4 Simple Strategies to Save Money When Picking Business Vendors
As you build your business plan for your small business, you will become more aware of what you require for that operation to run smoothly and successfully.
Vendors are an important part of that picture, because no business operates entirely self-sufficiently. Even if you’re at the early stages of your business planning, and thus your stock and volume requirements might be guesses on your part at this point, it’s not too early to begin working on obtaining aggressive pricing from vendors.
To that end, here are four strategies you should be doing when selecting business vendors to save your business money.
Listen for Highly Pushed Items:
When hearing a vendor’s pitch, listen to what items or services he pushes with particular gusto. Particularly if these aren’t central to the product that he is selling.
If you hear something, it’s typically the highest margin product, and one you probably want to avoid. For example, when shopping for hardware at BestBuy the salesperson will always push the extended warranty. Why, because it has a 200% margin, whereas most BestBuy electronics have margins in the single digits.
While the clear answer in this situation is to say no to the extended warranty, this same logic holds true whenever negotiating with a vendor.
Discuss Volume-Based Price Discounts Early To Discover Vendor Margin:
When discussing pricing with a vendor, whether they are a service or product provider, ask about volume discounts. Ask what pricing they could give you if you were able to purchase at volumes 10x what you think you can actually realistically need, and see if there’s a substantial discount in pricing.
The goal here, is less about trying to get a volume discount down the road (although that’s great) it’s more about discovering how much margin there is in a particular product.
For example, if they tell you that ordering at 10x the volume can get you a 40% discount, then you know that the cost of goods sold or underlying service cost is at most 59% of the retail price.
Now that you’re armed with the information that the vendor is still profitable on that individual item at a 40% discount, you can try to negotiate some of that discount for your individual purchase.
Price Compare Openly: The most obvious technique is also one of the most effective. Before selecting a vendor, find out who two of their competitors are. If you think you want to use vendor A, get a price from vendor B and C first.
Be open and tell B and C that you’re going to get three bids first and that you’re telling all three companies the same thing, that way they’ll know they need to get aggressive from the get-go. Then take the cheapest of those two quotes, and get your quote from vendor A.
If A doesn’t beat the cheapest quote, show them that quote and tell them you need them to beat it by 5%. If he doesn’t you’ve learned where the floor is in pricing, whereas if he does, you know there’s yet more margin hidden there.
No Competition? Then Compare Resellers:
How do you get comparison price quotes if you already know which vendor you want to use, or worse, if they’re the only significant vendor that provides that service or product? The answer is to look for resellers and approach them independently for quotes. Often resellers, particularly of high margin products, are given considerable latitude to package and price the product or service, and often choose to do so in dramatically different ways.
For example, the largest credit card processing company is First Data and they have some proprietary hardware that make them largely without competition when it comes to providing credit card processing for small businesses that want to offer gift cards. Thus, if that was the situation you found yourself in, you’d seemingly have to accept First Data’s pricing without being able to negotiate.
However, if you first look for resellers of First Data you’ll find that Wells Fargo Bank and Bank of America are simply reselling First Data’s processing services, but via their own salespeople. Thus, you can get three different bids for the same exact service and product, and use those companies to bid against one another and give you cheaper pricing.
Aggressively shopping for better vendor pricing is one of the least sexy things that a small business owner can do. Saving 5% on a large vendor doesn’t have the same punch as making a big sale. That’s unfortunate, however, because while the sale will come and go, saving money on a large vendor will pay dividends for the life of your business.
Consequently, it’s important for every business owner to employ basic negotiation strategies to obtain better vendor pricing for their company.