The latest Farmers Insurance commercial shows a ram butting his head against his own reflection on a truck door. Well, negotiating price sometimes feels like you’re a ram and the other person is the truck door.
The seller may have a preconceived idea of what the price should be based on the market demand, his raw material, manufacturing costs and his target margins. The buyer, on the other hand, has shopped the market and knows what he is willing to pay based on his budget guidelines.
Depending on who opens the negotiation, the history of the relationship and the urgency of the need, the head-ramming begins.
If the buyer goes first, he sets the tone by stating, “This is the price I need” or “I can’t pay more than this price.”
If the seller goes first, she may inquire as to the price the buyer is looking for. Sellers usually don’t like to anchor the price range by stating a price. They also may ask, “How many units would you require and when would you expect delivery?” If the unit price varies based on volume, the seller may be able to offer a lower price if the buyer commits to more units.
As you can see, this is a multi-variable negotiation. We are not just talking price, but volume, a delivery schedule and potential long-term agreements.
When I was a director of purchasing at a major New York department store, we tried to have as many annual agreements as possible to guard against price increases. In fact, the retailer’s agreements stated that if there was a price increase, it could release one last shipment at the contracted price. This permitted a more accurate budgeting of expenses. The company’s largest annual agreement was for gift boxes. Almost ninety percent of the order was consumed in the weeks between Thanksgiving and Christmas. It took the company’s three vendors all year to produce the quantity it required. Due to fashion trends and hot gift items, no doubt the company would run out of a size and require a reorder. That was always a separate negotiation.
I learned from my vendors the keys to achieving the best price. Considering set-up time for each size, volume was the major driver of the lowest price. The longer the run, the less the set-up cost impacted the final price. Sizes were added over the years that were similar, so the company combined sizes and extended the runs, thereby lowering the price per unit. The company used the same strategy with merchandise bags, its second largest expense.
Delivery was the next challenge; the retailer always wanted to aim for a full truckload to each location to minimize freight costs. Lastly, the company’s annual gift box requirements were sent out to a number of local manufacturers for bid, thus elevating the level of competition in the market. It also made it known the retailer was open to any suggestion that would maintain quality but reduce its costs.
Rather than being the ram in the commercial, we chose to work collaboratively with our suppliers to find ways to reduce their costs and ultimately, the company’s price. There was no butting of heads; we were determined to find win-win solutions while maintaining strong business relationships.
Cary Silverstein, MBA, is a writer, speaker and community volunteer who splits his time between Scottsdale, Arizona and Fox Point. He is the co-author of the book “Overcoming Your NegotiaPhobia,” and can be reached at (414) 403-2942.