Successful entrepreneurs understand the importance of building long-term business relationships that can contribute to their bottom line. That’s why many business owners invest their time and energy into maintaining strong relationships with their partners, employees and clients.
While each of these relationships has its own set of challenges – and rewards – the relationship between business owner and supplier/vendor cannot be overlooked.
So how can business owners best position themselves at the bargaining table? Possessing strong presentation and communication skills are important traits to bring into the room, but negotiation skills are just as valuable.
For a great book on this subject, check out Never Split The Difference by Chris Voss. Chris was a former FBI hostage negotiator and does a great job providing practical real-world examples of how to apply his concepts.
Why is supplier and vendor negotiation important?
Before we get into negotiation tactics and tips, it’s good to understand the importance and impact of negotiation. Suppliers and vendors wield great power in the business world. Simply put, a supplier’s rate impacts a company’s profit margin. Supplier negotiation can reduce costs to maximize margins and keeps price increases from compounding year over year. And negotiation success is not as simple as locking in the lowest price. For example, let’s say that your business negotiates a low supplier rate today. If your contract includes an auto-renewal at 8% per year, then the good deal we got today will very quickly become a terrible deal in the future. Negotiating done right, considering the entire picture and package, impacts profitability for businesses and thus, overall business success.
5 Tips for Winning Supplier Negotiations
While many business owners consider the art of negotiation innate, it can be taught (another plug for the book mentioned above). Utilize the five tactics below when negotiating the best prices with suppliers and vendors and it could mean the difference between staying in the black or sliding into the red.
- Know how to talk the talk (and do it respectfully)
Want to earn a supplier’s respect? Know the lingo. Understanding an industry’s unique jargon may come with its own learning curve, but once decoded the negotiation process suddenly becomes easier to navigate because all of the parties involved are speaking the same language. Additionally, using respectful language to counter will take you a long way. For example, “This is a little more than I budgeted. Is there any way we can adjust the proposal so I can stay within budget?” may go a lot further than “The price is way too high. We’ll need to get to X.”
- The first offer isn’t always the best offer
Price negotiation should be treated like a house purchase – never accept the first offer put on the table. Instead, be prepared to counter offer and bargain back and forth until a fair amount is reached. If the quote includes features that won’t be used, or if the offer doesn’t adequately reflect the amount of business the vendor will incur as a result of the deal, then request a lower price. If possible, try to keep this to one or two counter offers when working to build a professional relationship with a supplier.
During negotiations, be careful to not drive the price too low. That’s when shoddy deals are made and quality (i.e. customer service) is sacrificed by a vendor now trying to cut costs. To avoid driving the price too low, know your industry – including the value of the related benefits (same day delivery, etc.) of working with suppliers. For example, a business needing delivery within 8 hours probably pays more for their materials or inventory, but their storage cost is much lower. Not having to stock every material or supply will not interrupt day to day business if the buyer knows it can be delivered that afternoon. Most likely, the hassle of having to maintain inventory and locate the supply is more than worth paying a bit more for immediate delivery.
- Gather quotes from other suppliers
There’s an old adage that says, “there’s nothing wrong with a little friendly competition.” The same is true in business. Competitive pricing is an entrepreneur’s best friend. Therefore, always request at least one additional quote from other vendors before negotiating with a supplier.
In fact, honesty is the best policy in this instance. Let the vendor know that quotes have been gathered from their competition, and the best bid (note, not necessarily lowest unless that’s all you’re going for) will be awarded the contract. If all goes according to plan, the vendor will cut their initial, proposed cost, offer better terms, or come back with some other form of benefit to the customer. This is an example of competitive pricing at its best. But don’t make the mistake of telling Vendor A what Vendor B’s price is in an attempt to beat Vendor B. Sharing the fact that A is high is fine but if A’s rebuttal still is high, it’s time to either pay the higher price or give B the business.
When comparing quotes, make sure to factor in the entire package and relationship with that supplier and perform a cost benefit analysis. If you are considering a supplier you already have a relationship with and you both value the relationship, know the product is quality and they consistently delivered on time, that must be factored in even if your existing supplier is coming in at a higher price. If you decide to go a lower bid over your existing supplier, do it respectfully and leave the door open to return to doing business together.
- Have a deposit available
Sometimes in business it’s all about shaping the negotiation, and there’s no better way for a business owner to do this with a supplier than by making a substantial deposit. This gesture of good faith not only shows a vendor how serious the business owner is about making the purchase, but also how easy they are to work with. Think about it… money talks. And at the end of the day, suppliers are just like any other business, they like to get paid. From a supplier’s perspective, a large, lump sum up front is hard to walk away from. That’s why a deposit is a powerful negotiating tactic for any business owner to use to their advantage when striking a deal.
Note: During times of high demand a larger deposit might become more of a requirement than a negotiation tactic, but in general don’t be surprised if a supplier asks you to put anywhere between 10-25% down on an order. Make sure to research your specific industry as far as what is a common amount to put down when ordering from the vendor or supplier. The key here will be striking the balance between introducing risk by paying too much for a project upfront and using the deposit as a price negotiation tactic.
- Discover areas of mutual gain other than pricing
Negotiating can be unpredictable. For example, what happens when a supplier refuses to lower their price? If this occurs, look at the contract more closely. Perhaps there are areas outside of pricing that can give both parties an opportunity to benefit from the agreement. For instance, concessions can be made to the warranty, payment terms, shipping fees, frequency of delivery, discounts on bulk purchases and more. In other words, consider everything negotiable and nothing final until the contract is signed on the dotted line. Knowing what these are will require asking qualifying questions, but will be well worth the ask. Focusing too much on price can cause your business to lose sight of the overall picture.
Implementing The 5 Tips:
Small Business Supplier Negotiation Strategy Overview
When is Negotiation Appropriate?
As long as you have an end goal in mind and keep the requests reasonable, negotiation is usually accepted. It may depend some on the personality and culture within the supplier or vendor. Some suppliers may be more likely to become offended by a low price ask; some expect it. If you are in a new supplier relationship, you may not have as much negotiating power when going too low on price out of the gates; it may also not be beneficial to your business. Instead, talk about why you are looking for a new supplier and frame the conversation around what is important. Sometimes what matters most with new supplier negotiation is not price. Perhaps what you need most are quality, better payment terms or guaranteed on time delivery.
When can negotiation help vs. hurt a business-supplier relationship?
The key to avoid here is over negotiating. This can happen for a variety of reasons, but not limited to: giving a list of “demands” that at their core change the nature of the deal, waiting until the last minute to introduce a new condition, or simply countering too many times with a too low offer.
Some signs that you’ve over negotiated may be the supplier just walks away from the deal or lets you know that “they think another vendor may be a better fit.” In some cases of last second negotiations, if the supplier was counting on your business to meet revenue goals, they may have no choice but to accept your offer. There’s still a “hurt” that can result; if you’ve thrown in a new condition or countered last second, they may never forget the situation you put them in and decide not to work with you the next time.
Negotiating as a Small Business
When it comes to supplier negotiation, large enterprises have more buying power and may be a larger percentage of the supplier’s overall business. Apple bought LuxVue Technologies, maker of micoLED screens, in part because Apple knew the supplier wouldn’t be able to meet their demand needs. On a lesser scale, a large buyer who knows they are 25% (or more) of overall revenues can more easily dictate pricing than someone who is 1%.
However, as a small business, don’t rule yourself out as a partner that will be able to get good pricing.
Relationships can go a long way. Having the owner-to-owner relationship can benefit small businesses over large enterprises. That being said, your negotiation process must be adjusted when dealing with more powerful suppliers. Demand for product (or a specific vendor/supplier) helps keep prices high and minimizes how much negotiation is possible. If the supplier needs to get rid of the product it is more likely that you’ll have some negotiating power rather than if a supplier has an always in-demand product where they will be able to simply sell it to the next buyer if you’re not willing to pay the price.
Avoid These Vendor Negotiation Pitfalls
Avoid Insulting Your Supplier
I had a situation when someone countered with an offer of half of my proposed service fee. This left me not even wanting to consider working with the individual. I wasn’t offended but if that individual felt paying his price was fair, it’s clear we weren’t a good match, and I wasn’t going to waste my time to try and convince him. An insult is something that you can’t come back from as easily vs. approaching the situation in a way that leaves the door open. The key to any negotiation is to know what the other party values and what he doesn’t. The more you can offer him that he values while keeping as much of what you value is the best deal for both parties. A supplier struggling with cash flow might be willing to give on price if you pay net 15 days. But once you agree to that, you must do it or risk an insult and the situation looking like a double cross.
Making The Negotiation All About Price
Another way to upset a vendor or supplier is to keep a negotiation only to price, while not acknowledging the other benefits that they might have given you in the past – a rush job, custom jobs, weekend delivery, direct owner involvement. Focusing only on price and appearing ungrateful or unaware of the other benefits that a vendor brings to the table: quality, reliability, etc. are an easy way to push a supplier over the edge. This could leave you in a situation without a supplier, when your existing supplier simply counters with “no, find someone else.”
Negotiating isn’t for the faint at heart. It takes both confidence and finesse. If you need assistance requesting a quote from a vendor, negotiating a procurement contract or securing a vendor discount, contact Lucrum Consulting. Our team is prepared to help you sharpen your negotiation skills to ensure your business receives the best supplier price in the industry. Learn more about our fractional CFO consulting services and view our pricing here.
You can find more information about how to get the best from your supplier at the Quickbooks blog about negotiation skills.