You are sitting on the beach at your favourite resort enjoying the sundrenched beach and ocean. A waiter approaches bearing a silver tray and asks for drink orders. Two coronas will fit the bill you say, and the waiter quickly returns with the cold bottles with lime wedges inserted. Life doesn’t get much better, you think as you turn your gaze to the surf. On returning to the hotel you sign off on your bar-tab and notice the two beers have cost $36.00. You don’t even blink given the sheer indulgence of the resort and the experience.
Later that week you are in a local village hunting for souvenirs when you spot a ramshackle shop with a prominent Corona sign. You’re suddenly thirsty and you order two which are drawn from an ice-filled drum. The vendor charges $8.00 which you see as reasonable value. But they are the same beer and the street vendor’s purchase price was probably more than the resort.
Welcome to the world of framing. Both transactions gave reasonable value because you have used a different frame of reference to assess value.
Max Bazerman, a Harvard professor, has written extensively about cognitive biases in negotiation and how they can sometimes lead to irrational behaviour. In one experiment, he gave two groups an identical negotiation. One group was asked to minimise the expenses associated with a sale while the other was asked to protect the profit margin for the same sale. It was essentially the same task, but framed differently. One group had a negative frame (expenses) while the other had a positive frame (profit). The group with the positive frame completed many more sales than the other and while the negative frame group made a greater profit margin, the positive group made more profit overall.
People tend to feel the pain of a loss more than the happiness of an equivalent gain. This is known as loss aversion. If you frame a negotiation as a gain for the other party (a better deal than they currently have) rather than a loss (the difference between their opening position and your offer) you are more likely to gain agreement.
In setting prices, a premium priced item can make the regular priced item seem more reasonable. A company selling bread makers priced their standard product at $275. Sales were slow. They then introduced a premium product at $430. The premium product did not sell well, but sales of the cheaper product almost doubled. The expensive product had changed the frame consumers used to assess value.
Skilled negotiators understand framing and use it to improve deals.