low. Try offering a cheaper alternative or cutting some features so you can meet them halfway
If they're still refusing to pull up their anchor, it may be time for you to pull the plug on the negotiation.
Negotiation is the best way to turn your prospect's anchors from a drag into a dealmaker.
You need to be quick, decisive, confident and prepared if you want to match your prospect's anchors with counter-offers and keep the deal moving.
Research your competitors, know how much room you have to move in the negotiation and don't be afraid to walk away if you aren't getting anything in return.
Want to level up your negotiating skills in sales? Download your free copy of my book on negotiation!