Lowballing is a common negotiation tactic that can catch both buyers and sellers off guard. Whether you are buying a house, negotiating a salary, or selling a service, understanding how lowballing works—and how to respond to it—can give you the upper hand.
Here we explore what lowballing is, the psychology behind why it works, some examples of lowball offers, and how to leverage it in your own negotiations.
What Is Lowballing in Negotiation?
Lowballing is a negotiation tactic in which the initial number offered by a buyer or seller is lower than the asking price/market value of a product.
For buyers, they may attempt a lowball offer knowing it is unlikely to be accepted but with the intention of driving down the asking price, and winning a decent deal overall. Note that for buyers, the acceptable percentage to go below the asking price depends on cultural norms and where the market is at.
As for sellers, they may initially advertise a lower price to get the attention of a potential buyer, only to raise the price after the buyer has made some sort of commitment, which may look like a deposit, an application fee, or a preliminary contract, to name a few.
Why Does A Lowball Offer Work?
Lowball offers work because they depend on social psychology principles such as:
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Anchoring bias: Anchoring occurs when you prime your negotiation partner with a number in order to influence all following counteroffer numbers. This plays on the psychological bias that causes people to "anchor" the first piece of information they hear in their minds. Even if irrelevant and unreasonable, the first figure will influence their perception of the rest of the negotiation.
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Contrast effect: The initial, lowball figure causes any counteroffers to appear reasonable and fair by contrast—even if the counteroffers are below the asking price.
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Cognitive dissonance: The internal discomfort caused by a clash of two opposing ideas. For example, when a buyer's discomfort at a new, higher-than-anticipated price clashes with their feeling of commitment towards the sale. The discomfort of this cognitive dissonance can drive them to make a quick decision in order to resolve the feeling of internal discomfort.
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Commitment bias: In 1978, a psychologist named Cialdini conducted a study in which one group of participants were asked if they wanted to take part in an experiment with a start time of 7:00 am. A second group was also asked if they wanted to take part in the study, without being told about the 7:00 am start until after they committed. A large subset of the first group declined to take part, whereas the second group boasted a 95% attendance rate. Cialdini concluded that when people make a verbal commitment, they feel honour-bound to hold to it, even when new, potentially unfavourable information comes to light.
Examples of Lowballing
Let's look at a couple of key common industries in which you are likely to encounter lowballing. The first example describes a buyer using the lowballing technique; the second is from a seller's perspective.
1. Lowballing in Real Estate
A young family searching for their forever home finds a three-bedroom house listed at £400k in a desirable neighbourhood. Knowing that the house has been on the market for a while and that other houses in the area are going for £380k, they decide to lowball offer £360k. By anchoring a lower price in the negotiation, they influence the seller to suggest a counteroffer of £380k, which they accept.
The housing market is one of the most common arenas in which you will see lowballing, but be aware that the extent of lowballing acceptable in real estate is highly dependent on where the market is at in given point in time.
2. Lowballing in Car Dealerships
An elderly gentleman decides to transition to a more accessible car model and, when visiting a car dealership, likes the look of a second-hand Honda Jazz. He is informed by the car salesman that the car will cost £13,000. He agrees to this figure, only to later discover additional charges on his bill, bringing the price up to £13,600. £600 doesn't seem like much compared to the initial price of £13,000, and he has already said he will buy it, so decides to sign the contract anyway. The contrast effect, cognitive dissonance, and commitment bias are all at play here.
How to Negotiate Lowball Offers
In negotiation, buyers and sellers use lowballing in an attempt to win the most favourable price. But how does this work, practically speaking? And what do you do if someone tries to lowball you?
If someone lowballs you
You've delivered a stellar pitch and outlined your unique selling points. Your customer is nodding along, things seem to be going well, and then they hit you with,
"Ah, but [insert competitor name here] is offering the exact same thing at a much lower price! Can't you do it for...?"
—at which point you almost spit out your coffee. Don't worry, all is not lost! If the negotiation is handled well, you can still walk away with a deal that you're happy with. Take a deep breath, and follow the steps below:
1. Keep a cool head
It's easy to take offence when a buyer tries to lowball you, especially when you feel that your product or service is being undervalued. Just remember, this is business and isn't personal. They are trying to get the lowest price possible, but that doesn't mean they expect you to accept the first number they offer.
So take a deep breath, keep a cool head, and be ready to counter.
2. Focusing on the facts
Assuming that you have done your market research, your service is priced the way it is for a reason. If you offer features that your competitor doesn't, be sure to highlight these. Perhaps you offer higher quality, specialise in a speedy service, or the price reflects the area you trade in.
3. Respond with a (reasonable) counteroffer
Remember the anchoring effect? Try not to be swayed by it. You can continue the negotiation either by maintaining your figure or dropping the price in your counteroffer, but try not to undervalue your product in the process.
Remembering the anchoring effect and armed with the facts (see above), you will feel more confident negotiating a price in your own favour. That being said, it's important to be open to points your negotiating partner makes; perhaps they have noticed something that you haven't.
For an example exchange, let's imagine you are selling a second-hand dining table.
Buyer: £500 seems a bit steep given that the going rate for this kind of table is much lower. I've also noticed that there's a scuff on the leg here. Would you take £450?
You: I'm aware that the market rate is a little lower, but not as much as £50 lower. And this is actually a limited edition piece. I hadn't noticed the scuff, however, so I would be willing to take off a little to compensate. How does £490 sound?
Buyer: It's still on the high side, to be honest. I guess I could stretch to £470?
You: £485, and I'll throw in the cushions for free?
Buyer: Done!
It might have been tempting, upon hearing £450, to drop down to £470 in an effort to close the gap. By avoiding anchoring bias, sticking to the facts, and highlighting extra benefits, the reasonableness of the counteroffer is self-evident and much harder to argue with.
4. Don't be afraid to walk away
Let's say that the above exchange went the total opposite. Even after doubling down on the benefits and providing a reasonable counteroffer, your potential buyer continues to drive a hard bargain. Perhaps, horror of horrors, they expect free delivery as well as a discount. There comes a point when you need to be willing to walk away.
For some buyers, your willingness to walk away may cause them to reconsider and come around to accepting a higher price. For others? Your present loss is future gain. By saying no to a bad deal now, you are giving yourself the opportunity to say yes to a good deal in the future.
If you plan to give a lowball offer
If you plan to submit a lowball offer, tread carefully, especially in cases where you want to build a long-term business relationship. Bear in mind that lowballing is more accepted in some cultures than others and that bartering is fraught with nuance. In Chinese culture, for example, haggling is acceptable, but hardline lowball offers may cause offence.
If you have balanced the pros and cons and are ready to attempt a lowball offer, here's how you should go about it:
1. Have your market research ready
When you dive in with a lowball offer, be ready to justify your thinking with concrete market research, including:
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Quality of the product: Are there any faults or missing features?
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Local going rate: Could you get the product/service cheaper elsewhere?
2. Justify with other benefits you can offer
Perhaps what you can't match in budget, you can make up for with other benefits. For example, in the case of buying a house, are you chain-free? Or can you save the seller time by picking up the product you are buying?
3. Don't go so low that they don't think you're serious
There's lowballing, and there's low balling. As noted earlier, what is considered cheeky to the point of insult will differ depending on culture and market norms. Research this to make sure you don't go so low that the buyer won't even consider entering into a negotiation with you.
Lowballing in Negotiation: Key Takeaways
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Both buyers and sellers can use lowballing as a negotiation tactic.
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Lowballing works because of the psychological principles of anchoring, contrast, commitment, and anchoring bias.
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Solid market research and hidden benefits are valuable ways both to succeed with and rebut lowballing.
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Always take culture and market norms into consideration.
If you are keen to develop your negotiation flare and dive further into the psychology of negotiation, contact Scotwork today.
