Negotiating Price
Negotiation of price, in this context, involves a series of discussions between the parties who are working towards engaging and being engaged for specialist services or supplies. The negotiation sets out to achieve a happy medium in which both parties can crystallise the agreement through a formal contract.
Negotiation can be a complicated process in which price is one element. Other areas of purchase negotiations which require consideration include, value for money, delivery, payment terms, after sales service and maintenance arrangements, quality, life cycle costs of a product or service and whether or not the product or service is essential.
It is crucial to draw up a list of the factors which are important prior to commencement of the negotiation. It is necessary to understand from the outset which elements you are and are not prepared to compromise on. For example, to place a large steelwork order then a large discount may be negotiated from the supplier or to procure a particular BMS system, training may be negotiated. Whilst not strictly cost negotiations, these additional elements are of significant importance as to provide added value to any arrangement drawn up, ultimately impacting on the cost.
By gaining an understanding of your sub-contractor or supplier and the current market climate, you can potentially work out how significant and important your business is to them. In terms of lift manufacturers, the lift manufacturer is likely to have the upper hand if they are a large multinational supplier and you have on offer the business to supply one number 2 storey lift. It would be beneficial to approach a supplier who has a number of competitors and is smaller in size, you will be in a much better position to attain movement.
The development of the negotiation strategy is important as this will help set clear objectives and set boundaries of tolerance throughout discussions. Start by defining the priorities such as low price, rebates, discounts, rapid mobilisation, out of hours working etc. Ensure that time is spent thinking about the different counter offers that the supplier or sub-contractor could come back to you on and where you are prepared to concede or compromise.
The more research and time spent on preparing for the negotiation discussion, the more favourable the outcome upon conclusion of talks.
The negotiation discussion should start by stating the aspects of the deal you are happy with and with the points you want to discuss and the same should be sought from the supplier. Go over the proposal to ensure what you perceive is being offered is actually what the supplier has proposed. Once satisfied that the proposal is compliant, do not indicate that there are concessions from your side too early but appear positive.
Never accept the first offer always make a counter offer. If the price is unfeasibly low to start, drill down to find out the reasons why i.e. is the product or service to a satisfactory quality or life cycle, consumable costs i.e. filters and what are the additional costs associated with servicing, revisits etc. If the proposal includes features that aren’t necessary for your application, try reducing the price by having them removed.
By referring back to the negotiation strategy, success of the discussion can be measured. By following the criteria set down in the plan your chances of striking a good deal and all parties walking away happy are greatly increased.
Always remember to document the deal that has been struck!
Use negotiation tactics with great care and be aware when they are being used against you i.e. reference to deadlines, factory slots, holidays etc may be a pressurising tactic to force your hand.
Don’t allow pressure to force you into agreeing a point your not happy with. If a position of stale mate appears to have been reached, take a break or park that point and come back to it later.
Don’t squeeze your suppliers or sub-contractors too low. Other areas of the service will be compromised to cover the supplier’s shortfalls. If they go out of business the loss of service may also be detrimental to your operations. Being a ruthless negotiator and forcing other companies out of business will not protect your reputation as a valued customer and will ultimately cost in the long run.
Do not get drawn into a Dutch Auction. Stick to your plan.
Ensure that all aspects of the deal are documented.
Ensure that the person you are negotiating with has the relevant authority to make the concessions they promise. If they don’t the deal will have to be revisited at a later date.
Chartered Institute of Purchasing and Supply www.cips.org