Anchoring a deal in negotiation

- There's an interesting dynamic that can happen in negotiations. It's called anchoring. Anchors are initial points from which you're going to negotiate. They can lock you into a position, and unfair anchors can kill a deal. If you get one, consider walking away. Also understand, if you give the other party an unfair anchor, they may walk away. When you go to set an anchor, base it in reality with data or assumptions. Many times, the final offer in a deal, will end up within a reasonable distance from that initial anchor. For example, if you anchor your deal at $100 upfront, and that's your first offer, more often than not, you'll end up between 80 and $100. If instead, that first anchor was $500, you'll end up between 400 and 500. That anchor can drive the final deal price a great deal. Now understand, that anchor also has to be based in reality. You can't just throw a huge number out there, without some basis in fact. If you receive an anchor from the other party, and you don't like it, change it. Go from one metric to another, and that's an easy way to switch the anchor. For example, I know a software company that was going to launch a platform, and the customer wanted to pay them $10,000 for the software. But they also wanted unlimited use of the software, forever. The startup would've lost out on significant longterm revenue, if they went with this single purchase price. That initial $10,000 anchor was not a tenable position. Now the startup didn't argue with that anchor. They changed it. And they said "Well we don't look at it as an initial purchase price. "We'd rather look at it as a subscription model. "And we'll only charge you $100 per user, per year, "for a seat license to our software." They set this anchor based on comparable software sales in the market. And they were able to show their customer, "Here's what comparable software costs." They ended up ultimately with a fee structure of $100 for the first thousand users. $90 per year for the next thousand, and then $75 a year for any users over that. And it was an ongoing revenue stream. The startup captured significantly more value over time, because they were able to change the anchor from that initial one-time purchase, to an ongoing subscription. As you look at the deals you're entering into, be very aware of what those anchors are, and how they can shape the final outcome of the negotiation. Be deliberate about putting an anchor out there, and offering facts and data to support your in-going point. Because ultimately, that starting point is going to have a huge effect on the final negotiating price.