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How Expensive Suppliers Negotiate, Part I


PurchTips - Edition # 183

By Charles Dominick, SPSM

 

Do Your Suppliers Negotiate Like This?

There are some commonalities that make many negotiations predictable. For example, buyers often start by telling the supplier that the same product or service can be purchased from a competitor for a lower price or with better terms. Suppliers commonly respond that the competitor's product and service is inferior and that doing a comparison on price alone is not smart.

Sound familiar? I call this supplier negotiation technique "de-commoditizing." A commodity is a product that is the same regardless of who sells it and, therefore, the only variable is price. To preserve their profit margins, suppliers want to create the impression that their product or service is not a commodity, thereby distracting you from driving the price down.

Sometimes, allowing the supplier to differentiate their product or service can have value to your organization, especially if you are negotiating for a product or service that you don't have much experience with. But from a negotiating leverage standpoint, you need to be careful how you open yourself up to this information.

You don't want to be negotiating price, have the supplier defend its product or service as a non-commodity, then take a subservient role as if to say "I really don't know anything about your product, can you please teach me what I need to learn?" Instead, anticipate the de-commoditizing discussion and begin the dialogue with a statement like "The purpose of this meeting is to give you the opportunity to make your price and terms more attractive to us and to allow you to share any additional information that you feel we should consider in our decision." When the supplier shares differences to be evaluated, there are five questions you should consider:

  1. Is The Supplier Meaningfully Differentiated? After giving the supplier the opportunity to present its differences, you need to ask: Are those points truly unique to this supplier or do other suppliers possess those same capabilities? Are those differences valuable or immaterial?

  2. Do The Suppliers' Differences Have A Measurable Financial Benefit To Your Organization? If the supplier's differences are meaningful, can they be quantified in terms of monetary benefit to your organization? How much additional revenue or cost savings will these differences mean to your organization? Without quantification, you can't know whether the premium you'd have to pay is worth it.

In the next edition of PurchTips, I'll cover questions 3 through 5 and explain how a supplier's de-commoditizing can benefit your organization.

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