Supplier Negotiation Strategies // Save $1,000's sourcing from Vietnam and China
Want to potentially save 1000’s of dollars on your next project? Check out these tips from our expert sourcing professionals
Like most people you want to save as much money as possible when you buy your products. By now you should know that the quoted price is very rarely the final price. Once you’ve narrowed down your list of suppliers to the final few (3 to 8 is a good number) then it’s time to get serious about negotiation and getting the final details, and most importantly price, figured out. In Chinese society, negotiations are expected and are part of business norms. But be warned, many factories have years, if not decades, of experience negotiating. We made this guide in order to give you a leg up on as you prepare to negotiate with your suppliers.
Tips to dominate negotiations with factories
Negotiations are a balancing act between you and the supplier. Obviously you want to get the best price but you also want to keep the factory happy so that they will continue working with you. I personally believe that the best negotiations happen in person. However many of you cannot travel, so we wrote this guide as a to cover both in person and email negotiations.
1 // Know the real price of your product
After compiling your list of potential suppliers, you should have a pretty solid idea of the actual manufacturers’ price of the item. Keep this in mind when you order but also remember the factory is a business and they need to make a profit too. In order for you to succeed you need to know as much as you possibly can about an item. This includes how much each customization cost, the expected price for a range of quantity orders, and the manufacturing process of your item. You also need to get an idea of the range of prices offered and figure out what you should be paying for your product. With more knowledge, you can confidently source your product.
2 // Contact multiple factories
Sourcing is a numbers game and the more factories you're talking to the more likely you are to find the best one. This step should provide more options to you and allow you to use factory quotes against each other. By having the most options available you have a better chance of finding the perfect supplier for you. Most people start with Alibaba, but you should be suing as many resources as possible. If you don’t know of any others check out our guide to Alibaba Alternatives. A bigger net catches more fish.
The more factories you talk to the more likely you are to find the best possible price. Even after finding one good factory, maintain contact with other factories. When you are trying to get a target price, you can and should use another factories quote as a reference. You can use two factories quotes against each other to drive prices down, and once you get the hang of it to create a bidding war between two or more factories to get your business. Don't’ expect that to happen early but with practice, you can get there.
3// Stick to your budget
It’s very, very easy to go over your budget. Before you start negotiating you should figure out the total cost of your project from beginning to end. The total cost isn’t just the product cost, but also the shipping, import and custom fees, and Amazons fees.
First, you should figure out the total cost of the entire project, including a breakdown by quantity. The cost you need to include are product cost, packaging cost, duty, and shipping. From there you should be able to get the total landed cost. In addition, you need to reach out to Amazon and get a quote for their cost on your project and add those cost together.
Here's a screenshot of the cost part from a recent Validation report we did for your reference :
Product Validation is one of Cosmo Sourcing most popular services and you can reach out to us if you wish to have us do this for you. However, if you wish, feel free to look around as there are several other companies that offer this service or do it yourself.
As a rule of thumb for FBA sellers, you should spend 1/3 of your budget on buying and shipping the product, ⅓ for Amazon and FBA fees and ⅓ for yourself.
4 // Don’t forget shipping
Shipping cost can be huge, sometimes as much as the product itself. Most suppliers give their initial quotes in EXW (Ex-Works) which is the cost of the product to be picked up at the factory. However, There are other shipping terms such as FOB, in which the product is delivered to the export port, that will cover some of the shipping routes but have a larger quoted price from your supplier. You can and should negotiate shipping terms with your suppliers and get quotes from a freight forwarder
If you are confused about shipping terms, check out our guide to intercom and trade terms to learn more.
5 // Negotiate in the local currency
This tip is more of expert-level tips and requires a bit more work than the others. In order to fully do this step you need to have a knowledge of Chinese exchange rates, and knowledge of how to pay a supplier, you can use our guide on paying Chinese Suppliers as a reference. It also helps to have a bank account set up in China to make it even easier.
China’s currency is the Renminbi and the units are the Yuan. As of this writing, the exchange rate is 6.375 CNY to 1 USD. While most factories and suppliers give quotes in USD it’s important to keep the exchange rate in mind and ask for quotes in CNY. When you ask for a quote in USD an exchange rate is chosen–and one that, not surprisingly, favors them over you.
When we are buying we ask and negotiate in CNY since it’s easier for Chinese factories to work in their own currency but we give quotes to clients in USD using the latest exchange rates. We always use the most recent quote from www.xe.com for the exchange rates. We at Cosmo have a transparent sourcing process and all payments are made by you directly to the factory. We can help all our clients with the payment process and can even handle the payment when requested.
Of all the advice we give this is the one that most people call us out on. We very often get people telling us that we are wrong and that they’ve been sourcing for over 10 years and they’ve always got prices quoted and pay in USD. Just because you've done it one way for so long doesn’t make it correct. We have been in China for years and have compared quotes given to us in USD and RMB and the RMB quotes are consistently lower by about 5-10%. Yes, Chinese business will have accounts that can hold USD but unless they have significant business interest in the States, they will ultimately need to convert the money to RMB. If you don’t believe us try it and compare your results.
6 // Negotiate payment terms
30/ 70 is the most common terms and what you should expect to pay although 50/50 is not unheard of. 30/70 means that you pay 30% of the total cost in advance and the remaining 70% upon completion. Completion is usually when the product arrives at the port and is signed off by a 3rd party inspection but before being handed to a freight forwarder
If they ask more than 50% you should be very suspicious and consider looking elsewhere. If they ask for 50% upfront make sure that they are very clear about what they need it for. Sometimes the factory needs molds made, which can cost thousands of dollars, or they may need to reorganize a line. There are legitimate reasons but make sure that the factory has one, otherwise negotiate back down to 30%.
7 // Negotiate better terms after multiple orders
If you’ve been making multiple orders from a factory and plan to make more orders in the future then you should try and negotiate a better price. Simply put, since you can provide the factory with a reliable revenue stream it is in their best interest to keep you as a client and you can get a lower price. Factories often prefer the stability of a long-term and consistent customer than one who pays more but won’t be reliable. There are additional costs that a factory takes on to start a new client, and those are reflected in the original quote, but after the first orders are completed those cost are no longer applicable.
8 // Negotiate additional goods in the event of defects
Defects happen, it’s important that you have an agreement with the supplier about what to do with them when they arise. There is always some product, due to various reasons that will come out defective. The maximum rate you should tolerate is 5% and less than 3%. When setting up a contract make sure that you have a section about defective products. Assume that about 3% will be defective and that you will pay for anything less than that and they will be responsible for anything above it.
You can and should hire a 3rd party inspection service to inspect the goods before they leave the origin country.
9 // Negotiate Quality and not just price
There is a Chinese Proverb that says “ Buy the best and you’ll only cry once, buy cheap and you’ll cry forever.” While cost is obviously a big reason why you select a factory it should not be the only one. You should make sure that the factory is capable of making your product to your standards and expectations of quality. Unfortunately, Chinese factories very often will cut corners and deliver a bad product. This act is so common in China that they have a term for it called Chabuduo. You need to make a decision, and is taking extra steps to make a better product, such as double stitching, worth paying more for you? Then let the factory know and have them agree to perform these steps. You will pay more but you will get a better product out of it.
10 // It is possible to get to low of a price
Again this goes back to ChabuDuo; The Chinese art of corner cutting. Chinese factories will cut any corner they can to save money and you will often get a lower quality item as a result. This is absolutely something that you should be aware of and make a plan for it when you do encounter it. This is why the previous two steps of negotiating quality is important.
11 // Be polite, professional and even make friends with them
Be polite, professional and positive - Just because they work at a Chinese factory does not mean they are not human. They love hearing praise and prefer to work with people that they like and enjoy talking to. Offer compliment about products when they do a good job. And make sure that you come across professional, this will give you more legitimacy.
In China there is a concept called Guangxi, which is network based on trust and respect. Having a good relationship with a supplier is good for a small buyer and essential if you plan on working with them for a while. Chinese businesses are very focused on making personal relationship. Chinese prefer to do business with people they know and like. if you are visiting China and meeting with suppliers, it’s not uncommon for most the time spent with you supplier having lunch and getting to know them and not about business. In fact the first meetings in China are almost always personal and discussing business happens on the second or even third meeting. If they really like you then expect to have a dinner and drink and end the night at KTV ( upscale karaoke bars that are popular in China). Make sure you have a few songs you’re prepared to sing. China is a drinking culture too, so be mindful of that. The fact is Chinese prefer doing business with people they know and trust and will give you a better rate than a stranger.
12 // Never marry a supplier
I know I just said relationships are important but the fact is you need to constantly be looking and keeping contact with other suppliers even after you’ve made a final purchase. China is a huge country with many suppliers often making the same things. If you happen to find a better supplier don’t be afraid to jump to them or order from both factories. It’s not uncommon for a buyer to buy the exact same products from 2 different factories. Even beyond China, Vietnam is quickly growing as an alternative destination, and with the impending trade war is looking even more attractive. By the way, Cosmo has a dedicated team for sourcing in Vietnam.
13 // HIRE A PROFESSIONAL TO HELP YOU
If you’re confident in your abilities, feel free to go at it on your own, but there is nothing wrong with asking for help. If you’re sourcing product from China for the first time, it may be a good idea to hire a company to help you out. You may find yourself spending hours, if not days or weeks, sorting out the details on how to source your product. When your time is valuable, you may be better off hiring a partner to help you source. Time spent sourcing is less time building up your new product or company. Working with a professional will take one major item off your mind and allow you to focus on
Of course, we would recommend Cosmo Sourcing (though we admit we are biased), as we have been sourcing and buying from China for years. While there are a few decent companies out there, do make sure any company you choose has a transparent model and that they do not work on commission. You need to find one that will keep you informed at every step. You likely already have enough on your hands, investing in a reliable sourcing company will ensure your process goes smoothly and you aren’t paying more than you should for a subpar product.
LET COSMO DO IT FOR YOU
If you don’t want to do validation yourself, Cosmo Sourcing offers Product Validation, as well as a full range of services to plan, find, make and ship your product from China or Vietnam.
We combine all services into our Simple Sourcing Package, which is designed to do everything to take your idea, turn it into a product and ship it to an Amazon warehouse. Cosmo can do everything from creating a product spec sheet, validation, sourcing, ordering and evaluating samples, arranging inspections, finding freight forwarders, quality assurance, negotiations and even working with prep and fulfillment centers in the States. Our goal is to handle every single step of your business in China and Vietnam for you.
If you are interested in working with us to source your products, send us an email to email@example.com or visit our product request page. Even if you don't use our services, we are happy to answer your question as well so feel free to reach out!