Revisiting the Fundamentals of Negotiating with Chinese Manufacturers
The fact that we still receive a substantial number of questions regarding order quantities as they relate to pricing tells me that some people will find this post helpful. For those e-commerce sellers that have been sourcing and importing private label products for years, negotiating with Chinese suppliers is likely "old-hat" for them. However, no matter what your level of experience dealing with suppliers, you may still be able to pick up some useful tips.
Hopefully after reading this, you’ll understand why buying larger quantities is almost always a better idea than trying to play it conservative and ordering the Minimum Order Quantity (MOQ). Not surprisingly, there is also a lot of bad advice suggestions out there from the so-called “experts” on trying to lower the MOQ’s in order to test the product without investing too much capital.
While this course of action has some merit when talking about brand new products not currently listed on Amazon, it has no place as a negotiation strategy for the vast majority of products. Regardless of what your negotiation goals are, it all starts with that first communication to a supplier. And let's face it, not all suppliers are the same. Different skills are required to effectively negotiate with the plethora of different personalities you’ll run into when sourcing products.
Negotiating with Chinese Suppliers: A Lost Art
There's definitely an 'art' to negotiating with Chinese suppliers. Your ultimate goal when searching for factories should be to find one that will not only manufacture your product to the desired quality specifications, but one that you can build a long-lasting relationship with who will go the “extra mile” for you once you’ve proven yourself a good client and built up the level of guanxi required before they consider you worthy of their attention and friendship.
You'll want to make it your mission to convince your supplier to see you as a preferred customer that not only pays on time, but demonstrates an obvious desire to grow their business. Once you've established this close relationship with your suppliers you'll be in a good position to get support with your private label goals. Partnering with a supplier should be every private label seller's goal. A mutually beneficial partnership with a high quality, honest, and ethical supplier will not only benefit your bottom line, but it may also lead to additional benefits that won’t be realized until the relationship matures. Some of these benefits might be:
- Better payment terms. This can be a huge bonus, as it will lead to increased cash flow and allow you to place even larger orders, thus lowering your Cost of Goods (COG).
- Higher quality product. Many suppliers offer their best customers upgrades to better components and raw materials, thus producing a higher quality final product.
- New products. Developing and nurturing a relationship with a good supplier can lead to them offering you their new products before other customers. Even if it’s just a newer, better version of your current product, it can have a big impact.
- Better pricing. This is the obvious benefit of doing business with a supplier for a long period of time. Once they know you, your business, and have seen your orders grow, they will often be amenable to re-negotiating pricing. Make sure you fully understand the pitfalls of pushing for lower pricing, and be mindful if you sense any reluctance, as forcing the issue can have disastrous consequences.
- Better overall service. Once sellers learn that the most critical part of getting these perks from suppliers is not just the quality of the relationship, but more importantly the level guanxi, the all-important cultural concept that is ingrained in every aspect of Chinese society.
A few tips to consider when approaching and dealing with new Chinese suppliers:
You obviously want to get the best price you can, and usually the fastest way to lower pricing is to raise your order quantities. The following examples are very basic, but warrant discussion, as there are still many sellers out there who don’t fully realize the impact that even a small drop in unit price can have on their long-term profitability.
Let's say for example you want to buy 100 units of a $7.00 product.
If you're able to negotiate even a small 30 cents discount per unit it might not sound like much, but when your business scales and you begin ordering and selling more product these small discounts can add up to BIG savings on Cost of Goods (COG). Take a look at these examples:
- Buy 100 units @ $7 = $700
- Buy 100 units @ $6.70 = $670
Net Savings on COG: $30When your business begins to scale:
- Buy 500 units @ $7 = $3,500
- Buy 500 units @ $6.70 = $3,350
Net Savings on COG: $150When your business establishes regular and continuous sales for you product:
- Buy 1000 units @ $7 = $7,000
- Buy 1000 units @ $6.70 = $6,700
Net Savings on COG: $300 When you build up cash flow from previous sales, you can invest in more inventory to last a longer period of time and thus cut down on all of the additional logistics costs of ordering again. This is a key point so I want to stop and let this sink in. Experienced sellers know that the freight charges represent one of their biggest costs.
We all know shipping from China is not cheap. So if you can cut down on the number of orders by bumping up you quantities, you will ultimately be significantly more profitable. We have a comprehensive ebook, along with interactive spreadsheets that do a DEEP dive into this scenario. We will be offering this eBook for download in the next few days, so be sure to enter if you want us to contact you when it becomes available.On with the examples!
- Buy 3000 units x $7 = $21,000
- Buy 3000 units x $6.70 = $20,100
Net Savings on COG: $900 And it will likely be MUCH more savings, as you will easily be able to qualify for a better discount when ordering at these levels. But for the sake of consistency in the example, the discount is 30 cents per unit. You might be thinking "but I'm not currently able to buy 21k worth of stock right now”. And that’s understandable, but we wanted to show you the benefit of ordering higher quantities and how it can save you thousands of dollars by not only lowering the price per unit, but also cutting down on the freight costs of shipping those multiple, smaller orders—which can be a HUGE bump to your bottom line.
While it’s all about negotiating, this can't happen without first building a real relationship with your supplier. Please familiarize yourself with the differences between American business culture and Chinese business culture, as even the concept of negotiation is different in China and it all revolves around the concept of guanxi. As we revisit the basics of negotiating with Chinese suppliers, we thought it would be a good idea to list some of the “DO’s” that will help you in your efforts.
The 5 Most Important 'TO DO's' When Dealing with New Suppliers
- You DO want to show your suppliers that you're a good customer by paying on time and communicating efficiently and effectively with them (a surprisingly big deal to Chinese suppliers)
- You DO want your suppliers to know that you have a solid plan to grow your business and thus, increase your orders with them.
- You DO want to show your suppliers that you are an expert when it comes to knowing your product. You need to be able to demonstrate that you know what you’re talking about when it comes to the specifications and details of manufacturing your product. Study up! This is a big deal to suppliers.
- You DO want to convince your suppliers that you’re in it for the long term and not just looking for a “one and done” deal. If they know that you are loyal and plan to be with them for a significant period of time, they will be more likely to help you by doing the favors that were mentioned earlier in this article.
- You DO want to show your suppliers they are appreciated by not only maintaining, but nurturing & growing your relationship with them. This is only a part of the very important cultural concept of Guanxi (google it and study it). This can be accomplished in a number of ways: sending gifts, offering compliments, writing a testimonial for them, and visiting them from time to time.
Cut 1% to Save $1000's On Business Services?
When negotiating with Chinese suppliers, you should carry that over and look for savings from your other vendors that your business uses on a recurring basis. Services like shipping, fulfillment, and payment processing. For example, let's look at credit card processing merchants. It pays to shop around for the best deal from the various payment processing services, as a small 1% discount per transaction can amount to thousands of extra dollars in your pocket over the the course of a year. I always try to negotiate but I also like to be 'fair' with my suppliers to build a good relationship. Business can change fast and if you have good relationships in your industry you'll be well placed to call upon and leverage your supplier friendships to help you adapt to those changes.
Thus Ends This Rudimentary Lesson
It’s always a good idea to periodically revisit the fundamentals from time to time. Change happens fast in the e-commerce world, and sellers have to posses super-human traits to not only keep up with all of the changes, but to adapt, overcome, and thrive DESPITE these changes. These are just a few tips for helping you secure a better deal and save you money when negotiating with Chinese suppliers and purchasing your private label products. The best advice we can offer: study up and become familiar with Chinese business customs and culture. Once you have a handle on just how different it is, you’ll begin to make progress in your supplier relationships. Guaranteed.