Small businesses are typically at a disadvantage when trying to lower pricing. After all, they are rarely their vendor’s number one priority and typically aren’t able to use economies of scale to lower pricing with large volume orders. However, there are some simple and straightforward approaches to reducing vendor pricing. It starts with the understanding that offering concessions to lower pricing is a viable strategy to reducing purchasing costs. What are concessions and how can small businesses best use them when trying to negotiate a lower price?
Understanding Concessions
Concessions form the basis of the ultimate “what if” scenario. Essentially, they are a company’s way of giving something up in return for something else. Within every negotiation, each side has concessions. Some negotiators are proactive and write these concessions down before entering a negotiation, while others merely go point-by-point in an aimless pursuit of getting what they want. When looking at vendor negotiation, small businesses must be proactive and determine their own set of concessions. It’s these concessions that ultimately form the basis for negotiating that lower price.
Don’t be Afraid to Use Concessions!
As a salesperson, I’ve come across a myriad of different negotiators. Those who were proactive, and had their concessions ready, always did better than those customers who merely “winged” it. When using concessions to lower your company’s purchasing costs, it’s essential to have those concessions ready and to use them properly. Start with those concessions you deem to be the least important and progress forward. Match a concession for a concession and most importantly, don’t be afraid to be the first party to offer that concession.
The hardest customers to service are those who refuse to participate in the process. Instead of being proactive, they sit back in the hopes that by saying nothing, the vendor will offer the best possible price. This approach doesn’t work and while silence is a powerful negotiation tactic, it is only useful when used intermittently within the negotiation.
- Match concession for concession
- Don’t be afraid to offer the first concession
- Offer least important concessions first and then move forward
- Use silence only when the conversation is ongoing
Possible Concessions for Small Businesses
As mentioned, your small business likely doesn’t have the purchasing volumes to demand the best pricing. However, this doesn’t mean you can’t use several inherent advantages that come with being a small business. To give you some idea of what these advantages are, think of what your vendors typically try to get as concessions from your business.
Your vendors will often ask for larger volumes, more opportunities to sell other products, faster payment, or even contractual supply agreements to help support their inventory. So if you know they’ll ask for these during the negotiation, your job is to anticipate these requests and even use them to your advantage. What does this involve? Well, if you match concession for concession, you should be able to use them to help drive down your purchase costs by offering them in return for lower pricing.
- Prompt Payment Incentives: Granted, managing a small business is fraught with issues and it’s not reasonable to expect that you’ll be able to prepay all your orders. However, when cash flow isn’t a concern, use that strong cash position to lower your company’s purchasing costs. Prepaying orders, or pursuing prompt payment incentives like net-10 day 1% discount on invoices, is a powerful way for you to reduce your purchasing costs.
- Larger Volume Orders: Managing an inventory is never easy and there is always the concern between purchasing too much or too little. When confronted with the choice of higher purchases for lower pricing, make sure to factor in your company’s inventory holding costs. There is an inherent trade-off between reducing pricing by purchasing more, and holding inventory for extended periods.
To learn more about the strategies in the above video, and to become an expert at measuring inventory holding costs versus larger volume purchases, please read: Sample Excel Sheet for Freight Costing & Inventory Cost Reduction
- Offering Other Opportunities: A number of vendors need to work with customers whom they can call partners. Large or small, they often look to customers who are willing to test and approve new product developments. Often they just need some valuable input and your small business can provide that for them. Don’t be afraid to express interest in purchasing other products.
- Contractual Supply Agreements: Most vendors should be willing to hold inventory for customers. However, the only way that can happen is if customers accept the liability and costs of entering into a contractual supply agreement. If your small business isn’t shy of taking on additional responsibility, then perhaps using these agreements to lower purchasing costs, is the way to go. Just remember, contractual agreements imply you own the inventory. Make sure to respect your portion of the agreement.
To read more about running a contractual agreement on supply, please read: Supply Chain Management: Running a Better Supply Agreement
When it comes to small business vendor negotiation, keep in mind the simple rule of offering a concession for a concession. Understand that concessions are simply “what if” scenarios. Come up with your own list of concessions and make sure they are applicable to your company’s strengths and your business model. In addition, don’t be afraid to get the negotiation going by being the first to offer a concession. Start with those that are least important to your company and always make sure you get something in return. Last but not least, don’t be afraid to be a part of the process. Staying quiet in the hopes that your vendor will magically offer you their best pricing, isn’t a strategy that consistently produces results.
To read more about matching concessions for concessions in negotiation, please read: The Role of Concessions in B2B Sales Negotiation
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