Rounded prices get more offers from buyers

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📝 Context

Topics: Pricing
For: Both B2C and B2B
Research date: August 2018
Universities: Columbia University, Leuphana University of Luneburg, ESMT Berlin

You’re looking to rent a venue for your next launch event, and have come across two initial quotes, of which you’re expecting to negotiate down:

• Conference Hall A costing $20,000 for the day

• Exhibition Space B costing slightly less - $19,445 for the day

While the exhibition space's initial offer is lower, science says you’re more likely to choose the first option, as the first one you will try to negotiate and book.

P.S.: Want more guidance to set your prices? Our Science-based Playbook of Pricing & Promotions is full of insights to help you optimize pricing while maximizing profitability.

P.P.S.: Keep an eye out tomorrow, I’ll be sending you a special case study, applying Science Says insights to a real-life startup. I’m curious to hear what you think of it!

📈 Recommendation

To receive more offers (e.g. when listing a flat for rent), or get more responses to offers you make (e.g. when making an initial offer to rent a flat), use round numbers (e.g. $22,000) instead of more precise numbers (e.g. $21,947).

Pro tip: Once negotiations have started, switch to using precise prices, to close at a better price.

🎓 Findings

• People are less willing to enter into negotiations when given a precise offer or price (e.g. $21,947) compared to a rounded price (e.g. $22,000), even if the precise price is lower. 

• As part of a series of 6 experiments and market observation of real estate data, researchers found that:

  • People were 77.5% less likely to choose to start negotiating when presented with a precise price compared to a rounded-up price

  • Homeowners saw renters who made precise offers (e.g. $427 per month) as 26.8% less flexible than those making round offers (e.g. $450 per month) and were 12.5% less likely to start negotiating with them

• The effect strengthens as the level of precision in prices increases (e.g. $810 vs. $800).

  • A one-digit increase in the precision of a listed real estate price (e.g. $3850 per month vs. $3800 per month) led to a 65% increase in the chances a property would be relisted at a reduced price

    • Compared to an offer with 2-digit precision, only 53.1% chose to negotiate when given an offer with 3-digit precision ($3,490)

    • This further reduced to only 46.9% of people being willing to negotiate for a 4-digit precise offer ($3,489)

🧠 Why it works

• When deciding to enter a negotiation with someone, we look at key signals, such as the price they offer, to assess our negotiation counterpart.

• When we see a very precise number as a first offer (e.g. $33,254) we assume the person making the offer is less willing to negotiate.

• In contrast, rounded prices (e.g. $35,000) seem more flexible and negotiable compared to precise prices.

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✋ Limitations

• The research focused on the decision to enter a negotiation, when both sides are unsure if the other wants to talk. Previous research shows that during negotiation, moderate to high levels of precision make people pay a higher final price because they negotiate less.

• The study measured people’s willingness to negotiate - it didn’t look at whether this resulted in a sale being finalized after negotiations.

• The research looked at event space hiring costs and real estate prices, at relatively high prices (from $1,000 to $30,000,000). The effect may differ for services (e.g. consulting) or lower-cost products (e.g. a second-hand chair for $30).

• The research focused on one-time interactions between strangers. It still needs to be studied if the effect applies to negotiations between ongoing or long-term partners (e.g. renewals), who may have a better understanding of the counterpart’s pricing.

👀 Real-life example

Rental listings on Zillow for Medford, a suburb of Boston, include very precise monthly prices. As a market that’s been cooling in recent years, with properties staying on the market longer than in neighboring Boston, it’s likely that landlords and sellers face stiff competition securing tenants or buyers.

❌ Issue: By listing highly precise prices, many potential renters are likely to choose not to not make offers to these properties.

✅ Solution:  To increase the likelihood of potential renters reaching out to start negotiations, and maximize the rent they receive, landlords should:

• List properties at precise prices ($3600 for the first, $3800 for the second)

• Respond to initial offers (e.g. “I offer $3,200”) with precise counteroffers (“How about $3,425”?), so the other party will negotiate in smaller chunks ($25 at a time, rather than $100 at a time)

• End the negotiation with a final price that is likely higher (e.g. $3,375 vs $3,300)

🔍 Study type

Lab experiments, online experiments, and market observation (analysis of real estate data on RedFin.com, from six U.S. cities and 11,203 property listings).

📖 Research

Too precise to pursue: How precise first offers create barriers-to-entry in negotiations and markets. Organizational Behavior and Human Decision Processes (August 2018)

🏫 Researchers

• Alice J. Lee, Columbia University

• David D. Loschelder, Leuphana University of Luneburg

• Martin Schweinsberg, ESMT Berlin

• Malia F. Mason, Columbia University

• Adam D. Galinsky, Columbia University

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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