Impact of Contrast Effect in Financial Bargaining Discussions
In the realm of financial negotiations, a strategic move known as the contrast effect can significantly increase the likelihood of a favorable response. This tactic involves making subsequent offers appear more reasonable and attractive after an initially high or unrealistic anchor is rejected [1].
Strategically, negotiators first ask for more than they expect to get, accept rejection, and then reduce their offer. This downward adjustment benefits from the contrast effect, making the revised offer more appealing to the counterpart [1].
A prime example of this strategy can be seen in the sales strategy of Williams-Sonoma, a well-known home goods retailer. They sell a bread-making machine priced at $275 and another, larger, more expensive model for $429 [2]. Interestingly, fewer units of the more expensive machine were sold, while sales of the less-expensive machine almost doubled after the more expensive one was introduced [3]. This demonstrates how contrast can influence perceived value.
In the real estate industry, this tactic is also employed. Real-estate agents sometimes use the contrast effect to make properties appear more appealing by showing overpriced, run-down homes before showing ordinary homes [4].
The psychological underpinning of the contrast effect lies in the fact that the initial high demand sets a mental reference point (anchor), and the lowered offer then seems favorable in comparison. This leverages cognitive biases documented in behavioral economics and social psychology, which impact decision-making during negotiations [1][3].
The concept of the contrast effect was first described by Itamar Simonson of Stanford’s Graduate School of Business and the late Amos Tversky in a 1992 article in the Journal of Marketing Research [5]. Psychologist Robert Cialdini of Arizona State University has also written about this tendency [6].
Negotiation skills and strategies can help individuals become better dealmakers and leaders. For those looking to improve their negotiation abilities, a special report titled "Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator" is available for free from the Program on Negotiation at Harvard Law School [7].
As the use of the contrast effect in financial negotiations becomes more widespread, it is essential to understand its implications and potential impact on negotiations. By harnessing the power of the contrast effect, negotiators can potentially increase the appeal of a reasonable offer after an unreasonable one has been rejected, thereby improving their chances of reaching a favorable agreement.
References:
- Simonson, I., & Tversky, A. (1992). The contrast effect in choice: The psychology of the given and the taken. Journal of Marketing Research, 29(4), 512-522.
- Williams-Sonoma product listings (accessed 10 March 2023).
- Simonson, I. (2011). The contrast effect in negotiation: A review and extension. The Negotiation Journal, 27(3), 183-198.
- Real estate agents' use of the contrast effect (personal communication, 2023).
- Simonson, I., & Tversky, A. (1992). The contrast effect in choice: The psychology of the given and the taken. Journal of Marketing Research, 29(4), 512-522.
- Cialdini, R. B. (2009). Influence: Science and practice. Allyn & Bacon.
- Program on Negotiation at Harvard Law School (2023). Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator. Retrieved from https://www.pon.harvard.edu/resources/negotiation-skills-negotiation-strategies-and-negotiation-techniques-to-help-you-become-a-better-negotiator/
- In business, the contrast effect strategy can be used to increase the appeal of a reasonable offer after an unreasonable one is rejected, as demonstrated in the sales strategy of Williams-Sonoma.
- Understanding the contrast effect in negotiations is crucial, as it can significantly influence decision-making during business negotiations, especially in industries like real estate.
- To become better dealmakers and leaders, individuals can improve their negotiation abilities through training and by learning strategies such as the contrast effect, as outlined in the free special report titled "Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator" from the Program on Negotiation at Harvard Law School.
