When it comes to negotiating the right deal with your suppliers, it doesn’t always have to be based on getting what you want at the lowest possible price. Far from it.
There are other benefits you may want to negotiate – sometimes at the cost of a higher price. Like extended payment terms, priority delivery, a greater service offering, additional inclusions and certainly a more favourable quality of products or goods.
Negotiating with suppliers can be a tricky business. There are many factors to take into account. With that in mind, here are some further tips on how to negotiate a deal which includes setting your objectives, understanding your supplier's position in the market and most importantly, using the right strategy to meet your desired outcome.
Review Data And Identify Objectives
The preliminary work to analyse your requirements is key to a successful negotiation. To go in blind and hope for the best outcome would be naive. To avoid this, you should consider how your interactions with the supplier have transpired in the past:
- Have you been buying the products/services that are discounted in your contract?
Perhaps the supplier has provided discounted rates on items that you’re not actually buying. You may offer to remove these from the rate card, to allow for a better rate on a product that you are using in higher volume.
- Has the agreed rate always been honoured?
If your average price paid per product unit is sitting higher than the agreed supplier rate then perhaps the supplier hasn’t been honouring the rate card. If the product selling environment is based on availability and demand, it’s possible this could be simply because the availability has been low. Whatever the reasoning, the result provides a negotiation lever as the supplier has failed to honour the contract.
- Are there products that you’re buying from the supplier that aren’t being discounted currently?
These should be marked for consideration in the negotiation. If they are big ticket items, then you certainly would want them included in the next contract.
- Is you current deal best suited to your purchasing habits?
Perhaps your agreed rate is only available 30 days in advance, and your data shows that typically your purchases occur inside this period. You may want to negotiate this condition, or alternatively make promises to change your buying behaviour in return for a more competitive rate as an incentive. In general, this strategy is a win/win – enabling lower risk for the supplier, and greater incentive for you to initiate change.
- Does this particular supplier best support your requirements?
If the supplier covers only a small portion of products and services that you buy in this category, perhaps it may be worth considering another supplier to service your requirements instead?
- Are there new products or services added after the contract was executed, that you’ve been purchasing?
You may like to consider requesting these for inclusion in the new contract, and potentially negotiate these in replacement of some products you’re buying in lower volume.
Once you have intel above, you can start to position your objectives around the buying behaviours outlined in the data.
Before you set off to start wrangling with your supplier, there is a range of key considerations you need to have top of mind when setting objectives for purchase negotiations. They might include price, value for money, delivery and payment terms. It could be after-sales service and maintenance arrangements. Quality is vitally important. There are also lifetime costs of a product or service. And whether or not the product or service is essential to your business.
Before you start to negotiate, draw up a list of factors that you see as important to you. For instance, 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 ensure that training is part of the deal.
Review The Market
It’s a fairly simple process to gain some research into your potential supplier. By doing this you can work out how valuable your business is to them. Your bargaining power also increases in direct proportion to your potential supplier’s need for your business.
If you find that your supplier runs a near monopoly, it is likely that they will have the upper hand because they have enough business already. But if the supplier has some real competition, or is a new player in the marketplace, there’s no question that you’ll be in a much stronger position. Another point is that the supplier might be already offering some excellent deals in a bid to increase market share.
If you’re a small supplier’s main customer, that’s a different story. Your leverage in negotiations could be considerable. But be careful. Pushing too hard may erode any goodwill that has been established 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.
A good plan of attack is to try and identify the key staff in the suppliers’ business to negotiate with. There’s no point in trying to squeeze concessions out of a junior member of staff who doesn’t have the authority to grant them.
Consider these key questions in better understanding your negotiation power:
- Do you have access to any benchmarking on market rates for the same product/services?
- Could another supplier provide the same product or service?
- Do you have a unique or compelling offering in this negotiation that may give you bargaining power?
- Are there any new entrants into their market that may pose significant threat to the security of their position?
- Is there any rivalry with competitors that could be leveraged to your benefit?
- How sizeable is your business amongst this supplier’s portfolio?
- What is the benefit to the supplier in retaining or attaining your business?
- Are there any mutual interests that could be optimised in this negotiation?
Evaluate each of these questions, identifying whether each factor is a positive or negative in your favour.
Alternatively, consider modelling your evaluation on the Porter’s Five Forces model, which encompasses a similar approach:
Creating A Negotiation Strategy
Before beginning negotiations, it’s vital to put pen to paper and plan your strategy. It will help you to set goals and work out where you stand when you have to draw the line and walk away from any deal. You can begin by establishing what the priorities are, such as low price, high specification goods or a specific delivery schedule.
Give some thought to different offers the supplier could make and what you are willing to concede or compromise on. A good example of this is you may decide that you’ll only pay full price in exchange for fast turnaround. That should test their service capabilities. 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 strength.
A key component of negotiations is to establish your preferred outcome. You should remain realistic because if you’re not prepared to compromise, negotiations won’t move forward. Consider what offer your supplier is likely to make and how you’ll respond to it. Remember, if you want to do more business with the supplier in the future, you should strike a deal that both parties are happy with. Getting the best deal possible is naturally important in the short term, but a good relationship in the future may help you get even lower prices or other perks, such as priority delivery. So don’t underestimate the importance of good will.
- What is your ideal outcome?
- What are your must haves?
- What are your nice-to-haves?
- What are your negotiation levers?
- What are you willing to give/concede? i.e. Longer contract for better rate?
- What are you willing to lose?
- Are there items you can put forward that will support the supplier in meeting their objectives? - i.e. Consolidate to one supplier to increase volume, influence key stakeholders/decision makers/influencers to agree to a purchasing strategy more beneficial to the supplier
- If you can’t get what you want, is there an alternative offering that is acceptable to you?
By understanding your ideal outcome and your walk away point, you give your team clear boundaries during the negotiation. In theory, both parties come to the table with a scalable outcome in mind. Your ideal outcome (or MDO) will likely be their least favourable (or LAA), and vice versa. However if there is a level of crossover in the area between each of those positions, there is, in effect, an opportunity for agreement. The trick is to establish this point of intersect without revealing your cards.
Table One: Opportunity for Agreement
MDO: Most Desirable Outcome
LAA: Least Acceptable Agreement
Sometimes between two parties, the objectives are not aligned, in which case there is simply no opportunity for an agreement:
Set The Scene
The moment you have your strategy in place, it’s time to get cracking and get your negotiation team on point. Make doubly sure they have all the skills, in all the right areas. You’ll need to ensure you match the seniority of the suppliers representatives. For instance, you shouldn’t send in a junior account manager to bargain with the managing director. That would be highly embarrassing. Make sure that each member of the team is familiar with your negotiating strategy.
Like any play, there is a set. Like any dance, there is a costume. Similarly, in a negotiation there is a level of performance involved, which can influence the outcome substantially. Some tactics to apply pressure include:
- Good cop, bad cop:
One member or your team may take a more aggressive approach, while another retains a more likeable persona in order to influence the supplier according to how they best respond
A small room may add perceived pressure to the situation. By contrast, a large boardroom may also provide an intimidating backdrop for a negotiation
- Number of attendees:
You will certainly want to ensure you have as many or more attendees than your supplier brings to the table
- Delay tactics:
Establish power by taking a relaxed approach to the agreed meeting time
Agree in advance on power plays such as generalising, association and name-dropping, which can create an intimidating environment and therefore apply pressure
Your team may wish to create a pretense of limited authority, in order to remain non-committal and enable uncertainty on supplier side
And in the reverse, it is important to prepare your team to identify and respond appropriate such tactics played out by the supplier!
Getting Negotiations Underway
Before you kick off negotiations, state the parts of the deal that you’re happy with and the points you’d like to discuss. Ask the supplier to do the same. Make doubly sure that both sides are satisfied with what’s been negotiated. Also, have the supplier restate any discounts offered and payment terms. If you have enough bargaining power, insist on using your terms and conditions of purchase.
Remember this. Don’t indicate that there are things that you’re prepared to concede or compromise on too early in the negotiations. It’s a very smart idea to give the impression that you’re approaching the negotiations positively without revealing your position. And if large purchases are involved, set out the key points of the deal in writing.
There are some trades where 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 you are real negotiated discounts that go beyond the standard level.
Pay attention throughout the session to both visual and verbal queues. In general people respond when you mirror not just their body language, but also their verbal language patterns - effectively demonstrating you speak their language. For example, in neurolinguistics, a typical auditory personality will use phrases like “this really resonates with me” or “…”. Appropriate phrases to get this type onside are “I hear you”, or “how does this sound?”.
A Visual type personality will use phrases such as “I see”, “I really don’t see how we can offer that”, or “In my mind’s eye”. Responses such as “Let me put some colour around that for you”, and “Can we focus on this area” will speak their language.
Another type is the kinaesthetic, who focus on phrases around touch such as “Can we just touch on this?” or “I can’t grasp the idea". Useful phrases to adopt when engaging with a kinaesthetic personality type are “how does this grab you?”, “Just to smooth things over” and “that’s far too abrasive”.
- Clearly outline your priorities and objectives to the supplier at the beginning of the session
- Start boldly - be prepared to give power away over the course of the negotiation
- People will make allowances if they like the person they are dealing with - it’s important to be friendly
- Don’t allow emotions into the room - showing emotion in a negotiation gives the opponent power
- Ask for a break if you need one
- Every time you agree to a point, clarify that you’ve understood it correctly and take notes.
Review Proposal, Analyse Impact, Provide Feedback, Repeat
Now we’re getting down to the nitty-gritty. Never accept the first offer. Make a low counter offer in return. The supplier is then likely to come back with a counter offer. Always ask what they can include in the price. Now if the price is surprisingly low, ask yourself why. Run these questions through your mind. Are the goods on offer of sufficiently high quality? Do they really offer value for money? And what will the after sales service be like?
Another good tactic is to 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 suppliers market means prices are falling, point this out.
If the price includes features you don’t need, try to lower the price by asking the supplier to remove these features from the deal. Remember, use your bargaining power to get a great deal. This should occur if you’re a main customer of the supplier, and it’s where you ask for bulk discounts.
Alternatively, look at how you can change behaviour for a more conciliatory approach. Are you able to make changes within your business that support the objectives of the supplier? For example, introducing a new process or policy around what and how you buy?
Or perhaps you might consider offering the supplier sole provider status in order to attain a more competitive price?
Take note. 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 like customer service which could prove costly to you.
Formalising An Agreement
Once all the points have been agreed upon, and the deal has been struck, get a written contract drawn and signed by both parties. It should contain what’s agreed upon, details of price, payment terms and delivery schedules and a clause stating the supplier’s right to ownership of the goods until they are fully paid for. Plus, a clause limiting the seller’s contractual liability – taking into account the purchasers statutory rights.
You should get legal advice when drawing up your standard terms and conditions. Aim to get a contract that protects your interest and that shifts legal responsibility for any problems to the supplier. Make sure the contract covers any after sales service that you require. Build into the contract what will happen if there are any problems with the goods or services. You should also consider including any dispute resolution or exit procedure that must be followed if either party is dissatisfied with the relationship or wants to end the contract.