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Price negotiation is on every importers mind when engaging with suppliers on Alibaba or Globalsources. Yet, it’s misunderstood as the practice of forcing the supplier to squeeze their margins to right above the production cost.
Going to hard on the price negotiation can result in terrible quality issues, and unanswered calls.
In my opinion, 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 shareholders 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 do so.
This is the complete guide to price negotiation with Chinese factories.
1. Accept that the supplier must also make a worthwhile 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 lose money on your order.
Yet, many importers are obsessed with price haggling.
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 – but with a nasty twist.
You see, 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 come 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 percentage, but don’t become obsessed. In 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.
2. 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 for 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.
3. 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?
No, you won’t, and they know that.
Negotiate the price before you make any commitments to the supplier, not when you are stuck.
4. Walk away if they try something funny
Now, let’s look at it from the opposite side.
What if the supplier decide 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 try 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 afterwards.
5. 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.
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