Your business's ROI is heavily influenced by the quality of the relationship and sustainability of the pricing you get from vendors. The best way to ensure high levels of both is to establish agreements and clarify details early in the partnership. Discuss these 10 issues with vendors to avoid disagreements.
Before making your first payment
1. Exact pricing and its constituent parts
This seems obvious, but a surprising number of companies forget to get these basic details nailed down and in writing. You should know how much the service will cost, down to fine details including:
- What units measure the price: All-in-one? Hourly? Monthly? Per specified item? Per pound?
- What is the agreed-upon price per unit?
- When and how is the price subject to change?
- What ancillary charges — such as shipping, taxes, or fuel surcharges — are attached and under what circumstances?
- If prices change, how much advance notice will you get?
Most contracts should include these details. Getting everything in writing. Email can be an excellent way to get a written statement without putting anybody on edge about an official written document.
2. Bulk discounts and other offers
Bulk discounts are the most common deal a vendor might offer you. If you buy more units of what they offer, you can usually qualify for a discounted price per unit. Get that information ahead of time so you can make smart decisions about timing your purchases and upgrading as you grow.
For example, if you need 1,000 units of a part every three months and get a 10% discount on the price for 3,000 units or more, you’re better off buying parts once a quarter instead of once a month.
Ask the vendor what other kinds of discounts they offer. Some other common examples include a cash payment discount (because they don’t pay banking fees on those), early payment discounts, autopayment discounts, and paperless statement discounts. Discover all the ways to save money, and work those into your business plan.
3. Payment date
There are two factors to consider here.
First, are you paying before or after you receive the product or service your vendor provides? If you pay after, you have more power over quality and service than if you pay in advance. Whenever possible, negotiate this arrangement along with clearly stated terms of how long you have to pay after receipt.
Second, look at your business’s natural cash flow and try to time your vendor payments to suit. For example, a health club that charges all clients on the fifth of the month would want to schedule as many of their bills to come due after the fifth, when they have the most cash in pocket.
Even businesses without direct control over when they get paid can find patterns in how well they do throughout the month. For example, a local bar may see high revenue on payday for the largest employers in town.
4. What happens if you’re late
You hope to never be in this position, but you might pay a vendor late. It could be an oversight where two office people both thought the other had sent the payment, or it could be the result of a bad month where you don’t have the funds.
You should know before it gets to that point what your vendor’s policy is for late payment. Do they add a late payment fee? If so, how can you get it waived? Do they stop delivery until you catch up? If so, how can you keep getting what you need while you’re still in arrears?
This information is most important during a lean period because it can help you strategize your finances to keep in business until things pick up.
5. Terms of credit
Not every vendor will let you make purchases on credit instead of requiring cash payment in advance or at the time of delivery. For vendors who allow credit, you must understand their terms of credit. (It also usually helps if your credit score is rock solid.)
Many vendors work on an informal credit basis, where they deliver without asking for upfront payment and trust you to pay within a certain period. This is essentially lending you the value of the service at zero interest until you pay.
Others grant you credit but charge you for the privilege. If that’s the case with your vendor, understand the costs and also how you can arrange not to pay that extra fee.
6. Communications protocols
If you need to contact your vendor, what is the best way to do so? Ensure you have the phone number and email of a specific individual responsible for your account, their direct supervisor or manager, and the company in general. That way, you can get an accountable individual when there’s an issue.
Similarly, know who to contact when placing or changing orders. This might be the same person as your troubleshooter, or it might be an entirely different department. The more you know about this, the smoother your business will run.
What exactly must the vendor deliver to warrant a payment? For example, this could be a number of units of goods, hours of services, or a completed project or task.
Beyond that, you should also have an agreed-upon minimum standard. For goods, what level of quality must they be and at what time must they be delivered? For services, what are the metrics for fulfillment? For a project or task, what are all the components the vendor must meet before the task is considered completed?
Understanding this ahead of time helps you both before and after the transaction. Knowing it before enables you to gauge the fair price. Knowing it after helps you know whether or not you should pay.
8. Exclusivity considerations
This option doesn’t apply to every vendor relationship, but it can help you both when you bring it into play. Does your vendor expect you to do business only with them for the goods and services they provide? Do you expect the vendor to only do business with you within a specific territory?
One typical example of this is with retail rental property. If you’re running a crafting store in a strip mall, it’s reasonable for you to expect the landlord not to lease another spot in the same mall to a different crafting store.
If negotiated carefully, this kind of deal can give you both an edge over your competitors, but enter into these deals carefully. They often risk more than they reward.
9. Term commitment
This one is simple. Does your vendor require a guaranteed term in which you will buy what they sell? If so, how long does the commitment last? What are the penalties for leaving early? Make sure you can live with those terms before signing up.
Similarly, some vendors won’t require a term commitment but will incentivize a more extended contract by offering better terms if you agree. These can add up to significant savings, but make sure you know all the details before getting your company mired in such a restriction.
10. What happens if they mess up?
If a vendor fails you, getting reasonable compensation for the trouble can be frustrating if you haven’t agreed to a course of action ahead of time. As you walk through how they’ll deliver and how you’ll pay, come up with a list of potential ways it can all go wrong. For example:
- A late delivery that impacts operations
- A low-quality delivery that does you no good
- Clerical errors that impact your business
- Rude or difficult staff members who turn off your team or customers
- Damage caused to your facility during delivery
Set up ahead of time what the vendor will do for you in these situations. That way, you’re not spending time and effort negotiating a solution while also dealing with the stress caused by their mistake.
Final thought: Renegotiation
After you put together these details, you should renegotiate terms as situations change. Once a vendor relies on your business, they’ll do a lot to keep it, even if it cuts their profits to do so.
Of course, renegotiating is easier if you’ve already established you’re a good client and have a great relationship with the vendor in question. That starts by nailing down the above details and abiding by them for a few quarters. Regardless, it’s in your best interest to answer these questions as quickly and in as much detail as possible.