How To Negotiate Price Increases

PurchTips edition #117


Click here for the printer-friendly version.

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.

Do You Want a More Rewarding Procurement Career?

Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.

Earning your SPSM® Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM® Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!


Need Better Performance From Your Procurement Team?

Are you a procurement leader whose team isn't achieving the results you know are possible? Maybe it's not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.

You need a performance improvement plan that's easy to implement and quick to produce results. The NLPA can help.

Download our whitepaper "The Procurement Leader's Guide To A More Successful Team." You'll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.


Are You Getting The Most Out of Your NLPA Membership?

Members of the NLPA get more than just articles like this by email. As a member, you also get access to:

  • The Procurement Training & Certification Starter Kit
  • The latest Purchasing & Supply Management Salaries Report
  • Leading-Edge Supply Management™ magazine
  • Members-only webinars 10x per year
  • And more!

If you haven't been taking advantage of these benefits, why not log in and start now?