Negotiating a Price

Anyone negotiating to buy a company, a car, a house, making an initial offer – don’t bid with a round number like $15 per share, $10,000 or $1 million. Rather, bid with a more precise number, like $14.80 per share, $9,800 or $1.03 million.

Investors in mergers/acquisitions who offer “precise” bids for company shares yield better market outcomes than those who offer round-numbered bids.

If you make a precise bid, the targets are more likely to accept it, and more likely to accept it at a cheaper price. And with cash bids, they’ll generate a more positive market reaction.

People place more value on precise numbers than on relatively round numbers. People tend to assume, that someone must have crunched lots of data to come up with an amount so specific. A round number, on the other hand, suggests that a person is just ballparking it—offering an approximate valuation based on vague knowledge.

In a TV show The Price is Right, participants played an online game guessing the market price of three consumer products. Before making their guesses, they received “audience suggestions” for what they should bid. When given the chance to choose which audience members would help them on future bids, participants were least likely to choose those whose suggested bids had ended in zero.

Precision also indicates determination. As an example, consider these two ways to propose a future rendezvous. “I could say let’s meet in one year, or I could say let’s meet in 365 days,” he says. “Now, if I say the latter one, it sounds pretty serious and precise. But if I say we’ll meet in a year, it sounds like, sure, maybe we’ll meet in a year, but maybe it’ll be more like one and a half years, or maybe some other time.”

Benefits of precise bidding in the real-estate industry: a precise listing price indicates that the seller has done legwork to estimate the true value of a house, and is thus less likely to be bargained down. The same holds true for other negotiations.

Investment banking: Of the potential buyers whose initial bids were divisible by $5, 69 percent ended up with the winning bid. Of those whose bids were divisible by $1 (but not by $5), 75 percent won their deals. And so on.                                                             The more precise the bid, the higher the rate of success.

Precise bidding also increased the likelihood that the targets would accept the bidders’ initial offers. Bidders whose initial bids were divisible by $5 ended up increasing their offers by an average of 18 percent to win the deal. As for those whose bids were so precise that they weren’t even divisible by 25 cents, they only had to increase their bids by an average of 6 percent in order to win.

That said, a bid too precise may make the bidder look suspicious, or even ridiculous, to the recipient. Bidding $1.03 million for a house is one thing. Bidding $1,033,235.83 is another.

If a bid is too precise, it may strike as strategic to the recipient, rather than being driven by superior information. This may lead the recipient to rethink whether the bid is really informed.

Suresh Shah, Pathfinders Enterprise


Comments are closed.