Vendor negotiation: 10 steps to an effective strategy

Fortune 500 companies could boost their earnings before interest, taxes, depreciation, and amortization (EBITDA) by a third by reducing vendor and supplier costs by just a tenth, according to a Proxima study.

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For companies in both the Fortune 500 and FTSE 350, external supplier costs make up the vast majority of what they spend. The Proxima Study found that for Fortune 500 companies these costs make up, on average:

• 75% of Fortune 500 companies’ spend and 65% of their revenues
• 70% of Financial Times Stock Exchange (FTSE) 350 index companies outgoings and 60% of their revenues

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Whether you’re managing finance in a large company or a 10-person SMB, these findings show how important good vendor management and negotiation strategies are to keeping every business in a strong financial position.  

Why vendor negotiation is important

The key advantage of strong, healthy supplier relationships is that you can gain better value for your business. The better you know your suppliers, and the better they know you, the more likely you are to benefit from dedicated service, preferential pricing, and special terms. As an Insead management expert explains, these relationships happen when a “salesperson… attempts to build offerings that are indeed value creating, and tries to help [customers] get the best or fairest deal possible.”

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Good relationships mean you can also resolve issues through negotiations—including the best possible pricing and payment conditions—as well as the timelines for product or service delivery. Long-term relationships with suppliers may be strengthened by focusing on what is beneficial for both parties in the talks rather than merely negotiating for the lowest feasible price (more on this later).

How to negotiate with vendors

A Harvard Business Review article contained a gem of wisdom about dealmaking:

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“Substance is the terms that make up the final agreement. The process is how you will get from where you are today to that agreement. My advice to deal makers: Negotiate process before substance.”

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Let’s look a bit closer at the potential process.

Step 1: Research industry before negotiating contracts with vendors

Get organized first. It pays to be well-prepared when you negotiate with suppliers. Before you start negotiating, make sure you know:

• their market position
• their competitors' prices
• and what the market bears for their products or services

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Benchmarking vendors’ pricing against what other customers are paying is critical in ensuring making confident purchases and getting the best price for your company. Some finance automation tools like Ramp come with built-in procurement planning tools to help you understand going rates. 

Step 2: Source quotes from multiple vendors

It helps to have options, so talk to at least three suppliers. During this process, make sure to:

• Let each one know you're collecting more estimates to encourage a lower price
• Say you will choose the provider who provides you with the most competitive payment terms
• Examine the quality of the bids in detail when evaluating them

Step 3: Research your vendor's customers

Determine your supplier’s current or previous client list based on your bandwidth. Contact those customers and solicit their comments. If the buyer is satisfied with your supplier, you will know how to modify your offer. If the client is dissatisfied and you are committed to working with the supplier, you may have an advantage at the bargaining table.

Step 4: Run a competitive bid

This is an important step. Whether you choose to structure this as a Request for Proposal (RFP) or a Request for Quote (RFQ), this can net you savings for years to come. Letting vendors know that you’re running competitive bids can motivate them to give you the best offer possible. It’s no surprise so many large companies often make this a mandatory step in their purchasing process. You should consider doing so, too.

Step 5: Set a price target

Whether you’re eager to rein in consultant costs or better your SaaS management outlays, it’s important to set a target price before starting any negotiations. Make a mental note of what you can afford to pay and the discount you’d like to see. Your financial planning and analysis (FP&A) colleagues may be able to help you land on that number. It could be a sliding scale of 30% to 50%. But only set your price target after you’ve run a competitive bid and obtained pricing benchmarks.

Step 6: Keep your budget secret

No matter what, keep your budget to yourself.

• Don’t give the seller an upper hand
• Vendors and suppliers may take advantage if they know your exact budget
• As long as the price is right and all parties benefit, then all is good

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Budgets aside, it is not wise to disclose any information about your company that may be used against you during negotiations.

Step 7: Prioritize your needs

Remember to define your must-haves and where you’re willing to flex to achieve this dollar amount—the lowest price isn’t always the best price. For example, if your business depends on your ability to meet your service level agreement (SLA), it’s worthwhile to pay more for communication tools with better uptimes so you can stay in contact with customers in real time.

Step 8: Never accept a vendor’s first offer

Instant acceptance shows you have high spending power and can be priced at premium rates. Stretch your negotiating skills and take on giants. They all need business and are open to negotiation to get new customers and retain existing ones.

Step 9: Offer vendors deposits or phased payments

Larger deposits will result in a larger discount. Suppliers, like any other business owner, are concerned about their accounts receivable, so offering hefty deposits on your purchases is another approach to achieve larger discounts. If the supplier knows they'll get 50-60% of the money upfront, you'll have greater bargaining power, and they'll be more willing to work out a price.

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Phased payments involve pegging payments to project milestones, and this can also be a good way to break down lump sum costs and win more favorable terms. Another upside? You get to keep more cash in the business for longer, too.

Step 10: Think long-term about your vendor negotiation strategy

Vendors and suppliers love to work with companies that pay on time and are easy to work with. Just as companies love to work with suppliers and vendors who can hit every project deliverable on time and be easy to work with, too.

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That’s why approaching vendor negotiations with a winner takes all mentality will often backfire. Instead, look at vendor negotiations—whether with new vendors or established ones—as an ongoing opportunity to build relationships and forge partnerships. This approach can yield much goodwill, more favorable negotiations, and more openness on both sides towards finding a deal everyone is happy with.

Step 11: Show vendors you provide value

Yes, your suppliers are eager to serve you.

• But keep in mind that a seller may walk away from an agreement just as quickly as a customer can
• The best method to get the most out of your supplier's sales staff is to be friendly and cooperative in order to arrive at a mutually beneficial compromise
• Make sure they understand you are someone who can provide recurring business

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Give them some hints about how much business they can expect from you based on previous purchases—if you have a track record together. But balance this with restraint. Just as you should hold your cards close to your chest with your budget, you don't want to overcommit to a vendor. Remember, you may be able to find more favorable deals in the future, and always check vendor risk.

Simplifying pricing benchmarking with Ramp

Ramp can give you pricing insights to help you negotiate with vendors. Ramp Price Intelligence leverages data from millions of anonymized transactions to benchmark what your peers are paying for the same software. These insights give you the tools you need to negotiate and purchase software with more confidence.

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Why not start using Ramp today? A faster, time-saving way to track spending, manage vendors, and save money is waiting. Learn more about Ramp's Price Intelligence.

And if you want to learn even more about spending less on your tools, check out our SaaS savings e-book.