Every shopper knows that sensible buying saves money. Unfortunately, not every business owner realises the importance of careful buying in keeping a business profitable. Look for settlement discounts, rebates, specials – they will all save you money.
When attempting to buy an easily defined article, shop around. This can often be done by telephone although some businesses refuse to quote over the phone.
Remember to compare only “apples with apples”. And if something sounds too good to be true, it usually is. For example, a major office equipment retailer could drop its price of faxes well below that of its competitors.
Buyers eventually discover that the ink cartridge runs out on the second day of use because the retailer had fitted smaller and cheaper cartridges to lower the price. It was false economy to buy the cheaper product. Always be a little cautious.
Businesses sometimes make special offers, or even loss leads, to get you in the store. All businesses should take advantage of advertised specials if they can, but beware of buying other items at the same time which are not being discounted. That is why businesses ‘loss lead’.
Some companies offer shareholder’s discounts. If you are a shareholder, this can gain you an extra percentage discount, even on advertised specials.
While this practise is most common amongst sellers of consumer goods, conglomerates such as Coles, Myer and Pacific Dunlop also own companies that offer discounts if you are doing business-to-business trade.
Negotiate Your Way
It is almost always worthwhile trying to negotiate prices, especially if your order is large. Even for small items it is worthwhile asking for a “trade discount” or a discount for cash, but always remember to make the suggestion to someone with sufficient authority to make pricing decisions.
Be careful, however, not to antagonise businesses you rely on for service with hard negotiating tactics.
A client paying top dollar will always receive superior service, higher quality goods, better attention and longer credit terms when things are in short supply.
As a rule of thumb, aim to build a good relationship with suppliers you are likely to depend on and negotiate harder with businesses you are unlikely to need again.
It makes good business sense to negotiate hard for big-ticket items like real estate, but it will pay you to also do so for off-the-shelf equipment like faxes and office furniture.
Examine the possibility of bulk buying or forming a cooperative buying group with other similar businesses to get access to your materials or other vital parts that you need on a day-to-day basis.
How Much Should You Pay?
Suppliers may adopt one of three methods to determine the asking price for their products. These are “cost plus”, “going rate” or “flexible mark-ups”.
It is important to have some idea of the approach they are adopting when negotiating prices for supplies.
Cost plus means the seller estimates the cost of production and then adds on a margin to cover what is considered a reasonable profit.
At the other extreme is the going rate approach which comes from an awareness of the need to be responsive to market conditions, as determined by customer demand and competition.
These sellers are price takers. However, costs can’t be ignored altogether in their pricing decisions because it is costs which determine whether the business survives and therefore, takes or leaves the price offered in the market.
Flexible mark-ups come from a blending of these two approaches. Mark-ups are added to whatever cost base is considered appropriate (full cost, wholesale cost, etc.) in a flexible manner to reflect demand and competitive conditions.
This allows the manager to be sensitive to the market when pricing, but still be aware that if prices fall below cost, the business’ profitability may suffer.
The scope for doing deals is very wide. The many factors which help decide in what price range a business should position its products at a particular time include:
The business’ policy regarding margin and turnover. Businesses may be looking for a high margin/low turnover style of operation or at the other extreme a low margin/high turnover style.
The competitive situation for each product. If the product you want to buy is under less competitive pressure, the sellers will opt for higher mark-ups. This is usually the case where a product has some special feature (quality, durability, latest technology, etc.) or where it is exclusive.
Standardised products which are widely available may be discounted below normal margins to generate sales, especially where you can shop around and compare prices.
The method chosen for launching a new product also determines the price. When sellers are unsure of the demand life of a new product, they may decide to take advantage of early demand generated by novelty and set prices to give a high margin and quick profits before competitors enter the market or the market becomes saturated.
On the other hand, where a product is expected to have a long life, and repeat business is important for maintaining sales volume, a lower price may be charged. This would give only a modest margin, but may cause sales to build up more rapidly and create customer loyalty.
When demand for products varies throughout the season high mark-ups may be found at the beginning of the season and sales prices towards the end of the season, when customer interest is flagging.
It may sometimes be possible to time purchases to take advantage of seasonally low prices, but before making that decision, remember to take account of the cost of holding goods until needed.
Remember too that when a business can increase its turnover substantially by supplying you, the marginal cost of each extra item supplied is likely to be lower than for the existing output. Don’t be shy to point this out when negotiating a deal.
A final point about negotiation – If you are given a good price in confidence, it is unethical to go to another supplier and ask them to better this price. It pays in the short term, but in the long run suppliers will be wary of making you a low offer in the future