written by Cary Silverstein
The latest Nationwide 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 would set the tone by stating “this is the price I need” or “I can’t pay more than this price”. If the seller goes first, he 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 may also ask, how many units would you require and when would you expect delivery? If the unit price varies based on volume, he may be able to offer a lower price if you commit for 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, our agreements stated that if there was a price increase, we could release one last shipment at the contracted price. This permitted a more accounting of expenses. Our largest annual agreement was for gift boxes. Almost ninety percent of the order was consumed in the weeks between Thanksgiving and Christmas. It took our three vendors, all year to produce the quantity we required. Due to fashion trends and hot gift items, no doubt you 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 we combined sizes and extended the runs, thereby lowering the price per unit. We used the same strategy with merchandise bags, our second largest expense. Delivery was the next challenge; we always wanted to aim for a full truck load to each location to minimize freight costs. Lastly, our annual gift box requirements were sent out to a number of local manufacturers for bid, thus elevating the level of competition in the market. We also made it known that we were open to any suggestion that would maintain quality but reduce our 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 our price. There was no butting of heads; we were determined to find win-win solutions, while maintaining strong business relationships.
Cary Silverstein MBA has extensive experience in business, vendor and labor negotiations. Cary earned his BA in Political Science and Industrial Psychology from CUNY’s Queens College. His MBAs in both Marketing and Organizational Behavior were awarded by The Arthur B. Roth School of Business at Long Island University. He attended Marquette University in Milwaukee and was awarded a Certificate in Labor Management Relations. Cary has also attended advanced negotiation training at Harvard’s Program on Negotiation (PON).
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