As a seller, you try to aim for every product to be sold at the highest final sale price. But what most negotiators do not realize, is that the initial list price is the starting point for the negotiation. In other words: your opening offer is extremely important for the final sale price.
List price strategies
To examine the best strategy to set the list price, Cardella & Seiler (2016) variated the list price, trying to find if negotiation behavior of the buyers and sellers and thereby the final sale price was influenced by the initial list price.
They defined three types of list price strategies regarding the last digit: rounded (either 0 or 5), just below (4 or 9) and precise (low precise 1, 2, 3 and high precise 6, 7 and 8). Participants engaged in a stylized, bi-lateral housing negotiation. The price was set to $200,000 (rounded), $199,000 (just below), $201,326 (high precise) or $198,674 (low precise).
In an earlier article, we already described the effect of round pricing (https://www.newneuromarketing.com/to-round-or-not-to-round).
How to initiate a negotiation best
When the researchers looked at their results, they discovered that the list price influences the initial offer of the buyers, and thereby the entire negotiation.
High precise pricing (the last digit being 6) leads to the highest final sale price, getting your company the largest payoff! A high precise price raises the feeling that you, as a seller, have thought well about your price, leaving less downwards wiggle room.
Additionally, you as a seller tend to make more precise counteroffers, which in turn leads to higher final sale prices. The negotiation in the high precise category may take somewhat longer overall, but the result is even better! Buyers tend to make the lowest offers when a price is rounded, yet rounded pricing is a commonly used strategy. Sellers tend to make the lowest counteroffers when the price is just below rounded.
What about experienced negotiators?
Unfortunately, experienced negotiators will see through what you’re doing, attenuating the observed effects.
Fortunately, the principle of list prices can be used not only in real estate but also in other markets where negotiation is common. Think of cars, secondary markets, and subcontracted services et cetera. Setting the initial price deserves some strategic thinking since your first move is essential when enlarging your profit. So be precise and get your best price.
Take home points
In a negotiation with inexperienced buyers, you as a seller should set your initial list prices to be high and precise.
