What it means
Lowballing is common in property purchases, business sales, car deals and salary negotiations. A buyer offers much less than the asking price in the hope of ending up at a better price than if they had started closer to the seller's figure.
The first number put on the table tends to influence where the discussion ends, an effect called anchoring. It carries risks.
A seller who feels insulted may refuse to negotiate at all, and the buyer can lose a good deal. The tactic works best when the buyer has genuine alternatives and is prepared to walk away, and it is less effective where the seller has several other offers.
There is also a deceptive version in sales and contracting. A supplier gives a very low quote to win the work, then adds charges, change orders or price increases later, once the customer cannot easily switch.
This is sometimes called low-balling in procurement, and buyers guard against it by comparing quotes in detail and requiring fixed prices. In employment, a lowball job offer is one below the market rate for the role.
Candidates can respond by researching market pay, explaining their value and asking for specific changes. Employers who lowball may fill roles slowly or lose strong candidates.
In business valuation, lowball bids appear in takeovers. A bidder may offer a price far below fair value, hoping the target's board will be pressured to negotiate.
Boards respond by obtaining independent valuations and, if needed, seeking other bidders. Ethics and reputation set limits.
Repeated lowball behaviour can damage a business's name, since word spreads quickly among suppliers, customers and professional advisers. Many negotiators prefer a firm but credible opening position backed by evidence, because it preserves the relationship and still moves the price in their favour.
In practice
Real-world examples.
Example
A buyer offers $240,000 on a house listed at $320,000. The seller declines but invites a second offer, and they eventually agree at $295,000. The buyer later admits that the first offer was too low to be taken seriously and that it nearly ended the talks.
Example
A building contractor quotes $90,000 for a renovation, far below rivals' $130,000. Halfway through, he announces $35,000 of extra charges that were not in the quote. The owner, with walls already open and a family waiting to move back in, has little choice but to pay.
Example
A start-up founder is offered $400,000 for a company that she values at $2,000,000. She uses the offer as evidence to start talks with other possible buyers. Within two months she receives an offer of $1,600,000 and accepts it.
Formula
Calculation
Discount to asking price = (Asking price - Offer) / Asking price
Suppose a business is listed for sale at $1,500,000, and a buyer offers $1,050,000.
Discount = ($1,500,000 - $1,050,000) / $1,500,000 = $450,000 / $1,500,000 = 30%.
If the seller counters at $1,400,000 and they settle at $1,300,000, the final discount is ($1,500,000 - $1,300,000) / $1,500,000 = $200,000 / $1,500,000 = 13.3%.
The opening offer was a lowball, but the final result was a more modest discount.Case study
Seen in the real world.
Kestrel Logistics is an illustrative, fictional freight company that attracted a takeover approach from a larger rival. The bidder offered $18,000,000 in cash, while the board's advisers valued the company at between $26,000,000 and $30,000,000.
The directors rejected the offer as a lowball and published an independent valuation to shareholders. They also invited two other companies to look at the business, and one made an offer of $27,500,000.
The first bidder returned at $26,000,000 but lost to the rival. In this illustrative story the board's firm response and a supported valuation turned a low opening move into a better outcome for shareholders. Shareholders received $27,500,000, or about 53% more than the first offer.
Watch out
Common mistakes.
- Making an offer so low that it ends the conversation, when a believable figure keeps negotiation going.
- Accepting a very cheap quote without checking what is excluded, which can lead to extra charges later, especially when it is far below every other quote received.
- Treating the opening number as the true value, when it is a negotiating position that says more about the bidder's tactics than about the asset.
Questions
People also ask.
Is lowballing illegal?
Making a low offer is legal, but promising a price you intend to raise after the customer commits can amount to deceptive practice in many places. Contracts that fix the price and the scope of work in writing give the customer much better protection.
How should I respond to a lowball offer?
Stay calm, explain how you reached your price, support it with comparable sales or valuations, and counter with a figure you can justify.
Why does it sometimes work?
The first number often anchors the discussion, and sellers who are in a hurry or short of other offers may settle for less.
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