Negotiating the right deal with your suppliers doesn't necessarily mean getting what you want at the cheapest possible price.
You may want to negotiate other factors such as delivery times, payment terms or the quality of the goods.
Most business owners would view a good deal as one that meets all their requirements. But there are many other factors to consider, such as whether you want to do business with a particular supplier again.
Both sides should conclude a negotiation feeling comfortable and happy with the agreement. Negotiations can be unsuccessful if either side feels forced into a corner.
This guide sets out how to negotiate a deal, including setting your objectives, understanding your supplier's position and using the right tactics.
Setting objectives when negotiating with suppliers
There's a range of key considerations you need to bear in mind when setting objectives for purchase negotiations. These might include:
- value for money
- payment terms
- after-sales service and maintenance arrangements
- lifetime costs of a product or service
- whether or not the product or service is essential to your business
Before you start to negotiate, draw up a list of the factors that are most important to you. Decide what you are - and aren't - prepared to compromise on.
For example, if you're ordering supplies in bulk you might want to find a supplier that will offer you a discount. Or if you're investing in a complicated piece of computer software, you might want to make sure that training is provided as part of the deal.
The key is to establish your preferred outcome. But remain realistic - if you're not prepared to compromise, the negotiations won't get far. You should also consider what offer the supplier is likely to make and how you'll respond.
Remember that if you want to do more business with the supplier in the future, you should aim to strike a deal that both parties are happy with.
Although getting the best possible deal in the short-term is important, a good relationship in the future may help you get even cheaper prices or other perks, such as priority delivery. Don't underestimate the importance of good will.
Understand your supplier
By conducting some basic research into a potential supplier you can work out how valuable your business is to them. Your bargaining power increases in direct proportion to your potential supplier's need for your business.
If the supplier runs a near monopoly it is likely to have the upper hand because:
- it has enough business already
- you only have a few other sources to select from
However, if the supplier has a number of competitors - or is a new entrant to a particular market - you'll be in a much stronger position. Also, the supplier may already be offering good deals in a bid to increase its market share.
Alternatively, a supplier may need your business to get rid of old stock or to fill spare production capacity. Try to find out as much as you can about the state of its order book.
If you're a small supplier's main customer, your leverage in negotiations may be considerable. But tread carefully - if you push too far you may erode its goodwill, which could damage the service you get. There's also the risk they could drop the product you require, or even go out of business.
Try to identify the key staff in the supplier's business to negotiate with. There's no point trying to squeeze concessions out of a junior member of staff who doesn't have the authority to grant them.
Negotiating at the right time can be an important strategic tool. For example, a salesperson may need to meet a monthly sales quota.
Developing a negotiating strategy
It's essential to plan your strategy in writing before beginning negotiations. This will help you set clear goals and work out where you will draw the line and walk away from the deal.
Start by defining what your priorities are, such as low price, high specification goods or a specific delivery schedule.
Think about different offers the supplier could make and what you are willing to concede or compromise on. For example, you may decide that you'll only pay the full price in exchange for fast turnaround.
Write down your negotiating strengths and how you might use them to get the concessions you require. Consider ways of defending the weaker parts of your argument and negating the supplier's main strengths.
Once you've set out your strategy, it is also essential to get your negotiating team right. Make sure it has skills in all the necessary areas.
You'll need to ensure you match the seniority of the supplier's representatives. For example, you shouldn't send a junior account manager to bargain with their managing director.
Make sure each member of the team is familiar with your negotiating strategy. The more confident they sound about what they want, the more likely they are to get it.
Before you start negotiating, state the aspects of the deal you're happy with and the points you want to discuss. Ask the supplier to do the same.
Make sure both sides are satisfied with what is being negotiated. Get the supplier to restate any discounts offered and payment terms. Keep these key bits of information to hand.
If you have enough bargaining power, insist on using your own terms and conditions of purchase.
Do not indicate that there are things you're prepared to concede or compromise on too early in the negotiations. Try to give the impression you're approaching the negotiations positively without revealing your position.
For important or large purchases suggest setting out the key points of the deal in writing. For example, for the purchase of company cars, these might state your requirements, such as the make, year, model, the interior specification and delivery times.
You also need to be aware of common negotiating tactics. If the other party keeps referring to urgent deadlines or a person they need to confer with, remember they may be using pressure tactics. Use such tactics yourself with caution.
Don't allow pressure to force you into agreeing to a point you're not happy with. Ask for a break if you need one. Each time you agree to a point, clarify that you've understood it correctly and write it down.
In some trades, suppliers set artificially high prices that are then permanently discounted. If this scenario applies to your business then ensure that any concessions the supplier gives are real -negotiate discounts that go beyond the standard level.
Negotiating on price
Some price negotiating techniques will be familiar if you've ever bartered at a market.
Never accept the first offer - make a low counter-offer in return. The other party is likely to come back with a revised figure. Always ask what else they can include at the given price.
If the price is suspiciously low, ask yourself why. Are the goods of sufficiently high quality? Do they really offer value for money? What will after-sales service be like?
You can also try to make the asking price look high by exposing any ongoing costs. Ask about repair costs, consumables and other expenses. If the current state of the supplier's market means prices are falling, point this out.
If the price includes features you don't need, try to lower it by asking to remove those features from the deal.
Use your bargaining power to get a good deal. For example, if you're a big customer of the supplier, you could ask for bulk discounts.
But remember that if you squeeze the price too low - perhaps by threatening to walk away from the negotiations - you may end up getting a poor deal. The supplier may have to cut costs elsewhere - in an area such as customer service, which could prove costly to you in the long run.
Even if you are a supplier's main customer and enjoy most of the bargaining power, forcing it to meet prices at which it could go out of business won't protect your reputation as a highly valued customer. The supplier will soon look for other customers and is likely to feel resentful.
Running checks on your supplier
Before signing a contract with any supplier it's essential to carry out due diligence to check it can fulfil the agreement.
You should credit check potential suppliers to ensure they have the cash flow to deliver what you want, when you need it.
This is especially important if you're entering into a long-term contract. For example, if your supplier is the only available supplier of Customer Relationship Management (CRM) software you are installing, you need to be sure it isn't at risk of going out of business.
The supplier will probably also run checks on you to ensure you have the means to pay for its goods or services.
It's also a good idea to get references for the supplier from other customers. The supplier should be happy to put you in touch with some of its previous clients. If not, ask yourself what he is trying to hide. However, remember that he's unlikely to put you in touch with a dissatisfied customer.
Sometimes a manager in a business bids for contracts and then passes the account to someone else. If this is likely to be the case, make sure you're happy with whoever is being assigned to do the work - and that you'll be able to deal with the manager if any problems arise.
Drawing up a contract for your purchase
Once all the points have been negotiated and a deal has been agreed to it's best to get a written contract drawn up and signed by both parties.
Although verbal contracts are acceptable and legally binding, they're very hard to rely on in court.
Both parties should agree on what the contract will cover. Typically it will include:
- details of price, payment terms and delivery schedule
- a clause stating the supplier's right to ownership of the goods until they're fully paid for
- a clause limiting the seller's contractual liability - taking into account the purchaser's statutory rights
Depending on who holds the bargaining power in the negotiations, the terms and conditions used may be your own, the supplier's or a mixture of the two.
You should consider getting legal advice when drawing up your standard terms and conditions.
Aim to get a contract that protects your interests and that shifts legal responsibility for any problems to the supplier. Notify the supplier in writing how you intend to use its supplies and ask for written confirmation that what it is selling you is suitable.
It's a good idea to explicitly ask about any hidden problems and to keep a written record of all assurances given.
Make sure that your contract covers the level of after-sales service you require.
Build into the contract what will happen if there are any problems with the goods or services. For example, will the supplier replace individual faulty goods or the whole batch and within what time period? Agree on penalties for failure to meet delivery times or quality standards, such as a future discount.
You should also consider including any dispute resolution or exit procedures that must be followed if either party is dissatisfied with the relationship or wants to end the contract.
Original document, Negotiate the right deal with suppliers, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs