I had my first sale through Network Solutions Certified Offer service a few
months ago. I was a little bit surprised to see someone paying upfront to
have an automated service email my whois address. However, it made me
curious. I had to understand how the system works and if I wanted to respond.
The Structure of the Certified Offer System
There are a maximum of four steps in the process:
- Initial Offer (Buyer)
- Accept/Decline/Counter Offer (Seller)
- Accept/Decline/Counter Offer (Buyer)
- Accept/Decline (Seller)
The first thing to recognize is that it is a structured negotiation system.
You are given a limited set of choices and the amount of negotiation is also
limited.
Game Theory Analysis
Let's run through a sample negotiation to see how one would expect these
negotiations to play out.
Starting Situation:
Seller = Owner of the domain name, he or she gets contacted by Certified
Offer
Buyer = Party interested in purchasing the domain name from Seller
Pb = Maximum price Buyer is willing to pay for domain name
Ps = Minimum price Seller is willing to accept for domain name
Step 1.
Seller makes initial offer (O1).
O1 is either greater than Ps or less than Ps.
At this point Ps may not actually be determined. Some Sellers may have a firm
minimum price already in mind, but many probably do not. This is where what
is known as 'price anchoring' comes into play.
Price Anchoring is a fairly well studied phenomenon and the results may surprise
you as a negotiator.
“Research into human judgment has found that how we perceive a
particular offer's value is highly influenced by any relevant number that
enters the negotiation environment. Because they pull judgments toward
themselves, these numerical values are known as anchors. In situations of
great ambiguity and uncertainty, first offers have a strong anchoring
effect—they exert a strong pull throughout the rest of the negotiation. Even
when people know that a particular anchor should not influence their judgments,
they are often incapable of resisting its influence. As a result, they
insufficiently adjust their valuations away from the anchor.We might expect experts to be immune to the anchoring effect. Real estate agents,
for example, should be able to resist the anchoring effects of a property's list
price because of their presumed skill at estimating property values. Testing
this theory, researchers Greg Northcraft and Margaret Neale had real estate agents
inspect a house and estimate its appraisal value and its purchase price.
Northcraft and Neale manipulated the house's list price, providing high and low
anchors. All of the agents' estimates were influenced by the list price, yet they
denied factoring the list price into their decisions, instead citing features of
the property that would justify their estimates.In another study, Thomas Mussweiler of the Institute of Psychology at the University
of WÃrzburg, in WÃrzburg, Germany, and his colleagues had customers approach German
mechanics—individuals expected to be knowledgeable about the true value of cars—with
a used car that needed numerous repairs. After offering their own opinion of the
car's value, the customers asked the mechanics for an estimate. Half the mechanics
were given a low anchor; the customer stated, "I think that the car should sell for
about DM 2,800." The other half were given a high anchor: "I think that the car should
sell for about DM 5,000." The mechanics estimated the car to be worth DM 1,000 more
when they were given the high-anchor value!As this research makes clear, anchors affect the judgment of even those who think they
are immune to such influence. But why?The answer lies in the fact that every item under negotiation (whether it's a company
or a car) has both positive and negative qualities—qualities that suggest a higher price
and qualities that suggest a lower price. High anchors selectively direct our attention
toward an item's positive attributes; low anchors direct our attention to its flaws.
Hence, a high list price directed real estate agents' attention to the house's positive
features (such as spacious rooms or a new roof) while pushing negative features (such as
a small yard or an old furnace) to the back recesses of their minds. Similarly, a low
anchor led mechanics to focus on a car's worn belts and ailing clutch rather than its
low mileage and pristine interior.”
What does this mean for the Seller? These researchers spell it out simply: “In our
studies, we found that the final outcome of a negotiation is affected by whether the
buyer or the seller makes the first offer. Specifically, when a seller makes the first
offer, the final settlement price tends to be higher than when the buyer makes the first
offer. “
(Source: http://hbswk.hbs.edu/archive/4302.html)
In the Certified Offer system in which the Buyer always initiates the process, then,
the Buyer is advantaged to get a more favorable outcome. Be that as it may, this is
when most Sellers will normally decide what Ps is.
Personal note: I know from my own personal experience that multiples come to mind
instantly after receiving an offer. I bet they are offering 25% or 1/3 of their whole
budget, so I will counter offer 10x the price and we'll meet near the middle eventually.
Instantly, I have already been anchored to a range before we even get started.
Step 2.
If O1 < Ps:
If the offer is less than the Seller's reservation price, no deal is possible at this
stage. The Seller has two options: Decline (end negotiations) or Counter Offer (C1).
If O1 > Ps:
If the offer is above the Seller's reservation price, the Seller again has two options:
Accept or Counter Offer (C1).
In both cases, a rational decision maker would counter offer (or end negotiations if
there was no interest in selling). When O1 doesn't meet Ps no deal is going to happen
without a counter offer (C1). When O1 is above Ps, it is still in the Seller's interest
to counter offer to minimize the amount of money left on the table.
So we naturally end up at Step 3 in any rational negotiation.
Step 3.
At this point the Buyer is presented with a counter offer (C1). They are given the
choice to Accept, Decline or Counter Offer.
The Buyer has already paid for the service and has nothing to lose. Therefore, declining
would be irrational.
The real choices are Accept or Counter Offer (C2).
If C1 > Pb:
If the Counter Offer (C1) is greater than their maximum price (Pb) they must Counter
Offer (C2).
If C1 < Pb:
If the Counter Offer (C1) is less than the Buyer's maximum price, they could Accept
the deal and walk away satisfied. They could also make another Counter Offer (C2) in
an attempt to reduce the cost of acquisition.
This is where it gets very interesting. One could argue that a rational Buyer would
accept C1 and be happy. However, it becomes important to bring up information
asymmetry at this point:
- The Buyer knows / can contact the seller at any time (via whois) before, during or
after the transaction - The Seller cannot contact the buyer at any point during or after the transaction,
so the buyer remains anonymous
In theory, the Buyer has the information about what the Seller would accept (C1).
This puts them in a strong position, if they want to try and save money. They could
come back at a later point in time offering C1 knowing that it is above Ps. However,
there is some risk because there could be a spite factor (Seller feeling deceived or
slighted and demanding more). There is also some plausible deniability since the Seller
is never really sure who approached them through the Certified Offer system. Therefore,
they may suspect the same Buyer but they cannot be certain about the identity of the
Buyer that offered through a Certified Offer.
Furthermore, the same Harvard study quoted earlier writes:
“What should you do if your opponent's first offer is close to your ideal—accept the
offer and quickly finish off the negotiation, or raise your expectations and keep
bargaining? My own research shows that if you immediately accept your opponent's first
offer, she will likely be filled with regret. Despite not having had to make any
concessions, your opponent will likely be beset with "if only" thoughts ranging from
"I should have made a more extreme first offer" to "Maybe the item I purchased is
suspect." Remember that you want to reach an agreement that's profitable to you and
that satisfies the other side. A satisfied opponent will be more likely to live up to
the terms of the agreement and less likely to seek future concessions or revenge. So
what should you do when you like your opponent's first offer? Demand concessions! You'll
not only achieve a more advantageous outcome for yourself, but you'll also increase your
opponent's satisfaction.”
(Source: http://hbswk.hbs.edu/archive/4302.html )
Therefore, if the Buyer is looking to acquire the domain as cost effectively as possible,
we expect a counter offer (C2).
Step 4.
The end-game is the Seller is presented with a take it or leave it scenario (Ultimatum Game).
If C2 > Ps:
One would expect a deal to take place (Accept) if the counter is above the Seller's
reserve price Ps.
If C2 < Ps:
If C2 less than the reserve (Ps) and we have rational behavior, it should be Declined.
However, this is a critical moment where the Seller's weakness may be exposed. They
may re-evaluate the probability of another buyer for the specific domain name, and
the odds of getting a better price. The knowledge that they cannot come back and
approach the Buyer again to sell the domain name may play on the psychology of the
Seller. This is the moment of doubt where the Buyer may be able to get better deals.
Conclusion
Ultimately, the negotiation is about fighting for the consumer (Buyer) surplus and
producer (Seller) surplus, as long as Ps > Pb. Analyzing the framework for negotiations
and the psychology of negotiations themselves, we can generally agree that the Buyer
has some advantage using this system in most cases.
There are also ways to protect against the potential advantages the Buyer has. Setting
the minimum price beforehand is an obvious strategy, which eliminates almost all of
the Buyer advantages if one is unwavering and patient, and owns a portfolio able to
cover its costs through sales, PPC or other means.
PhD. Economist's View
I love problems like this but often find myself needing outside input from
beyond the domainersphere. I asked my for my father's opinion after
explaining how the negotiation structure worked. My father is a PhD Economist
who has been working with economic development for over 30 years. I was quite
impressed by his answer given that he doesn't really know anything about the
domain industry.
What is the right strategy? That's very difficult. I guess the
chance of making a big killing would be based on the notion that once in
a while some buyer will come along who has some great idea that depends
critically on buying one of your domain names. If that happens, then he
or she is likely to be willing to pay big money. How big is impossible to
say, for you have no idea whether you are dealing with another Facebook or
something much more modest. If your strategy is based on a belief that
you happen to have some domain names that are so valuable to someone and
you're are going to get big money out of it, then you would offer an outrageous
price ($100,000?) that will almost always be rejected. But, such a big
idea is likely to be a speculative thing as well, and hence the potential
buyer may not have that deep a pocket now. Later, when Facebook succeeds, you
may say you should have asked for $10 million, but I seriously doubt that
such an approach would have worked. Because basically the intrinsic value of
Facebook was not in the domain name as such. So, until the thing gets
developed, there is not much value. Even $100,000 may be questionable.
Then you are talking about more modest buyers, but they may be reasonably
well established businesses that are willing to pay a respectable price
because they really like the name (personal detail omitted here). By
now, I think I am convincing myself (of course without knowing your business
at all) that a reasonable approach is to go for that segment. That means
trying to get something in the range of $1,000 to 10,000, unless you
happen to know you have a unique name that someone will want because he cannot
easily go for any alternate names (e.g., SouthernSudan.com). But, in
that group, the chances are they do care about the name and they have a
reasonable money power to pay a respectable price.
Thanks for the insight Dad. Perhaps a new career as a domainer is in order!
I would also like to thank my former professor, Elaine McCrate, for letting me bounce my
ideas off her while trying to understand this problem.
