How To Negotiate Price Increases
PurchTips edition #117
By Charles Dominick, SPSM, SPSM2, SPSM3
Do You Find Price Increases Hard To Negotiate?
January is a common time for supplier price increases. So, today, purchasers are trying, perhaps unsuccessfully, to
negotiate those price increases away.
How do you negotiate price increases? Better yet, when should you begin preparing to negotiate price increases?
The answer to that second question may surprise you. You should have begun preparing to negotiate a price increase when you originally obtained the current price.
Before I elaborate, consider a typical supplier justification like "We must raise your price by 28% because aluminum costs went up 28% last year."
That point is tough to argue if you're not prepared. So, when first obtaining quotes for high-annual-spend products or services, ask for suppliers' cost breakdowns.
A cost breakdown will indicate the percentage of the total cost that is comprised by each major material, other materials, labor, overhead, and profit. For example, a cost breakdown may look like this:
- Wood = 20%
- Aluminum = 7%
- Other materials = 3%
- Labor = 45%
- Overhead = 13%
- Profit = 12%
If a supplier proposes a price increase and tries to use the above type of justification, you can say something like:
"Aluminum increased by 28%, but aluminum only comprises 7% of your price. Considering nothing else, your price should only
go up by 2%."
Should you stop negotiating there? Heck no!
You can argue that productivity gains should have reduced labor costs enough to offset the small materials price increase. Maybe you can even convince the supplier that productivity gains more than offset the materials price hike and that your price should go down!
The key is to get that cost breakdown when you first obtain pricing from a supplier. Suppliers can be hesitant to share such information at times, but are usually more willing when they are competing for your business.
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