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Vendor Negotiation Guide: How To Get Better Contract Terms With Suppliers
Negotiating vendor contracts is intimidating. After all, the terms you land on determine the health of your supplier relationships and your brand’s cash flow.
But that can also be a good thing. For instance, having the conversation might lead to lower prices, more purchase order flexibility, and faster PO fulfillment. Here’s how you can negotiate these ideal vendor contract terms.
A vendor contract is a legal agreement covering transactions between a retailer and its supplier. These contracts outline the conditions (such as agreed price and contract scope) and obligations (payment timing and compliance requirements) of each party for either a 1-off sale or ongoing relations.
Vendor contracts are typically negotiated at the start of the supplier-retailer relationship and renegotiated as each contract comes to its natural end.
Supplier negotiations ensure that the relationship is a win-win. How so? Because these negotiations provide space for you and your vendor to understand each other’s needs.
This can lead to retaining your brand as a customer and streamlined operations for them. Plus, lower cost per unit or better overall contract terms for you.
Contrary to popular opinion, you don’t want to leave the negotiating table “the winner.” In fact, a win-lose negotiation strategy typically leads to better terms in the short term. But it also causes irreversible damage to your long-term supplier relationship.
Instead, the most successful vendor negotiation strategies ensure that both parties (you and your supplier) win.
“[You need to] understand that money talks,” Jun Loayza, founder of Metablox NFTs, told the Journal of Supply Chain Management. “And a supplier that sees dollar signs will make a partnership with you. The trust and credibility you build will determine the terms of your partnership and [get you] favorable rates.”
So, understanding your supplier’s needs can help you make a deal that benefits both now and in the future. It’s also better for business because you can build a solid, long-lasting relationship with your supplier.
But what does your supplier want exactly? Typically, suppliers want reliability. Similar to your brand, it’s much more expensive for your supplier to constantly acquire a new customer than to retain an existing one (more on this in a minute).
Knowing this better equips you to meet this need, making you a better long-term partner. And it only strengthens your relationship with them. This can be a game-changer when things go wrong, like if you ever can’t pay your invoice on time or need to ask for better terms.
Most brands negotiate their vendor contracts to bring their cost per unit down. And when you’ve been working with your vendor for a while, you’re better positioned to secure a lower price or smaller down payments.
How so? As I just mentioned, vendors favor reliable customers. So, you’ll have more leverage at the negotiation table if you can prove that you consistently place orders, pay on time, and communicate your inventory needs proactively.
Bonus points if you can show them that you’ll keep being that reliable (like by committing to order a minimum number of units from them).
You can then lean on this reliability to secure preferential pricing (the most competitive rate for the products locked in for a period of time). And, in turn, free up working capital for other initiatives, like developing new products or weathering market fluctuations.
Beyond cheaper pricing, you can also negotiate better overall vendor contract terms. For example, extended payment cycles, smaller down payments, or prioritized PO fulfillment.
But typically, you’ll only get these super favorable terms if you continue to work with your long-standing supply partner. That’s because switching vendors:
In fact, a University of Twente study concluded: “When supplier and buyer commit to a strong relationship, they [can] create value, which could not be created by either of the 2 independently, and [they] improve each other’s performance.”
How exactly do they improve each other’s performance? Because they’ll negotiate terms that will preserve the long-standing relationship. Meaning, you’ll settle on favorable terms to help you (and your supplier) meet your business needs.
Markets constantly change. And renegotiating your vendor agreements can ensure your current supplier setup supports your current operational needs.
Per Deloitte, “performance management is a prerequisite for effective [supplier relationship management]. It involves the setup and continuous tracking of operational measures mutually agreed with priority 1 suppliers.”
Meaning, you shouldn’t settle for whatever terms you initially agreed to. Revising your contract terms as your operational needs change ensures efficiency and profitability. And it makes your business more resilient to market fluctuations.
When Motorola changed its supplier negotiation process in the early 2000s, for example, the telecommunications company saved $600m+ when its market took a downturn. How? By simply cutting costs and increasing productivity throughout its operations before the downturn happened.
Most retailers spend more than ever on inventory and question if they should take on debt.
“When you don’t have a ton of venture capital raised… the most expensive part of growth is buying inventory and having to buy it so far in advance,” Lindsey Johnson, co-founder of Weezie, told Modern Retail.
Historically, bootstrapped brands relied on a “just in time” model. They’d place a purchase order and pay for part of it upfront. Then, that shipment would arrive with enough time to:
But today’s supply chain challenges make this model impossible. Orders are more expensive and rarely arrive on time.
Because of this, brands need to place orders earlier to avoid a stockout (replenishments now take ~6 months to arrive). And they’re paying the entire invoice long before that order arrives.
This hasn’t been totally disastrous for bootstrapped brands. But it does tie up working capital and seriously limit growth. Luckily, having clear vendor terms (combined with inventory planning) can keep brands from tying up more working capital than they don’t have to.
How? By securing extended payment terms. That way, you can build a production plan for what inventory you’ll need and when. And you can place those POs with plenty of time to avoid a stockout. (Psst – Cogsy can help with all of this.)
Whether this is your 1st time negotiating contracts with vendors or you’re renegotiating, there are a few fundamental best practices to lean on.
We’ve outlined them below in a sort of supplier negotiation checklist. And it should cover everything you need to know to not leave money on the table.
Feel free to skip to sections that are relevant to you, depending on whether you’re in a 1st-time vendor negotiation or renegotiating your vendor contracts.
Before you even approach your suppliers, you need to prepare for the negotiation on your end. Ultimately, the outcome of your conversation doesn’t depend on who’s most persuasive or has the best “negotiation skills,“ but on who shows up more prepared.
A vendor contract is a legal agreement. So, leaning on legal counsel to review your contract can help identify troubling clauses and loopholes. Plus, this counsel can ensure that both parties can realistically achieve the agreed terms.
Ideally, you’ll want your counsel to review your current vendor contract. That way, you confirm you fulfilled your responsibilities and can identify the current draft’s restrictions. This will inform what you might want to ask for in the negotiation.
Then, when the negotiation is completed, you’ll want your counsel to review the new contract terms. This way, you can confirm everything is in order before signing on the dotted line.
Generally speaking, your counsel is going to look for the 4 things every vendor agreement should cover:
Remember that the laws your vendor contract abides by depend on your and your supplier’s locations. So, seek legal counsel familiar with the local rules governing you and your supplier. That way, you’re best protected in case of a legal dispute later on.
Setting a precise date, time, and location for the negotiation encourages you to prepare. For instance, are you going to your supplier for this talk? Are you doing it over a conference call at a convenient time for both parties?
Think of this date and time as a deadline. With the logistics set, you can then gather all the information you need (like market rates, anticipated demand, and so on) to secure the best price and terms possible.
Plus, ironing out these details in advance also ensures your supplier knows to expect the conversation and can do the same (which can seriously help your case for better terms).
What would your ideal outcome be for this negotiation? Get specific about price, payment terms, and so on.
🔥 Tip: Calculate your brand’s optimal inventory quantity. That way, you can ensure your minimum order quantity is lower, giving you the best pricing without overstocking.
On the flip side, what are your deal-breakers? Meaning, identify what is up for negotiation and what is not (regardless of what other favorable terms may be offered).
When your key points and goals are outlined, it’s time to consider your supplier’s needs. That’s because your preferred terms will likely pose risks for your vendor’s business (like if the price is too low). So, to secure those favorable terms (or something close to them), you’ll need to devise a plan to mitigate those risks.
Lastly, prepare a few alternative term options you’d accept if your supplier won’t budget. That way, you can quickly reach a middle ground that makes both parties happy. Plus, when you compromise something you want, your supplier is more likely to do the same.
You wouldn’t pay $2 for a banana. Why? Because you understand that at most grocery stores, bananas sell for roughly $.20 each. So, that $2 price tag is well over market price.
Similarly, you don’t want to pay your vendors more than you have to per unit. But brands overpay on production all the time. Typically, this happens because the brand doesn’t know where market price sits.
That’s where getting quotes from a few different providers (even if you’re not looking to switch) can come in handy. The general rule is to shop for at least 3 different vendor rates. This should give you a sense of market price and the upper hand.
Say you find out you can get the same product at a lower cost (or better terms). You can then use this information as leverage with your preferred supplier.
As I mentioned, vendors (especially if you have an established relationship with them) will do their best to keep your business. And if you know you’d get a better price by switching suppliers, they’ll likely match or beat the competitor’s price.
When shopping for quotes, just make sure you’re transparent with all the suppliers you shop with. Although you’re ultimately looking to lock in loyalty pricing with your current supplier, you don’t want to ruin relationships with other suppliers. After all, you never know if you’ll need to work with them in the future.
Transparency is fundamental to building trust and credibility – especially in your vendor relationship.
Contrary to many business owners’ worries, opening up about what’s happening with your brand (the good and the ugly) can actually strengthen your vendor relationship.
Think about it this way: Your vendor’s business relies on maintaining your business. And if you shutter your store, they take a hit too. So, your vendor will do what they can to help keep your business booming, but they have to know what’s going on first.
For example, with supply chain issues causing longer lead times, your cash flow might be sitting in the red a bit longer. Let your vendor in on this fact before heading into the contract negotiation.
That way, when you ask for, say, extended payment terms or smaller down payments, it’s not a surprise. When they’re not caught off-guard, you’re much more likely to get the terms you want.
Negotiating your vendor contract might be new territory for you. So, here are a few tips for navigating the conversation.
It helps to know who you’re talking to. So, if you’re kicking off conversations with a new vendor (or taking over your company’s negotiations with long-term vendors), do your due diligence and research who you’re talking to.
Specifically, look to gather information about the vendor’s cost of production, current customers, usual rates, and so on. This will give you a sense of what to expect, or at the very least, what would make a fair contract.
“There’s no better position to be in when negotiating a price than to know what it cost the guy on the other side of the table to make what he’s selling,” Derek Johnson, CIO of Tatango, told Inc. “By figuring out the cost to make the product, you then have a much better idea of how much wiggle room you have in regards to negotiating.”
At its heart, a vendor contract is about compensation in exchange for goods. So, get clear on what compensation you can offer.
That means explicitly stating how much you’re willing to pay per unit and put down on each purchase order during vendor contract negotiations. Similarly, if you have a tight budget, share that information and make it clear that you have no wiggle room.
If you can only afford to pay $.50 per unit, and this vendor can only afford to charge $1 per unit, it’s not a good fit. And it’s better to know that upfront.
🔥 Tip: Sometimes unforeseen expenses will come up during production; this is where proper vendor management will make all the difference. So, make sure your contract states who is responsible for paying those out-of-pocket expenses.
Coinciding with your vendor agreement is your service-level agreement (SLA). Your vendor agreement outlines what is expected of each party (you and your service provider). Meanwhile, your SLA documents how you can measure the quality of that service.
As such, your SLA is all about the details. Throughout the negotiation process, be clear about what goods (or services) you require. Then, specify the quality, packaging, materials, dimensions, colors, and any other elements as clearly as possible.
The more details you provide, the better your supplier will understand what production will entail. And the more accurate their quote will be to the final price.
For example, say you already have a mold for your product that you can provide this supplier. And with that mold, it takes significantly less time, money, and labor to create your finished product. Chances are good that if your supplier knows this, they’ll lower your quoted price.
Moreover, clearly defining the specifications of the finished good in your SLA empowers you to hold your supplier accountable. So, if something isn’t delivered to standards, you can request a refund or a replacement shipment.
Building a long-lasting partnership depends on setting reasonable expectations for you and your supplier in the vendor agreement.
For example, say it takes 4 weeks for the supplier to produce your minimum order once the PO is processed. Then, it’s unreasonable to expect the shipment to arrive at your warehouse 3 weeks after placing the PO.
Similarly, it’s widely considered unreasonable for you to expect your supplier to work without a down payment on the PO. Or for your supplier to expect you to pay the total cost when placing the order.
That is unless these are the terms of your contract. So, when negotiating your vendor agreement, be sure to work together on terms that both parties can reasonably uphold. Otherwise, you’ll set (at least) 1 party up for failure and wreck the relationship.
Of course, you’ll want to document whatever terms you agree on in the final contract. That way, you can point back to what was expected in case something ever goes wrong.
As you know, suppliers run businesses too. And they need to know what’s in it for them. So if you’re looking to make a large order or start a long-term contract, you need to be upfront about it. This can incentivize your supplier to offer a better deal.
It might help to highlight what this relationship might look like long term. For instance, if it’s a one-off order, will you need to order more in the future? If so, what would it take from this supplier to lock you into a long-term contract?
Or, if it’s an ongoing partnership, how often do you plan to place POs, and how many units will you typically order? You can foster the provider relationship by sharing your demand plan for the next 12 months or so. That way, your supplier can prepare their business to fulfill your inventory needs (which can radically cut down your purchase order lead times, by the way).
Working with this supplier for the first time ever? Go into the negotiation with a substantial deposit on future orders.
For one, a deposit not only encourages the service provider to meet your terms. But it also starts the relationship on a good note by establishing credibility.
This deposit should equal roughly 50-70% of your typical purchase order.
But why do you need this deposit in the first place? Think of it like showing up to the bargaining table and instantly putting your money where your mouth is. Not only will this ensure whoever you’re negotiating with takes you seriously, but it’ll give you more bargaining power.
But if you’re a bootstrapped small business, you might now have the extra capital on hand to do this. No worries – instead, lean on your demand forecasts to unlock this same bargaining power.
For instance, you can build a 12-month inventory forecast in Cogsy. Then, promise in writing to fulfill a specific volume of this forecast with the supplier if they can lower your costs. That way, you don’t have to tie up precious capital before placing the order (which would put your business in a risky financial position).
Lalo, a leading retailer in the baby and toddler space, reduced its vendor down payments by 50% using this strategy. And by freeing up that capital, Lalo’s been able to experiment with new growth initiatives (like opening up a flagship store) and unlock 400% year-over-year growth.
When you have a long-time supplier, the dread that comes with revisiting your contract terms is totally understandable. But having that difficult conversation is the only way you’ll negotiate better rates and ensure both parties remain happy in the relationship.
While the above best practices all hold, there are a few more tactics to consider when negotiating with long-term service providers.
Nurturing a long-term partnership with your supplier starts by building a mutually beneficial relationship. This goes back to the “win-win” thing we talked about earlier.
“Spend time to discover the supplier’s goals to increase the mutual gains achieved in the agreement,” Doug Bend, a business attorney at the Bend Law Group, advises.
“For example, if the supplier won’t budge on price, focus instead on other areas of the agreement. Such as the amount of the down payment, the length and scope of the warranty, a discount for purchasing in bulk, and other areas of interest that might provide even greater benefits for both parties.”
In other words, don’t just focus on what can improve your bottom line. Consider also what can save your vendor resources or make them more money throughout the negotiation process.
It might be worth asking your team: What can your brand offer vendors in addition to the business order? For example, maybe you could send more business their way through referrals. Or maybe you can offer a shining testimonial that the provider can use to secure other customers.
Contract negotiations get confusing fast. And the longer the conversation goes on, the murkier what both parties want and need becomes.
So, give your vendor a heads up that you want to renegotiate your agreement. This way, both parties can take time to prepare their asks, so they can be coherently communicated to the other party.
Then, during the negotiation process, be brief, clear, and specific about what you’d like to see in your new contract. Typically, it helps to have a copy of the existing agreement on-hand to reference.
For instance, you can point to the clause that outlines pricing and ask that those costs come down $.07 per unit. That way, your vendor is on the same page (without needing to memorize every term) and can respond accordingly.
This will speed up the negotiation and prevent either party from feeling frustrated or defensive. Keeping the room cool (metaphorically speaking) keeps the conversation civil and the relationship intact.
Before sitting down for the negotiation, you outlined your ideal outcomes. And in the process, you also likely started to identify your primary concerns (these are likely your non-negotiables).
When talking to your vendor, prioritize your primary concerns and ideal outcomes first. And don’t try to solve everything in one go.
Instead, focus on a few immediate priorities that are high-impact and low-effort. Then move on to other significant concerns in the contract.
Midway through the conversation, you might realize some of your other “wants” don’t matter as much. Let your supplier make the first offer on those terms.
This will be a great opportunity to compromise, showing your supplier you care about their needs too. And in exchange, when you say something is non-negotiable, your vendor will be more likely to agree to your ideal terms.
🔥 Tip: You can visualize what’s priority and what’s not before going into the negotiation using an impact matrix template.
Don’t forget to settle on the minimum contracting terms when renegotiating your vendor agreement. That is the shortest period for the contract’s validity.
The last thing you want is to agree on a new price only to have your supplier increase that price a month later.
Plus, per ADR International, most 1-off, transactional, no-contract supplier relationships last less than 3 years. But the stronger and typically cheaper supplier relationships last longer (3+ years).
So, consider opting for a 12- or 24-month minimum contract term. This might even allow you to lock in better terms or a lower price as raw material prices continue to creep up.
Don’t forget to set a date to renegotiate your vendor agreement terms before the contract ends (you can do this as soon as you’ve signed the dotted line). That way, you proactively set time aside to reevaluate both parties’ needs and update the terms accordingly.
There’s more to negotiating than just pricing. For example, net payment terms, down payments, order fulfillment speed, MOQs, and so on. And most of these other negotiables can make your business more efficient and increase your bottom line.
For instance, you might leverage your loyalty as a customer to get expedited PO fulfillment. (This can be super handy if you see a sudden spike in demand and are in a rush to avoid a stockout.)
Alternatively, you might negotiate extended payment terms (such as within 60 net days, rather than 30). Or you could set up a payment plan where you pay a certain amount each month (kind of like a subscription plan).
You can also attempt to lower your minimum order quantities. But heads up: MOQs are typically on suppliers’ lists of “non-negotiables.”
Some brands have lowered their MOQs by offering to pay slightly more per unit instead (the lower holding costs might be worth it for your brand).
But whatever other terms you want to negotiate, it’s totally up to you!
Let the data guide you. Many DTC leaders have used demand planning to grow their revenue and negotiate vendor contracts that boost their bottom line. And Cogsy can make getting those favorable terms a whole lot easier.
Here’s how:
Ready to secure better rates?
The best vendor negotiation strategy is whatever will lead to a win-win (or mutually beneficial terms for you and your supplier). If the negotiation over-favors your brand, you might win in the short term but harm your long-term vendor relationship.
The supplier negotiation checklist depends on whether you are negotiating terms with this vendor for the first time or renegotiating an existing contract. But generally speaking, the supplier negotiation checklist includes:
The best way to negotiate costs with your supplier is to share your annual demand forecasts using a tool like Cogsy. You can then commit to placing a minimum number of orders with this supplier in exchange for a better price or terms. Other strategies to negotiate costs with your supplier include leveraging your history as a customer or agreeing to pay the total invoice upfront.
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