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When it comes to buying goods and services, getting the most bang for your buck is critical in today's economy. If you're like most other business owners, your bottom line is under siege just when your suppliers are looking to protect their own profits with higher prices and tougher terms.
For many business transactions, the secret to making the most of your money lies in smart negotiations. Remember that you don't have to accept your suppliers' opening terms. Instead, continually look for ways to create transactions that are mutually beneficial to you and your vendors.
Give and Take
Successful negotiating is more an art than science. The best way to master this is by studying some examples.
Consider this common scenario: You want to create a snappy, modern website for your business. Unfortunately, the really good web designers are in high demand-and your favorite one wants a big portion of his fee up front. What to do?
"It's not unreasonable for a website designer to ask for some money before starting work, but you can negotiate a reasonable amount," says Phil Marcus, principal of The Negotiation Pro of Columbia, Md.
"Suppose the firm asks for a third of the total up front for a new project," he says. "A good approach is to point out that the vendor does not have to buy any expensive materials like a construction contractor does; then, offer to pay 10 percent up front. Next ask, 'Can we set a schedule of payments to occur when certain portions of the site are done?'"
Many times, says Marcus, project agreements call for payments to be made when work completion reaches 25 percent, 50 percent, and 75 percent. Then the balance due is paid upon completion, minus 10 percent of the total bill for a 30-day period. "Holding back 10 percent allows you time to fiddle with your site and make sure everything is working correctly before your final payment," Marcus says.
The idea here is to avoid a drain on your cash flow, maintain quality control over the service you receive, and be fair to the vendor who benefits from your business.
Let the vendor know that if you are happy with the job you will order more work, will put a link to the vendor's own site on your site, and will post a fair appraisal on public bulletin boards such as Angie's List, which are consulted by prospects. A vendor will go an extra mile for any customer who promises to help improve business.
The approach that works with a web designer can work with any number of suppliers, whether offering services or products. Consider these scenarios:
Merchant Fee Hike
If you're like many businesses, the ability to accept credit cards is critical to your success. Unfortunately, many merchant account vendors take advantage of that fact by hiking their fees. Take heart: The merchant account industry is highly competitive and your vendor is likely to be open to counter offers.
"Pricing is always open to negotiation," says Paul A. Rianda, an Irvine, Calif.-based attorney specializing in the bank card industry. "The market has gotten to the point where profits have compressed and the main way of retaining merchants is through lowering price. Keep in mind that your existing processor knows you can go somewhere else and get it cheaper-there's always another guy beating on your door."
Merchant account pricing involves two main components: The first is the interchange rate, or the percentage taken by the merchant account provider of each sale made. There are dozens of these rates, varying by type of card and transaction. The second main fee is the transaction fee, which is paid for each transaction. This generally runs around 25 cents.
"In many cases, your lion's share of savings will come from negotiating better interchange rates," Rianda points out. Start by analyzing your sales by category. Generally, focus on the rate for "card-present" transactions if you're a brick and mortar outfit, and "non-swiped" transactions if you're basically a Web-based merchant.
Shop around and see what other merchants are paying and what other merchant account vendors are offering. Then you can ask your own vendor to match the better deal. Emphasize that you enjoy working with your current company and want to stay with them. What will they do to keep you?
Credit Card Rate Hike
Of course, businesses leverage credit card purchases every day, too. Suppose your credit card issuer spikes your interest rate, even though you are a stellar borrower. This seems to be happening more often today as a result of the turmoil in the credit markets in general.
In many cases, interest rates are negotiable, says Marilyn J. Holt, a Seattle-based management consultant. "You are in a better position if you have established a personal relationship with your banker," she says. And the size of the institution matters. "Small banks and credit unions are much more open to negotiation than the big banks, which can be intractable."
Before you talk with your banker, do your homework. Start by talking with other businesses in your region to see what rates they have been getting. Then you can ask your banker to match them for your outstanding debt, or for new debt that you incur. Take into consideration those competing credit card offers you receive in the mail, too.
Finally, be prepared to horse trade. "Offer something in return for a better rate," Holt advises. "Even if you are not in arrears, be prepared to knock the amount you owe down to 33 to 50 percent of the current amount. Some banks may offer you a lower interest rate if you set up a monthly automatic payment of a minimum amount."
What's not negotiable? Billing cycles, for one thing. Those are set by third-party transaction handlers and your bank has no control over them.
Addition of Surcharges
Earlier in this story we discussed an example with a website service provider. However, product suppliers can pose their own problems: Suppose you're dealing with a vendor that starts adding fuel and delivery charges or other bill-fattening items, or maybe it has started requiring COD.
"If this is a vendor with whom you deal regularly, you have more negotiating power," Holt says. "Tell them that you have a good relationship and want better terms. Offer to keep them as a vendor if they move out of the COD and give you a three-percent discount if you pay in 10 or 15 days."
The bigger you are as a customer, the better negotiating position you are in. Offer to increase the amount of merchandise you buy if they eliminate surcharges.
Grow Your Vehicle Fleet
"There's lots of competition in the vehicle leasing field, so negotiations are wide open," Holt says. Here are some things you can offer your vendor in exchange for lower monthly fees:
- An extension of your lease into multiple years.
- Leasing additional vehicles.
- Inclusion of the leasing firm's banner with a "Leased from XYZ" sign on your vehicles.
- Paying more months up front. "If you pay them six months of a three-year lease, they are better off than if you pay only two months," Holt points out.
- In addition to lower fees, you may ask for: more frequent, less expensive maintenance work; less expensive emergency service and the use of replacement vehicles without the vendor's logo; lower cost to apply your business's name and logo; or installation of security systems.
Office Expansion
Suppose you need bigger office space. It's available in your current building, but how do you approach your landlord?
In today's economic environment, commercial real estate is a "tenant's market" in many cities, meaning that tenants have more negotiating power. (For more on real estate negotiation, see "The Time is Ripe to Renegotiate Your Commercial Lease") You are important to your landlord because you are a proven quantity: A reliable tenant who is actually expanding in tough times.
Tenants everywhere are asking for-and getting-free rent. "You might tell your landlord that in exchange for taking twice the space, you are willing to sign a three-year lease, and you want the first three months' free rent," Marcus says. Or you might ask for more "build-out money." That term refers to investment in such critical amenities as interior walls, electrical wiring and cabling, attractive carpeting, or lighting. "All of this is very important to your customers," Marcus says. "And it can be expensive."
Other ideas: A landlord might have flexibility to give a tenant more amenities, such as more reserved parking, that do not cost the landlord out of pocket but provide significant benefit or cost savings to the tenant. The tenant may also want to negotiate a cap on common area maintenance expenses.
Speak Up
Many small business owners don't bother negotiating because they feel they will be turned down. Don't make that mistake. Vendors are ready to talk turkey in today's tough economy. After all, they want to increase revenues and retain accounts as much as you do.
But take the right approach. "Ask in a non-demanding way that offers the supplier something in return for whatever discount you need to make your project work," Marcus says.
Try to apply the power of negotiation to all aspects of your business. "Practically anything can be negotiated for," Marcus says. "There is no reason not to ask. The worst they can say is 'no.'"