How do people know if the price is right? How do they decide if they want to buy something for a specific price displayed in the shop? “People make estimates by starting from an initial value that is adjusted to yield the final answer,” explained psychologists Tversky and Kahneman in their 1974 paper. “The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values.” This means that the initial anchor serves as the benchmark for the rest of the pricing/deal negotiation – hence the cognitive bias ‘anchoring‘ that plays a huge role in our decision making process.
Now that we have an idea of what’s anchoring, how shall we use it to win deals/pricing negotiations? Let’s start with an elephant in the room. If you want to win a deal/negotiation, never be needy for the deal. Always appear to have your BATNA figured and ready. Keeping this in mind, let’s explore anchoring tactics that will help you win pricing deals/negotiations even in most difficult of situations.
Tactic 1: Use Bandwagon effect
Suggest a price to which the crowd is drawn. This must be the ideal price tag you want to draw your customer too.
Tactic 2: Use Ackerman Model
This tactic has been developed by Mike Ackerman, former CIA agent, for hostage negotiations. It’s one of the most effective negotiation tactics around.
- Set your target price (your goal).
- Set your first offer at 65% of your target price.
- Calculate three raises of decreasing increments (to 85%, 95%, and 100%).
- Use lots of empathy and different ways of saying “No” to get the other side to counter before you increase your offer.
- When calculating the final amount, use precise, non round numbers like, say, $37,893 rather than $38,000. It gives the number credibility and weight.
- On your final number, throw in a non monetary item (that they probably don’t want) to show you’re at your limit.
Tactic 3: Leverage Contrast Bias
a) Use an extreme anchor to put a benchmark from which rest of negotiation will follow. As we are susceptible to anchoring bias, an unreasonable anchor – however unreasonable it may be – sets the starting point of negotiation.
b) Another potential strategy is to show your competitors’ prices on your pricing page. This gives your customers a frame of reference from which they can evaluate your product, but also risks drawing in competitive options for them to choose from. Use this method if your offer is the best value amongst your competitors or can be framed as such competitors.
Tactic 4: Show genuine anger
When you show passion and conviction (to injustice or impossibility of working our the deal), this causes the other side to become more sensitive to anger/fear, which turns on flight-or-fight instinct in the amygdala. Channel that anger to the proposal/deal, not the person with something like “I don’t see how this would ever work” (strategic umbrage).
With above being said, when you don’t know the market value of the deal you are negotiating or are uncertain of the full information that your counterpart has, avoid making an initial anchor until you collect some information about your counterpart.
This article was published on e27.