Negotiating with suppliers

Thursday 16 February, 2012

By Duncan Heaney - duncan@consumerchoices.co.uk

Businesschoices.co.uk gives you some tips on how to get what you want from negotiations with suppliers.

We don’t always get what we want in life, but that doesn’t have to be the case when dealing with suppliers. It all depends on how you approach negotiations.

Discussions with suppliers are rarely straightforward. Whether it’s a small one-time order or an ongoing contract, negotiations are always a big deal.

Making a deal you’re completely happy with isn’t always easy, but there are ways to increase the chance you’ll be satisfied with the final agreed terms. Whatever you want in return, preparation and a positive attitude are key.

Before you start negotiating with a supplier, you need to make a shortlist of potential candidates. The Businesschoices.co.uk guide to choosing a supplier should help.

When you’ve found some suppliers you want to work with, negotiations can start. While it’s important to get a good deal, you shouldn’t focus too much on price. There are other important factors to consider, such as quality, delivery times and payment plans.

There’s no one correct way to conduct negotiations. You need to vary your approach based on who you’re talking to, what your objectives are, how long term you want the relationship to be, and what other options you have available to you.

However, it’s important to ensure both sides are comfortable with the results of a negotiation. If not, the deal could fall through or you could encounter problems down the line - for example being forced to negotiate new terms.

But before that - before you get into discussions even - you must have a good idea of what you want the deal to achieve.

Know your objectives

When first choosing which suppliers to speak to, you need to consider a number of factors, including:

• Price
• Delivery times
• Quality
• Reliability
• After-sales support
• Payment terms
• Lifetime costs

Before you start hammering out a deal, you should know which of these factors matters the most to your business, and where you’re willing to compromise if necessary.

For example, if you work in a time-critical market, where getting products to customers quickly is vital, you’ll want a supplier that can guarantee fast, reliable delivery. Or if you’re spending money on IT systems, you might want to ensure that tech support and training are provided as part of the deal.

It’s important to remember that you can’t always have everything. If you want a negotiation to be successful, you need to be willing to compromise. For that reason, it’s a good idea to list the factors that matter to you in order of importance. That will help you find things you can be flexible on.

Know your supplier’s objectives

When it comes to a negotiation, knowledge isn’t just power - it’s a weapon of mass destruction. A bit of research can tell you a lot about a supplier and put you in a stronger position when it’s time to hash out a deal. For example, looking at the number of competitors a supplier has lets you understand just how important your business is to them, and puts you in a stronger position.

Research can help you get an idea of a supplier’s objectives too. For example, if the company is a new player in a competitive market, it might be more willing to negotiate on terms than a more established business.

One thing you should definitely look up is who the key decision makers are within the supplier's organisation, and negotiate with them directly. A junior salesman is unlikely to have the authority to compromise, and deals can be delayed or even derailed entirely, as the requests are sent up the ladder to those who can approve them. It’s better to involve people with the authority to agree to concessions from the beginning.

Time’s something else you should be aware of. Before you contact a supplier, you need to know when the right time to contact them is. For example, a salesperson nearing his or her monthly quota will likely be hungry to do a deal, and you can use that to your advantage.

Develop a strategy

The application process consists of three phases:

1. Preparation is the key to a successful negotiation - before you meet representatives from the supplier you want to work with, you need to come up with a plan. Writing it down is helpful because it forces you to define clear goals and tactics.

The first thing you should do is write down what your priorities are. Is speed more important than quality? Are you willing to sacrifice reliability for a more favourable payment plan? Make sure you know what the most important areas of the negotiation will be, so you can make sure they are what you need them to be in the final deal.

It’s also useful to consider potential offers the supplier might make. This is where your research and preparation comes into its own. It’s possible to pre-empt some things, giving you the time to counter them, or work out where you can compromise to accommodate them.

2. Remember that compromise is essential - you will have to give a little in some areas. You should make sure you know where those areas are, and how much of a concession you’ll be willing to make. Write this into the plan - if it’s there in writing, you’re less likely to give too much away when you’re in the midst of intense negotiations.

3. Finally, plan your argument - if you’re unwilling to compromise in any areas, make sure you have solid reasons in place to explain why. Putting this down on paper helps you to locate weaknesses in your argument, and strengthen these areas. Consider the suppliers’ possible arguments too, and think of ways to counter them. Remember, there’s no such thing as being too prepared.

Develop a team

If you’re going into a negotiation, you might want to take in a team. Pick people with skills in all the areas you think you will need to cover. You should also attempt to bring in people that match the seniority of the contacts you’ll be meeting from the supplier. Things may get off to a bad start if you send a junior account executive, and the supplier sends its vice-president.

Whoever you pick for your team, make sure they’re prepared. You should all know your plan forwards, backwards, and sideways. It’s important for everyone to sound confident - the more you sound like you know what you want, the more likely you are to get it.

The negotiations begin

When you meet your potential supplier, state clearly what parts of the proposed deal you’re happy with and where your areas of concern are. The supplier should do the same - it’s important that the deal starts positively. Be careful not to tip your hand though - you don’t want to give the supplier time to counter your arguments before you make them.

It’s also not a good idea to let the supplier know how much you’re willing to compromise in the initial stages of discussions. Your pre-planned concessions should be used in exchange for concessions from the supplier. Never give anything away without getting something back.

Make sure the deal opens with a starting price, and find out about available discounts early in the talks. What you don’t want to happen is to find yourself making compromises for discounts that were already available.

Most important of all, be confident. If you’re a small business, it’s easy to assume that you don’t matter to a supplier - you’re inconsequential. That couldn’t be farther from the truth - businesses grow over time, and even if orders are small now, a supplier could have a significant customer within a few years. Make sure salespeople understand that your business has that potential, and it’s an extra point in your favour.

If you’re dealing with salespeople, it’s also worth remembering that for all their bluster and claims, they’re arguably under more pressure than you are. They’ll have quotas to meet and bosses to impress, which puts you in a stronger position.

Make sure the price is right

Here’s rule one: never accept the first price given. Instead, counter it with a lower offer of your own. It’s unlikely the supplier will accept this, and they’ll come back to you with a revised figure.

You shouldn’t start hammering out the details of a deal until you’re happy that the price is in the general area you’re willing to pay. When it is, you can start negotiating for extra discounts and additional services for the price.

A good tactic is to investigate every element of a deal. For example, if the price includes features you don’t need, you can see if you can get rid of them for a more favourable price. In addition, exposing the financial value of each element that makes up a service can make the price seem much higher, and you might be able to negotiate significant discounts as a result.

It’s also worth letting the salesperson know that you understand their market. For example, if your research shows prices are going down, point this out. It puts you in a good position if a salesperson isn’t quite sure how much you know about his or her company and industry - they’re less likely to try to get away with exaggerations.

If the price the supplier offers is unusually low, think about why that might be. Is the quality up to scratch? Perhaps delivery is a problem, or after-sales support is poor. Remember, it’s easy to get caught up in haggling on price, but other elements of the deal are equally important.

You should also be careful of pushing prices down too low. Playing hardball is often effective - walking away from the deal unless they drop prices further for example - but it’s possible to go too far. If prices go too low, the supplier is likely to cut costs elsewhere, potentially to your detriment. Worse, it’s unlikely to be fully committed to the relationship, and might even be resentful. If so, it will look for other customers, potentially your competition.

Common negotiating tactics

A common trick used by salespeople is to continually reference urgent deadlines or people to confer with. These may well be pressuring tactics, so be on your guard, and don’t let yourself be manipulated into agreeing to terms you’re not happy with.

Remember - you can always take breaks to clear your head, and ponder what has been discussed.

Sometimes suppliers will also set prices that have been artificially raised. You should be careful to ensure that any discounts the supplier offers are real, rather than just setting the price to the standard level.

The best tip we can give is this: write everything down. When a key point is agreed, get it in writing to solidify it. It will make it much harder for the supplier to wriggle out of later in the discussions.

Draw up contracts

When a deal is made, you should always get the terms written up in a contact. This is important because, while verbal contracts can be legally binding, they’re very difficult to prove in a court of law.

The contract should cover:

• Price
• Payment terms
• Delivery plans
• A clause that states that goods belong to the supplier until paid for
• A clause limiting the supplier’s contractual liability - this should also consider your statutory rights
• What happens in the case of faulty goods or failed deliveries - for example, setting timelines for replacements, or penalties for missed deliveries

When the contract is being drawn up - either by you or the supplier - you should get legal advice to make sure all the terms and conditions are fair and legally binding. You should also make sure that the contract states that the supplier has legal responsibility for any supply-related problems.

The contract should cover the level of after-sales support you get. Most suppliers will give you a service level agreement (SLA) that defines the quality and responsiveness of the support you will receive.

Further information

For more information about negotiating with suppliers, the government’s Business Link website offers a wide range of resources.

To learn more about choosing your suppliers, read the Businesschoices.co.uk guide.