Nary a quarter, much less a year goes by without buyers asking for lower prices (also known as “cost concessions” or “partnership funding”). Having dealt with Wal*Mart, Target, Costco, Home Depot, AutoZone, Advance Auto Parts, Meijer and other major retailers, this can be daunting. So how do you handle such pressure?
- Self Reflection. First, any good negotiator knows where s/he is on the leverage scale. If you are one of 7 or 8 brands in a “red ocean” category, expect to get cost pressure early and often. If, on the other hand, you are meaningfully unique, highly innovative and proactive, you may have more leverage than you think. It’s also important to understand your own sales staff, as the “chicken little” mentality will be alive and well. If I only had $1 for every time I heard the phrase “if we don’t give them X, we’ll lose the business…”
- Anticipation. Very simply, expect the cost concession conversation and have answers, requests, data and background ahead of time so you can make it productive and less contentious. We typically had 1 -2 “asks” per year and would have a good pulse on the market, supply/demand curve, key cost factors (ie, freight/logistics, raw material inputs, labor) and could supply these to the customer quickly.
- Differentiation. The intensity and pressure of cost concessions are going to be inverse to the uniqueness and differentiation of your business. The more meaningfully unique you are in what you provide and HOW you provide it, the less leverage a buyer will have when asking for cost concessions. As if you needed another reason to focus more of your resources on innovation!
- Respond in Kind. When the inevitable cost concession request arrives, don’t dismiss it. Let the buyer know you are considering it and will come back in a reasonable amount of time for a follow-up. What I found is a flat out “no” answer tends to force the buyer’s hand to explore other suppliers, remove promotions from your merchandising calendar, or delete sku’s as a show of seriousness. On the other hand, if you acknowledge you are open to a concession with some additional support, it’s incumbent upon you to decide what you will ask for during that conversation. For example, if a buyer needs a 5% cost down, you might decide an additional 10% in volume would enable you to drive enough cost out to protect your margin. Negotiate.
- Diversification. Put simply, when one buyer accounts for 1/3 or more of your business (I’ve seen as high as 60%), you are in a dangerous leverage position…and the buyer knows it. Also, when one product line or category within your business accounts for such a high percentage of sales, and you are one of several competitors, you are exposed. So, channel, buyer and category diversification is paramount in addition to innovation and consistent brand support.