Trying to figure out how to negotiate and get a better price from your supplier? Going too hard on the price negotiation can result in terrible quality issues and unanswered calls.
If you ask me, successful price negotiation is about finding the right equilibrium, where you pay the right price for the right quality, while the supplier can make enough money to stay in business and pay their owners and employees.
That’s not asking for too much.
Keep reading, and learn why you should not haggle your way down to poor quality, how you can prevent your supplier from jacking up the prices, and why you must be ready to stand up and walk away if they try to do so.
This is covered
- Set your target price
- Price negotiation is expected in China
- Accept that the supplier must also make a decent profit
- Be clear about your quality requirements before you start negotiating
- Price negotiations must be done at the right time
- Be ready to walk away at any time
- Stay up to date on raw material costs
- Other ways to get a better price
Set a realistic target price
Before you can engage in meaningful price negotiation, you need to set your target price. If you don’t already have one, you’ll need to contact suppliers to request quotations, and thereby find a price baseline.
Your supplier will ask you for both your specifications and target price when asking for a lower price. Sometimes they even ask before sending an initial quotation.
Further, it also helps you to know what to aim for. That said, your target price must be realistic.
Price negotiation is expected in China
Chinese suppliers don’t expect you to accept the first price offer. Price negotiation is even expected, and you’ll surprise your supplier if you don’t even bother to raise the question.
While there are limits to how far you should push the price, it’s alright to send them your target price and ask them to go down to match it.
Some may lower a bit while others walk away.
If the supplier quotes a price that’s way above your target price then ask why, and also share prices offered by other suppliers.
Further, I recommend that you request a price reduction shortly after having received the initial price quotation from the supplier.
Accept that the supplier must also make a decent profit
Rather few importers are aware of the (very) low-profit margins that most Chinese suppliers struggle with. It’s simply not possible for them to offer a 10 to 20% price reduction unless the price was way off, to begin with.
Asking them to lower the price more than 3 to 5% is the same as asking the supplier not to lose money on your order.
Yet, many importers are obsessed with price haggling and try to force the supplier to make a loss.
If you’re lucky, the supplier will simply tell you to go somewhere else. If you are not as lucky, they may actually give in and lower themselves to your (unrealistic) target price – and adjust product quality accordingly, something that may come as a nasty surprise further down the line.
A product can be made using various different quality standards, materials, and components.
For example, a zinc alloy watch can be made for less than 5 dollars, while the same design made in 316L stainless steel can cost four times as much – around 20 dollars.
In such a scenario, you have successfully priced yourself out of a good offer, only to pay a premium for a low-quality product. Not to mention the number of defective units. You will also get less attention from the supplier, as they will focus on customers that they can make a worthwhile profit from.
All of this makes sense. Yet, in the west of coming from the viewpoint that a ‘deal is a deal’ and that it’s up to the supplier to ‘produce high-quality products on time’ regardless of whether or we price them down below the production cost.
Because you have more orders in the future. And the supplier should for that reason ‘invest’ in you, because your product is special, and so on.
But the mindset in Asia is different. Don’t forget that they have salaries to pay too, and it’s not like they are swimming in cash, to begin with. Customers that pay slightly better get much better quality, lower defect rates, and better treatment. Not always, but often.
Go ahead and try to shave off a few percentages, but don’t become obsessed. At the end of the day, what will a 10% or even 20% reduction on the factory price even do for your business?
Perhaps you should be more focused on cutting costs elsewhere if that is so important.
Be clear about your quality requirements before you start negotiating
A product can, as I mentioned, be made using different materials and components. You need to have a ‘fixed’ product specification and understanding of what makes or breaks the quality of your product.
Otherwise, you can’t say if a price is good, or bad.
18 dollars is a decent price for a stainless steel watch.
11 dollars is a terrible price for a zinc alloy watch.
If you don’t understand the specifications and customization options for your product, you cannot successfully engage in a price negotiation.
Price negotiations must be done at the right time
You can’t start negotiating after a supplier has made the tooling and prototypes for you. At this stage, they already know that they got you.
They already know that you will place an order. Hence, they have no incentive to reduce the price.
What else will you do at this stage? You have spent months, and possibly hundreds of dollars, on samples and molds.
Will you just dump the supplier and spend six months developing new samples elsewhere, for the sake of shaving off a few dollars on the unit price?
You won’t, and they know that.
Negotiate the price before you make any commitments to the supplier, not when you are stuck.
Be ready to walk away at any time
Let’s look at price negotiation from the opposite side.
What if the supplier decides the raise the price, just when you are about to place the order?
This happens, and the suppliers tend to have all sorts of reasons. Labor costs went up. Taxes went up. Material costs go up. It’s their ‘most busy season’.
It doesn’t matter. They got you, or at least they think they do.
If a supplier tries to rip you off at this stage, you must be ready to walk away.
Yes, even if that means you have to start over from scratch. Or well, at least go back to the product sampling process.
If you let the supplier bully you even before you have placed an order, you are safe to assume that they will continue such behavior in the future.
Stay up to date on raw material costs
You don’t want to make an impression that you are gullible.
When you engage a supplier, you should mention that you have read up on current commodity and raw material prices.
This will weaken the case for the supplier to offer a higher price, or raise the price between orders.
You can, for example, use the following two sources:
Chinese suppliers also cite increasing labor costs and taxes, when providing a context for a price increase.
However, labor costs increases have panned out in recent years, and the Chinese government has been quite diligent in lowering taxes for small to medium-sized businesses too.
What are some other ways to get a better price from a factory?
Price negotiation is far from the most effective tool if you want to reduce your unit prices. Here 5 methods that will likely reduce your price far more.
1. Buy larger volumes
This one might seem fairly obvious – buy more and you’ll get a lower unit price. However, many importers tend to buy from more suppliers than necessary and thus lower the quantity purchased from each one of them.
Orders can easily be concentrated on a smaller amount of suppliers if you base your product selection on what the suppliers have to offer, rather than selecting a number of suppliers on a predetermined product list.
2. Use standard materials and components
A product is a composition of materials and components. Your supplier needs to purchase these materials and components from their subcontractors. A large number of various components and materials results in a higher amount of purchases that need to be made, and thus higher costs.
The best way to avoid this issue is simply to reuse the same materials and components in several products. A positive side effect of this approach is that you might also be able to lower the suppliers Minimum Order Quantity (MOQ) requirement.
3. Avoid unnecessary product customization
Customized products often require customized tooling, such as injection molds. While an injection mold can be used for a very large number of units (often counted in the hundreds of thousands) it’s in general paid for by the importer.
Thus the more customized products you order, the higher the tooling cost will be. If you’re specifically importing unique products that have no equivalent on the market, then you can stop reading.
However, plenty of importers fail to understand that even the slightest change in a design may lead to dramatically increased tooling costs. I list my suggestions below:
a. The importer is usually expected to pay for any additional tooling. Avoid product customization unless it’s essential
b. Limit the product customization to components and/or materials that don’t require expensive tooling
4. Lower your quality requirements
I’ve seen plenty of situations where the importer requires a quality standard that simply cannot be matched by the supplier. This could be dimensional tolerances that are too narrow or other product specifications that are all but impossible for the supplier to comply with.
From the supplier’s perspective, quality requirements that are very hard to reach increases the waste and the risk of a total loss. The end result is that the supplier is forced to raise the price in order to compensate for the increase in waste and risk.
If a supplier clearly communicates that your requirements are hard or impossible to reach, you should do any of the following;
a. Look for another supplier
b. Accept a price increase
c. Adjust your requirements according to the supplier capability
5. Book sea freight instead of last-minute air freight
Even though the freight cost is not decided by the supplier, many importers tend to waste money on not so cost-efficient transportation. Sea freight is in general much cheaper than Air Freight, something that can have a big impact on the unit price.
However, Sea freight is not as fast and takes around 30 to 40 days to reach most ports in Europe and North America. Thus it requires the importer to have some foresight and place the order well before the existing stock runs out.
It’s rather common that importers end up wasting their profit margins on expensive last-minute air freight bookings because they “simply cannot wait 35 days” for the cargo to arrive.
This is what I advise you to do;
a. Place your order at least 3 months before you expect to run out of stock
b. Ask your supplier to quote you a DAP price that includes shipping all the way to the final destination
When should I ask for a lower price?
I recommend that you ask for a lower price after receiving the initial quotation. You should also make your supplier aware of your target price.
Can you bargain on Alibaba.com?
Yes, you can request a quotation and ask for a lower price using the Alibaba message system. The supplier can adjust the price freely, and Alibaba.com don’t get in the way between the buyer and seller when it comes to price negotiation.
Do I need to be in the factory to negotiate the price?
While price negotiation is generally faster and effective when done face to face, you can still negotiate via email, Skype or WeChat.
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