Sourcing and Procurement Focus: Our Weekly Feature Article on Topics of Interest to Sourcing and Procurement Professionals or Related Supply Chain Functions  
 
 
  - November 28, 2007 -  

Procurement and Sourcing: When Negotiating with Suppliers, Should You Make the First Move?

 
 

Traditional Wisdom says No, but Stanford Research Says Making First Offer Provides the Power of “Anchoring”

 
 

 

SCDigest Editorial Staff

SCDigest Says:
The trick is to pick a point that gives you this advantage without being so ridiculous from the vendor’s viewpoint that they decide the business isn’t worth pursuing.

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When conducting negotiations with a supplier or potential business partner, the conventional wisdom has been that it is smart to let the other side make the first move. Why? Because the tendency is to make a first offer that includes some concessions. As a result, the starting point for the seller has now been shifted in your direction, providing a starting point that can be negotiated towards a new middle ground that is more skewed in your favor.

But research from Stanford Graduate School of Business Professor Margaret Neale says buyers and others in negotiations might want to rethink that approach.

Neale recommends instead often starting with an offer that is “just this side of crazy.”

By doing that, the buyer gains the advantage by defining the starting point to which the other side must respond.

In other words, rather than waiting for a price quote from a potential vendor and then negotiating off of that price point, it may make sense to begin with a very low ball, perhaps unrealistic price point that changes the dynamics about where the ultimate price will go. The trick is to pick a point that gives you this advantage without being so ridiculous from the vendor’s viewpoint that they decide the business isn’t worth pursuing.

 
 
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The only times it makes sense to wait for the other side to make an offer, Neale says, is when you have information that gives you significant advantage in the bargaining or “when you honestly believe that the other side dramatically values the object of the exchange at a much higher rate than you do.”

In other words, if the vendor clearly is interested in “buying the business” for strategic or other reasons, then it may make sense to let them come in with the first offer on price and terms.

Perhaps surprisingly, Neale also says the idea of the “poker-faced,” unemotional buyer is also not necessarily the right strategy. She said that “People don’t usually think we use emotions strategically.” Emotions can be powerful pieces of information, she added, citing a recent study that showed that in many cases negotiators who displayed anger during the process created more value than those who were unemotional.

As a buyer, when should you make the first offer? Or do you always wait for the vendor to come back with a price first? Have you intentionally used emotions or “anger” as a negotiating strategy? Let us know your thoughts at the feedback button below.

 
     
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