In many businesses, vendors and suppliers are common. Many times, you can’t operate a business without them. In spite of the fact that you may become friends with vendors and suppliers, you’ll still have to negotiate pricing, warranties, and service with them to keep your costs down and your profit margins high. Ultimately, the relationships you have with vendors and suppliers can help drive the success or failure of your start-up business. Therefore, you want to master the art of negotiation. You want to know how to get the best prices from suppliers and vendors in a way that is honorable and above reproach. You want to do so without burning bridges or harming anyone. So let’s jump right in and learn nine ways you can negotiate pricing.
Just like you, suppliers want to earn a profit. They probably depend on suppliers or vendors themselves. If you constantly “attack” their prices or bully them to decrease their production or delivery times, they’ll start to resent you. Who are you to question their earnings or attack their ethics? Are you trying to make money but expecting them to make nothing? That’s hypocritical.
Back in my landscaping days, I worked with a greenhouse nursery supplier in a start-up phase of her business. I knew that she was propagating (breeding, growing) some grasses and bushy ornaments herself. Yet, she was buying certain plants with long propagation periods from another nursery stock. Therefore, it wasn’t right to beat up her price points on Sego palms, for example, that she had to purchase for a premium from another supplier. However, she had a little bit more room to negotiate prices on the plants she was propagating.
So my first point is simply this. Don’t forget that vendors are trying to earn a profit just like you are. They want to do things that are honorable and above reproach, just like you do. Yet so often, I see business owners forget that suppliers and vendors are in business just like they are. They treat them disrespectfully or spitefully instead of respectfully. But as my momma always says, “You catch more flies with honey than you do with vinegar.”
Next, to negotiate successfully with your vendors/suppliers, you want to know who they are. Who are you talking to? What are they like? Do they have interesting personality traits? What do you know about their families? Do you know their personal or business goals? You see, the better you know your vendors, the more likely you are to “win” your negotiation. It’s been my experience that if you establish a connection with vendors, they are more likely to help you or want to help you.
Let’s go back to the plant supplier in her business start-up phase. I knew she wanted business from my landscaping company. If she could gain my business, she would establish instant credibility in the marketplace and attract other customers. I knew that because she and I had gotten to know each other before we ever got to the negotiating table. Therefore, when we sat down to negotiate prices and terms, I knew my advantage. I knew that she would reduce her prices in such a way that I couldn’t say no to using her products.
Now, the more you prepare for the task of negotiating, the smoother the negotiation will likely go. That’s Negotiating 101, folks. If you prepare for the negotiation, you’ll learn facts which could potentially help you. I’ll give you an example.
When I was working with the aforementioned plant supplier, I needed certain plants and grasses for the typical landscape style I drafted. Therefore, I did my homework. Many of my customers wanted azaleas, so I researched their costs. When I did my research, I found that her cost was about $1.50 per plant, which included costs for labor, mulch, and fertigation. Yet, she priced her azaleas to the public at $14 per plant. Therefore, I knew the markup involved.
Next, I looked at what other nurseries were charging for people in my position who were ordering tens of thousands of these plants every year. I discovered that the majority of other vendors charged $7 – $8 per 3-gallon plant. So when I went into negotiations with “my” supplier, I started at $5 per plant. Obviously, if I had been in her position, I wouldn’t have taken $5 for a 3-gallon azalea. However, we finally negotiated a $5.70 per plant cost, excluding licensed azaleas. Since I was prepared for negotiations, I “won” the contest, but she was able to make the money she needed, too.
Do you know what the vendor gains by providing you with supplies or services? In other words, what’s in it for the vendor? This is important to know. As you’re becoming friends with suppliers like in point #2, it helps to know their motivation. If you just listen as they talk, you can often identify their motivation which helps you prepare for negotiations.
I know certain vendors incentivize their sales staff by offering bonuses, vacations, or promotions to those who reach a certain dollar amount in sales. That’s motivation. Other vendors offer incentives when representatives sign new clients or sell a certain number of products. The plant supplier I was working with needed me as a reference. Gaining my business meant possibly garnering business from other landscapers in my area. Thus, her motivation was gaining my business for long-term proliferation of her business. On the flip side of that, my motivation was getting a fair price on a product so that I could turn a higher profit in my company.
To be fair to vendors and suppliers, you need to provide them with a realistic estimate of what you’ll need from them throughout the year. You don’t want to lie about this, but you can make assumptions as to the estimated amount of products you’ll need over during that time. If you’re ordering hundreds or hundreds of thousands of a particular product each month or each year, can vendors offer you bulk discounts or price breaks for high volume orders? Set your expectations so that vendors can prepare for your product and business flow. However, make sure the vendors don’t require you to meet your obligations for these special pricing points.
When I was negotiating with the plant supplier, I knew that I used a lot of Aztec Grass. Typically, I’d use about 100 Aztec plants per landscaping job, and my goal was to do 100 landscaping jobs per year. Thus, it was possible that I’d need 10,000 1 gallon Aztec plants. So if I purchased that many plants from her, what price point could she provide me? Now, I couldn’t guarantee that I’d order 10,000 plants, but based on my workflow, she and I knew I’d get close. Therefore, she dropped the price by $1 a plant. That’s not insignificant! I think we were at about $3 per plant. She dropped it to $2, which meant a possible $20,000 profit to me!
There’s another rule of thumb to follow when you’re negotiating with vendors and suppliers. Never accept their first pricing offer. That’s basic business. You don’t do it in real estate. You don’t do it at car lots, and you don’t do it in lawsuits. Whenever you’re selling your business, you never accept the first offer. That’s common. Now, obviously, there are exceptions. But as a general rule, you never accept the first offer. Be prepared for a counter-offer, though, or you may have the vendors come back and ask you for better pricing. Sometimes, you even have to be prepared to walk away.
When I ordered individual units from my plant supplier, she often attempted to raise my price, and I understood why. The market price moved very fast on plants, especially palm trees, and I would often have to position the conversation for a repricing strategy. Many times, I had to be willing to walk away and use a competitor. I had to.
No matter how much you like using a particular vendor, you must never limit yourself to one vendor or supplier. Don’t position the future success of your company on the back of one vendor. What if that supplier has a business glitch? What if the company has a production delay, and you need products now? What if you need one thousand widgets, but the vendor only has 500 in stock?
What if I had only used my friendly plant supplier? One time, I made a mistake positioning a particular product. All of a sudden, I needed 10,000 Aztec grasses immediately. There was no way she had that in stock. Thankfully, I had multiple suppliers at my beckon call who could help me fill that order, but think about what would have happened if I didn’t. How much money would I have lost by turning down that project?
Another good thing to do when you’re negotiating is to negotiate in the vendor’s off-season. Oftentimes, you can gain your best pricing during the supplier’s offseason. If you’re slow, they’re slow. That usually means they’re willing to offer better deals. Even if your business isn’t as cyclical as the nursery and landscaping business, it probably has slower periods at some point during the year. For instance, if you’re working with school-based businesses, summertime is a good time to negotiate because school is not in session. Yet, if you work in the pediatric dental field, you probably wouldn’t negotiate for better deals in the summertime because that’s when all the kids are going to the dentist. Remember, the school’s not in session.
In my landscaping business, I would have been foolish to ask my plant supplier for a decrease in pricing in the heat of the spring or summer. That’s the busiest time for a nursery. It’s when their work from the fall and winter is coming to fruition. That’s when they’re going crazy, delivering jobs all over. However, in the fall, after the rush of planting is done and when the average consumer’s mind is far away from their landscape, the nursery suppliers often had their weakest sales months. That was often the best time to negotiate pricing.
Finally, you have to know when to back down. You know, I always want to be the customer with which the suppliers look forward to doing business. I want to pay on time and be pleasant to work with. I don’t want to be “that” customer that we all hate to see coming. You know those customers. You almost have to put on a suit of armor to get prepared for that customers when he walks through the door. No, I don’t want to be that guy.
Go back to point #1: the supplier is in business to make money, just like you. The vendors are trying to feed their families, just like you. They’re trying to turn a profit, just like you. So whenever you’re negotiating with your vendors, you want to be fair. You don’t want to attempt to steal their time or profits. Inevitably, then, sometimes you have to back down.
I want to leave you with a quote from John F. Kennedy. He said, “Let us never negotiate out of fear, but let us never fear to negotiate.” Yes, negotiating can be scary, but it’s necessary for helping control costs in your new business. Trust me, learning how to get the best prices from suppliers and vendors comes with practice. It will get easier in time.
Next Article in the Series: Developing your new business’s marketing plan.