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How to Respond to an Unreasonable Opening Offer in a Negotiation

Use the power of subjective anchoring and standards to achieve a fair outcome

Imagine you have a big negotiation coming up.  You may have unknowingly done something that breached a contract that you entered.  Your lawyer has told you that you have a very poor legal position and may lose when you go to court.  The Court has ordered a mediation, and you are hoping to resolve the dispute for as small a payment as possible.


Let’s use this example to explore how to handle an opening offer from the other side that is highly unfavourable to you.


What is an opening offer and why does it matter?

An opening offer is the first offer that one party makes to another in a negotiation. It sets the tone and the range for the subsequent bargaining process. The opening offer can have a significant impact on the final outcome, because it creates a psychological reference point for both parties, known as an anchor. An anchor is a value that influences our judgments and expectations. This is called subjective anchoring, and it can affect how we perceive the fairness and reasonableness of any offer.  An anchor can have an impact even if it is arbitrary or irrelevant.


Evidence also tells us that in a negotiation solely about money, where there is no ongoing relationship between the negotiators, the negotiation is highly likely to end up around the midpoint of the first offer and the first counter-offer.

So, when the other side puts out the first offer and it is highly unfavourable to us, the end result is likely to be a result that is much worse for us than we would like.


What is an unreasonable opening offer and how to recognise it?

An unreasonable opening offer is one that is not supported by any objective criteria and is far beyond the market value, the industry standards, or other relevant criteria.

Some negotiators use the tactic of starting with an unreasonable offer to gain an advantage, by making the other party feel pressured, insecure, or desperate. An unreasonable opening offer can also be a sign of bad faith, lack of preparation, or unrealistic expectations.  It is critical to be able to recognise when an unreasonable offer is being made and then to know how to counter it.


To recognise an unreasonable opening offer, you need to do your homework and research the relevant facts, figures, and benchmarks of the negotiation. You also need to have a clear idea of your best alternative to a negotiated agreement (BATNA), which is the most favourable option you can pursue if the negotiation fails.


Imagine in our example, the other party starts with an offer to settle if you pay them $3 million. Based on your calculations, the worst case scenario if the matter went to court and you lost is that they would get perhaps $700,000 and you’d be out of pocket for $250,000 in legal costs.  You think a best case would be $200,000 and you were hoping to pay no more than $400,000.


If the anchor is set at $3 million, then the best midpoint you could achieve (if your first counter offer was zero) would be around $1.5 million.  Not only is that more than you want to spend but it is double your worst case.


How to respond to an unreasonable opening offer and avoid being anchored?

The most important thing to do when the other side starts with an unreasonable offer is to take away its anchoring power.  If you simply counteroffer with a really low offer (say zero in this case), it may be perceived that you are acting in bad faith and the negotiation may break down.


There are a couple of ways to discredit the anchor. Many people would get upset by the unreasonable demand and may react in a fairly hostile manner.  For example:


“You’ve got to be kidding. That offer is ridiculous and there’s no way you’d be entitled to anywhere near that if this thing went to trial. If that’s where you’re going to start then I say lets start with you pay me $100,000 for the pain and suffering you’ve put me through.” 


While it may be true that their offer is ridiculous, telling them so is unlikely to be helpful.


My preferred approach is to act as if, just perhaps, they may have information you are not privy to that supports their claim.  I would respond along the lines of:


“Wow, $3 million is much higher than any of the figures I came up with in my preparation. If you can provide me calculations and assumptions you made to get to that figure I’m happy to consider it. In the meantime, here are some of my calculations and assumptions to support my opening offer.” 


Then show the calculations for your absolute best-case scenario.


Defusing the anchor

Whatever the approach you take to defuse the anchor, it may be that later the other party tries to reintroduce the anchor to get a larger concession from you.  That might sound like this:


“Well, we’ve already dropped from $3 million to $1 million.  You’ve only come up from $100,000 to $180,000. You need to work harder if we’re going to get to an agreement today.”


In that statement, the other side is really relying on the anchoring power of their first offer to pressure you into a larger concession.  To respond to this, you may say something along the lines of:


“I can see you think your first offer was $3 million but we have already ascertained that you had no objective basis for that amount and it certainly seems like an ambit claim. Your reduced offer of $1 million also nothing to back it up.  While we are willing to move a little in order to reach settlement, we won’t be moving very much further without a compelling reason to do so.”


How far should you move?

When you find yourself in a negotiation like the one I have described, it is important to know how far you should move.  To understand this, you need to be clear on what your BATNA or best alternative to a negotiated outcome is. You may end up paying more than you are happy to pay, but if it is less than your BATNA, it will still be a good outcome from the negotiation. 


In our example, the defendant would pay $950,000 in damages and legal costs if they lost and would be out of pocket by $200,000 (plus some legal costs) in a best case scenario. Depending on the likelihood of each of these possibilities, the BATNA will be somewhere between those two amounts.


To learn more about BATNAs, you may like to read this post.


Conclusion

An unreasonable opening offer can be a challenge, but it is a challenge that can be overcome. By being aware of the concepts of subjective anchoring and standards, you can avoid being influenced by the other party's anchor and move them away from it.


If you have a tricky negotiation coming up and you need some assistance in preparing your negotiation strategy, please reach out for a no-obligation chat about how we can help.

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