Buy low, sell high: it’s the basic concept of generating profit. Doing this consistently to grow a healthy business, however, is easier said than done.
Purely focusing on buying at the lowest price can lead to issues which will add unforeseen costs and significantly impact or, at worst, end up costing you!
In this article we provide 3 points for you to consider when negotiating price with your supplier in order to reduce risk.
Calculate your maximum buying price
Different sources will tell you different formulas for working out your costs and potential profits. You’ll want to work out your maximum buying price based on how much you need to earn to keep you financially incentivized to continue the business (assuming all costs and operations are optimized). This will be your upper limit. Any quotes you get which are higher than this you can let the supplier know they’ve exceeded your budget. Even if you don’t plan to move forward with a supplier you can still learn more details about your product by having a dialog with them.
Scan what’s available, understand the cost
Don’t believe the prices shown on vendors listings. These almost always are exceptionally low to get your attention and the actual price will be different once you make an inquiry.
You’ll need to contact suppliers directly and provide details about your product to obtain an accurate quote (or have Checkpoint do this for you). There are many factors which impact price such as materials, labor, R&D, sales, marketing and service (we’ll go deeper on this topic in another blog post). Assume you are buying a commodity product where the R&D cost, materials and labor are consistent across suppliers. So the only variable left are costs related to sales, marketing and service.
The costs of sales and marketing contributed to you finding and making an inquiry with the supplier in the first place, so this investment is money well spent by the supplier.
As for service, it’s reasonable to assume that responsive, proficient English-speaking sales staff cost the supplier more than entry level sales staff with poor English. There is certainly value in service, so it can be worth paying a reasonable premium over a lower cost option with poorer service.
Don’t ask for arbitrary discounts
If a vendor’s business is healthy and your order is relatively small for them you don’t want to push hard for a discount. If you request a discount either they don’t provide the discount or they take the order and reduce their cost, which could mean sacrificing product quality. Either way you look like small potatoes for asking in the first place. If the supplier’s price is too high then simply tell them you need to order from a competitor because their price is prohibitive. Let them offer a discount without you having to ask.
Product cost is certainly one of the most important factors of maintaining a stable business, but pushing for discounts on small orders before a relationship is built is a short-term, high-risk strategy. Focus on understanding actual costs (to your supplier) while building a healthy, stable business, and you can then rationally ask for discounts as your business volume grows.
