Anchoring is a Powerful Negotiating Technique

by Jan 17, 2023Decision Making, Entrepreneur, Negotiation

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What do I mean by anchoring in a negotiation? How can buyers and sellers use anchoring as a potent negotiation technique?

Anchoring is a way to set expectations right at the start of a negotiation in ways that make your actual offer more attractive to the other party.

Let’s say I’m trying to sell a car, and I’d love to get $25,000 for it. I aim to anchor a price point higher than my target sales price. To explain the example, I might say to a prospective buyer: “I’ve done a lot of research, and cars like mine typically sell for over $30,000 — I recently saw one sell for $35,000.”

But then I add: “But it’s got high mileage and will need some maintenance soon, so I’m willing to take a bit less.”

See what I did there? I’ve set a price point in the buyer’s mind without letting them know I would be willing to take $25,000 for the car.

The point is that I have set $30,000 to $35,000 as the anchor to our negotiations. Subsequent negotiations will take place from the anchor point, and I am happy to make concessions since I really need only $25,000.

The same principle works for the buyer. If I’m interested in buying that car, I might lead off the negotiation by saying something like: “I just saw that two cars like yours sell for $20,000.”

And then follow up by saying, “But I know they’re rare, so I’m willing to pay a bit more than the market rate to get one for myself.”

Again, I’ve set the anchor at $20,000–I am willing to negotiate up from there to help close the deal with the seller.

Anchoring in the purchase of a company

Anchoring can also be used effectively in complex negotiations like selling companies.

A prime example is when you need to negotiate the amount of the escrow in the deal. Escrow is a percentage of the purchase price held back if something goes wrong. This can include expensive things not found in due diligence and appear months after the transaction closes, like — poor customer retention, unusable inventory, or product liability. The escrow is used to pay for these problems with the seller’s money.

With escrow, the seller wants the percentage of deal value to be as low as possible, and the buyer wants the opposite to help offset any potential risk.

I can speak from personal experience.

I remember one time when I was selling a company; a buyer powerfully used anchoring. They came to the negotiating table with data. They told us they had researched recent transactions and claimed the average escrow was 8 percent of the purchase price. But, they were willing to go down to 6.5 percent of the transaction value.

This move put me on my heels. They had data! As much as I tried to challenge their number, it just made sense to settle on the 6.5 percent in the end. It just felt fair to everyone. They were high integrity, so I never checked the data, but they were highly effective in getting me to accept their proposal.

Anchoring with data

This technique can easily be used in a salary negotiation.

One of the worst questions (and potentially illegal) anyone can face in an interview is: “How much do you want to make?” It always puts the interviewee in a tough spot, right? To counter that, bring a gun to a knife fight in the form of data.

A great anchoring response is, “I have researched this position, and jobs like the one you offer pay as high as $125,000.” You’re anchoring at $125,000–but you’re willing to take the position for $100,000. Again, you’ve created some wiggle room to help move the negotiation in a direction to benefit you.

Watch for weasel words and false anchors

One caveat with anchoring is when someone employs “weasel words” as part of the negotiation. In the example of the salary negotiation, when someone says “as high as,” they are entering a gray area where it can feel like they’re fudging the data. Perhaps those jobs are in San Francisco or require a top-level security clearance, pushing the salary figure up.

As one of my favorite quotes goes, “82 percent of all statistics are made up.”

The key is to watch out for when someone is trying to use numbers and data to their advantage. That’s called using what we might call a “false anchor.”

Let’s revisit our car-selling example. If the seller brings the $30,000 number to the table, but their car doesn’t have all the bells, whistles, and options that cars in that range usually sell for, they’re using a false anchor. In the escrow example, there was no consideration of the industry, which might impact the escrow amount dramatically.

That’s why watching out for weasel words and false anchors in any negotiation is essential. Feel free to push back on anything you hear–and ask to see the data yourself. An excellent counter to an anchor is to ask to see the data, so you are both looking at the same information. You will often find that the data is not comparable to the transaction under consideration.

Buyer Beware

Anchoring is a powerful negotiation technique that buyers and sellers can use. Beware of when anchoring is used against you, primarily when the other side uses weasel words. Always ask to see the data the other side used to develop their anchor. If you do, you’ll get a deal that is fair to everyone.

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