Need to sell something fast? Use "cheap talk"
Sometimes you want to sell something, whether a used car, a boat or a house, and you can sit back and wait to get the best price possible. But on other occasions, something has to go -- now.
In those cases, a new paper from the National Bureau of Economic Research has a suggestion: Use "cheap-talk" price signaling to let buyers know you're serious about doing a deal. (Note, the report is behind a paywall.)
That doesn't mean simply lowball the price. Instead, the method is to use round numbers, that is, multiples of $100, because people apparently read them as a "cheap-talk signal by impatient sellers who are willing to take a price cut in order to sell faster," according to the paper.
Negotiation experts often suggest highly specific prices, like $4,885 or $5,225 instead of $5,000, because such precision suggests a buyer has more knowledge of a product being offered or that a seller is fairly well set on the desired price and won't offer a lot of room for maneuvering.
The NBER paper's researchers from Cornell, UC Berkeley and eBay (EBAY) did an extensive analysis on product listings in eBay's collectible marketplace, which includes coins, antiques, stamps, art and similar categories. They focused on this area because a greater variation in valuations offered a better chance to test how price affected sales patterns over 10.5 million listings. Of those, 2.8 million received an offer and 2.1 million ultimately sold between June 2012 and May 2013. The listings all had a "buy it now" choice activated, so a buyer could forgo bidding and simply obtain the item. Buy-it-now prices ranged from $50 to $550.
The researchers found that price choice had a significant impact on sales results. The round-number listings attracted lower initial offers and ultimately sold for 5 percent to 8 percent less on average than listings using more precise prices. However, the round-number listings received offers between 6 and 11 days sooner than the precise-number listings and were also 3 percent to 5 percent more likely to sell.
An analysis of real estate transactions in Illinois showed similar patterns, leading the researchers to suggest that "round-number signaling plays a broader role in negotiations."
However, while some looking at the study suggest the same technique could be used in salary negotiations, the dynamics of such activity are significantly different. Instead of multiple buyers and one seller, there's one buyer and multiple sellers. The buyer has a pick of candidates and doesn't look just for price but also how well someone would fit its requirements.
If you're negotiating in a job situation, Columbia Business School has a better suggestion. Instead of offering a single number, provide a range in which the low end is the salary you really want and the top is 20 percent larger. If you're chosen, it's more likely than not that you'll be offered more than the low end -- which was the amount you really wanted in the first place -- because people don't want to seem impolite.