Customers are going to ask for price cuts. Remember that some buyers must ask just to see the response and have no intention to leave if you are a great vendor, especially if you have saved the guy a number of times in the past. Know your pricing history, know the current trend in material prices and be aware of everything your firm does for this buyer first, before responding to this common question. Consider all of your alternatives when this threat to pricing emerges.
Remember the buyer would not ask you if he did not like your firm. If he did not like you, he would go elsewhere and you would not get this chance. He is doing his job and understands that he must get something in return. This is necessary for him to keep his job. Every reasonable time this occurs, you must tell him you are going to do what you can to help him, but leave him with the caveat that he must help reciprocate with you on other issues you also have. You will analyze the account in total, lay out your plan, prepare a list of items that you want him to give you in exchange for working with him. Again, consider which options are comprised of the items on the list you use when you ask your customers for a price increase.
Take the opportunity to offer your buyer alternatives to this price reduction request that may be acceptable to him and you. Here are some alternative options to consider offering to your customer.
- Volume increases/ Process reviews/ Redesign options: Tell him to order two or three times the volume and you may be able to give him a volume discount given that setup costs are the same regardless of the volume run. Are there parts or services you provide to him that can be made cheaper if he orders in a different manner or different time (i.e. Middle of the month versus month end, order services all together with lower overall costs incurred)? Look at all of the tasks your firm does to complete a product, offer a service and think about stripping it down to bare bones to cut out costs. What processes can be eliminated that do not really affect the viability of the product? What can be changed in the manufacturing process that speeds up production, cuts labor costs, reduces scrap, eliminates finishing, painting, rubbing, edging, trimming, outside services, inspection time or any other task that cut labor hours and will cut your cost? Investigate all costs.
- Packaging: Suggest different cheaper packaging ideas, lower cost shipping methods or no packaging or freight at all (i.e. Let the customer come pick up the parts, strap the parts or products to a returnable pallet, package in a reusable wrapper, box, etc.). Can the packaging provided to the customer be cheapened? (i.e. Lower cost materials, no printing, wrapper comes on a roll). Can it be returned and reused for his products, parts, rolls, boxes, crates, spindles, etc.? Does the product really need a package or need to be wrapped in any fashion?
- Freight: Tell the customer you will drop the price if he picks up the product so you save on freight costs with your driver or an outside carrier. If you do not have company trucks and must hire outside firms, this may be very inviting to you and acceptable to your customer/vendor. Instead overnight delivery, allow a four or five-day shipping window (lessening the freight bill). If delivery date does not matter, go rail versus truck for long hauls. Give the customer a better rate if you are simply restocking a warehouse and have extra time versus fulfilling their current orders.
- Order Size/ Combination: Ask the customer to order other products and increase the order size and you might be able to provide some discounts. Ask the customer to increase the order size so this reduces the setup time required for any order (fixed cost spread over a larger denominator of products produced). Ask your engineers, for a particular customer, what would be the most cost efficient minimum order combination that could be obtained, that would drive down manufacturing costs; then take this model and offer a reduced price for these combinations of order mix of products.
- Stock Inventory/Guarantee buybacks: Ask your customer to allow you to make stock to be put on your shelves and held, but he must pay carrying costs while you are holding it for him (after an established period of time) and guarantee to buy it all in the event he leaves for another vendor. Do this only with written agreements in place.
- Early Payment Discounts for AR and AP: Offer an early payment discount to your customer (i.e. Pays in 10 days versus 60) and at the same time, take advantage of early payment discounts worked out with your own vendors associated with this account.
Work with the customer and tell him you want a resolution to the proposed price increase that he can accept but no matter what, be clear; your firm cannot absorb all price increases forever.