Many small businesses, especially those in niche or newer industries, struggle to obtain competitive pricing when ordering from manufacturers in relatively low quantities. High production costs can hinder a small business from taking advantage of growth opportunities. As their products grow in demand, they may hit an uncomfortable stage of growth where they are forced to squeeze maximum efficiency out of their current processes to keep up with that demand.
Consider, for instance, companies in the vegan food industry, producing items including alternatives to cheese and meat. The number of vegan consumers in the U.S. has risen more than 600% in the last five years, according to research firm GlobalData. This presents an attractive opportunity: entering a market niche with lower saturation to capture market share while competition is reasonably low.
The nature of this opportunity means, however, quite a few vegan companies are only a few years old and may be faced with rapidly growing demand. As small niche producers of food products, they specifically face the challenge of outputting enough food to satisfy their customers while still keeping their products fresh and authentically vegan. Furthermore, they need to accomplish this while keeping their costs low enough to grow their businesses.
Scaling Up Is a Challenge
As demand grows, these niche companies may lack the resources to manufacture enough product in-house. To overcome this, some outsource manufacturing to larger companies. However, the challenge with this strategy is ordering in large enough quantities to negotiate effective deals with manufacturers. Many manufacturers even charge premiums to offset the cost of producing a smaller quantity of goods.
In the case of vegan food, it must be fresh and is often perishable due to the nature of its ingredients. If you order too much, you risk the food going bad before you can sell it to a retailer or before a customer can purchase it. If you order too little, you may have difficulty manufacturing at an affordable rate. One solution is to add preservatives to the food, but this approach can counteract the health benefits of a vegan lifestyle. Compromising quality is an approach that could negatively impact your business in the long term.
Negotiation Tips
Fortunately, these production costs can often be negotiated down, and there are things you can leverage in these talks to help find an agreement that works for both your company—keeping your product authentic while still being cost-effective—and the manufacturer. Consider these approaches to help you negotiate an advantageous agreement with a manufacturer.
Join a consortium. In order to help lower production costs, many small businesses consider joining procurement consortiums, where multiple small companies band together to achieve volume discounts and economies of scale. Depending on just how niche your industry is, however, this can present its own challenges. In a space with few competitors but very specific manufacturing needs, you may end up sharing procurement with your direct competition, or you may struggle to find enough businesses to go in with you on a given order to reach the volume needed to qualify for a discount.
Negotiate pricing. Small businesses can also lower the cost of production by negotiating more favorable pricing with their manufacturers. Though this can be challenging, small businesses often find they have more bargaining power than they realize.
Below are some strategies that may help give you leverage going into pricing negotiations:
1. Research the costs and have a target dollar amount in mind before you speak with a representative. Ask your peers in the industry what they pay for their manufacturing, or ask a mentor if you can. Then you’ll know if the quotes you’re receiving are significantly higher than the industry average, and you’ll know you can probably find a better deal elsewhere.
2. Don’t accept the first offer, and get the job quoted by at least three manufacturers. Let them know that you are in talks with multiple manufacturers and that you will go with the best offer. This will encourage them to give you more competitive pricing. You can also ask them up front for a list of their customers as references. Their other customers may be willing to share their prices with you, so you’ll know what to expect before you begin negotiations.
3. Offer a mutually beneficial agreement. If negotiations are stuck, you may be able to compromise on the amount of the down payment or the length and terms of the contract. Do your due diligence, and try to understand the manufacturer’s business model as much as possible. You may be able to find a way to lower costs for both of you, such as shortening the time it spends on your order or helping it get a good deal on supplies. Giving the manufacturer favorable terms on other parts of the deal can be an effective bargaining maneuver to move things your way on price.
4. Have your down payment ready and immediately available. This can be one of your greatest negotiating tools. The larger the down payment, the more power you will have when negotiating the ongoing cost of manufacturing. This can be a challenge for small businesses, but some consider financing a larger down payment to save on long-term production costs.
5. Demonstrate trustworthiness by sharing your payment history and experiences with potential manufacturers. A strong business credit report could set you apart from producers who may not have as positive a payment history or as strong a business credit file, making you more appealing to manufacturers. This could grant you some additional leverage in negotiations and help ease any worries they may have about working with a small business.
As with any negotiation, the first offer you get from a manufacturer can simply be a jumping-off point. However, it’s important to understand the risks a manufacturer is undertaking when it agrees to work with a small business. One of the best ways to get your foot in the door with a manufacturer is to demonstrate that you understand these risks and its need to mitigate them. Making on-time or early payments and exhibiting positive business credit scores and ratings is helpful not only for procurement negotiations but also for building positive business relationships with manufacturers.
Following a partnership agreement, positive business credit score and ratings can increase your chances of successfully securing trade credit. This payment following the sale of goods (rather than on delivery) may be useful to both parties: It can help give you the cash flow you need to grow your business (and that means you can order more from the manufacturer and allow you to make timely payments that strengthen your creditworthiness.
Understanding your worth and the manufacturer’s needs will help you feel confident in negotiating an arrangement that benefits both parties. A mutually beneficial agreement is likely to be stable and long-lasting, allowing your small business the opportunity to grow along with demand.
Amber Colley is business credit expert and senior vice president at Dun & Bradstreet.
