Part of my role as a product developer is reviewing and negotiating production costs.
It’s not uncommon for me to join projects around the time a new client is beginning to receive quotes from suppliers or when they’re in the process of reviewing first costs. I’m added to email chains and asked to take over supplier communications. Maybe things aren’t going particularly well, or maybe things seem okay but the client senses they could be better. I begin reading emails to learn what the issues could possibly be.
Over time, I’ve found three common mistakes that are almost guaranteed to keep clients from getting the best production costs for their products.
They don’t shop around enough.
The best way to ensure that you’re getting a reasonable cost for your product, especially if it’s a new category for you, is to gather quotes from multiple suppliers and learn what the average cost is. Even if you’re familiar with the product and have a decent idea of what it should cost, there are many factors that contribute to costing and it’s best not to assume.
I often see clients get one quote and then try to figure out if it’s reasonable based on product details alone, or they immediately accept a cost that meets their target. “That sounds good” shouldn’t cut it.
Knowing the cost range is also helpful in vetting suppliers: the lowest cost may come from a desperate supplier or one who isn’t familiar with the product, while the highest cost may come from a supplier who commands a lot of business and produces very high-quality product. The lowest cost isn’t always the best and the highest cost isn’t always a rip-off.
They immediately start asking for discounts or accommodations.
Unless you’re a major brand that the supplier wants for their portfolio or you’re placing a very large order, you simply don’t have the leverage to start asking for discounts or accommodations on your first project with a supplier. Doing so can make you seem unreasonable or inexperienced, and you may rule out a great supplier.
Leverage generally takes three forms: brand prestige, a long-term business relationship, and high units. If you aren’t bringing enough value to the table, there’s nothing to negotiate with. And it’s not enough to simply promise future orders: every supplier has been burned by an empty promise at some point, and they aren’t going to repeat a costly mistake. You have to build a relationship to reap the rewards, which could include better costing for continuous programs or more favorable payment terms.
Unless the supplier is desperate for business (which is a very risky situation) or they’ve inflated their first cost in preparation for giving you a “special” deal, they’re not going to offer a lower price just because you asked.
They use aggression as a negotiation tactic.
I’ve watched companies nickel-and-dime their suppliers with the mentality that you must be aggressive to get the best price. Unsurprisingly, their suppliers reacted by sneaking those nickels and dimes back in wherever they could. For companies like these, costing is a tedious process of arguing every point and then anxiously checking every detail.
Healthy business relationships are transparent and mutually beneficial. When you take a win-lose approach and are willing to argue suppliers out of their profit, they will either 1) turn down your projects, 2) become uncooperative, or 3) potentially use dishonest means of recovering profit. It’s worth pointing out that there are also cultural differences to consider, and eastern countries with a collective mentality will be very averse to aggressive negotiation tactics. This behavior may damage your company’s reputation and hurt your future profits.
It’s far wiser to view your project as a lucrative opportunity for both you and your supplier and consider how you can use it to develop a solid business relationship.