Take the Long View When Negotiating with Your Vendors
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
For many businesses, the prices your vendors ask can make or break you. And even if price is no object, your vendors' abilities to deliver products or services on time, while avoiding errors or damaged products can control the fate of your business. However, if you take care to negotiate contracts with your vendors that protect your business, you can create a long-term relationship that will help your business grow.
John Olson founded Greystone Industries about ten years ago, doing approximately $40,000 in sales his first year. In 2010, Olson is already on track to break $2 million in sales. He attributes his successes in distributing and retailing fountain, pond, and waterfall supplies to the long-term relationships he built early on with his suppliers. Olson says:
A vendor’s primary goal is to sell their product and grow their market share. Over the years I have observed many companies like mine fail to create win-win opportunities for themselves and their vendors. They either fail to take advantage of offers that are available, fail to create new opportunities, or feel the need to try and "beat up" the vendor for pricing and terms. To truly be successful in negotiations one must understand not only their own business but that of their suppliers as well.
Price may not be the bottom line
As long as you're getting a price from your vendor that is close to market prices, you may not have a lot of room to negotiate on price. While it rarely hurts to ask — it's hard to negotiate better terms if you never even start a negotiation — it's worth thinking about what terms would really benefit you.
A lower price might not be the best deal. If, for instance, you can negotiate a trade term with a longer window in which to pay for the products you purchase, the price may not matter as much as if you have only thirty days to turn around payment. Think about what you really need in order to make the most money for your business. Of course, if a vendor offers you a price well above what you could expect to pay to another source for the service or merchandise you need, it makes sense to come back with a counter-offer more in line with market prices.
Focus on driving an equitable bargain, though. Getting the absolute best price can have consequences, especially if a vendor must cut corners in order to afford offering that price.
Think about the next few years
It's also important to think in terms of working with a vendor for years. If you're willing to take the focus of your negotiations off of price, your vendor may be more interested in working with you in the long run.
Phil Marcus, of NegotiationPro.com, has negotiated deals for clients as an attorney for more than 35 years. He offers a simple piece of advice for negotiating with any vendor:
Don't try to do what in Yiddish is called "hondling." That is, try to arrive at a fair price that allows the vendor to pay their bills and make a profit so they stay in business, rather than pressing and pressing for a cheaper price. Don't overpay, of course, based on what prices the commodity sells for elsewhere, but act like you want a long-term relationship and you will build one.
Relationships lead to exclusive opportunities
Because of Olson's relationships with his vendors, he's benefited in ways beyond improving the margin between the prices he buys his merchandise and what he sells them for. One of Olson's vendors offered him a private label option: the vendor manufactures products under its own brand as well as with Olson's brand, allowing Olson to sell two different products to his customers. The products are essentially identical, but Olson's customers are able to buy a product that has his name on it, which creates additional sales for both Olson and the manufacturer.
The ability to work together with your vendor allows you to create a team effort that can allow both of you to increase profits, no matter what price you've agreed on. It's worth asking your sales rep what opportunities your vendors can provide, especially as you work with him over time. Many reps will go the extra mile to let long-term customers know about special deals and programs.
There are ways to negotiate with vendors that will provide you with a financial incentive beyond a lower price, however. Especially if you're selling merchandise retail, many vendors will do what they can to help you sell products — and keep coming back to buy more. You'll have to look at what options would best be able to help your business, but many vendors will help if you just ask. Olson advices:
Have your vendor find your customers. Most manufacturers do not sell directly to dealers or installers. They are however, frequently approached by these potential customers and if you let them know you are receptive to working with them the manufacturer will often be in a position to send customers to you. If you don’t ask they generally will not think of it on their own. Many manufacturers and suppliers are happy to provide a link to your company's web site, list your company as a distributor of their products, pay for half or even all of your advertising for their products.
A few tips for price negotiations
If price remains a major consideration for you, there are some steps you can take to negotiate a lower price.
You have to offer something that your vendor finds worthwhile, of course: pre-payment or payment within ten days of delivery, for instance, can be useful in negotiating a price lower by anywhere from one to five percent.
Purchasing products in larger quantities can also help you negotiate a better per item cost. Many vendors will offer quantity discounts as a matter of course, but you may be able to negotiate even better terms.
However, it's usually easier to negotiate these lower prices if you have a long-standing relationship with your vendor, which just makes building a lasting agreement more important.
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