Large companies have an obvious advantage negotiating with vendors. After all, if your purchases represent a significant percentage of the supplier’s bottom line, it’s easier to get a good deal. Big companies also typically have large procurement organizations, with sourcing specialists for each expense category.
But if your company’s revenue is not counted in billions, vendor negotiations require a bit more finesse. Nonetheless, the same deals the big guys get may be available to your business if you follow these five strategies:
1. Leverage your growth
Suppliers often find smaller growth companies to be more attractive customers than their larger, more mature counterparts. A large enterprise may have a significant deployed product base, but that big company may not be investing in new products or services, and may even be reducing its consumption of the old ones. Growth companies drive new sales and represent the biggest opportunities for your suppliers. Even if your current spend is relatively modest, you can get price improvements by educating your suppliers on the current and expected growth of your business, and helping them to understand how that growth will drive future purchases. This transparency allows you to establish deals today that take advantage of tomorrow’s spending.
For example, you might leverage a tiered pricing model that benefits from growing volumes. You can establish longer term agreements at lower price points, based on future spend. You may even find opportunities to increase your spending with a particular supplier by aggregating your purchases from competing vendors, because purchasing often becomes fractured among multiple suppliers as your company grows. Identify which of your suppliers offer overlapping products and services, and consider establishing primary supplier agreements at lower cost.
2. Leverage your value
Focus on the areas, and the individuals, within the supplier organization that view your account as strategic. Although you may not be among your supplier’s larger customers, your company may be a top client within a key industry or market. Or you may be purchasing a product line or service that is currently particularly important to the vendor. At the very least, remember that you’re a big part of your account manager’s compensation. You might even be his biggest customer, or a key client within his region. Do the research and understand where your product and/or service mix ranks within your account team’s portfolio and your market segment.
3. Understand the marketplace
Objective pricing criteria are a critical element of any pricing discussion. Before entering negotiations, you should have benchmark data on the products, services, and volumes you’re purchasing. Some of this information is relatively easy to obtain. For example, vendor contracts with federal, state, and local governments are in the public domain and often available online. In the private sector, you may need to invest in third-party data or engage a consulting firm that focuses on the relevant spend area.
But benchmarks are only a piece of the puzzle. Equally important is the current market environment for the specific vendor with which you’re working. Is the supplier winning market share? Is it “buying” sales with wholesale pricing? What revenue targets does it have for the particular products you’re evaluating? Read its investor reports, research its competitors, talk to your peers in the industry, and determine what factors may be relevant to the negotiation.
4. Negotiate strategically
Your value to your supplier should never be limited to revenue. A strategic negotiation will seek out value arbitrage. That is, in return for pricing and term improvements, figure out how to provide your supplier with something that costs you less than the value it provides it. For example, you should brainstorm with potential suppliers to identify areas where you can mitigate their fulfillment costs, such as electronic order processing. Maybe they need testimonials, referrals, references, or case studies that you can provide. Are they willing to make concessions for early adoption of new products? Can they include services that you would otherwise need to purchase?
When engaging in strategic negotiations, keep in mind that account managers typically have limited authority beyond offering discounts. Creative negotiations that include nonmonetary elements to improve pricing will require collaborative discussions with the final decision makers. Otherwise, you’re relying on your sales rep to articulate your message to his management team and, as you know, nuances often get lost in translation.
5. Negotiate objectively
Employees within your business units may strive to be good stewards of company resources, but they often have long-term relationships with their account managers and the delivery team, making objectivity difficult. When a supplier has performed well in the past, buying managers are often reluctant to negotiate. As a result, you may be paying a premium for the relationship that inflates pricing beyond what the same vendor charges other clients. Over time, suppliers can become embedded within your organization, often defining the need, or even the budget, for their own products and services. An independent internal procurement organization can mitigate these risks, as can engaging third-party expertise to support your negotiations. The business unit can then focus on defining the right solution for your company, while the negotiation team helps balance the vendor relationship with the bottom line.
Midsize customers present fewer complications for suppliers. The bigger the company, the harder it is for the supplier to support it after a sale, which means higher costs for the vendor and a more difficult job of customer retention. In addition, big business can be slow to make buying decisions, encumbered by a long sign-off process or legal issues. As a smaller enterprise, you’re simply easier to do business with. Suppliers can offer more aggressive pricing terms because the costs of doing business with you are lower, and the chance of maintaining a longer relationship with you are higher.
These inherent advantages, combined with the above structured approach to your negotiations, will lead to pricing that can match the best deals in the marketplace — often on par with customers that have an additional three or four zeroes in their reported revenue.
So don’t assume that smaller volumes equate to inferior pricing. You have more leverage than you may think.
Scott Drobes is a managing partner of Third Law Sourcing, an Atlanta-based consulting firm specializing in strategic vendor negotiation.