Procurement Services for Suppliers
Anyone who has ever negotiated contracts with vendors is very familiar with the process:
- Identify those items supplied by the vendor with significant spend and purchase frequency
- Provide a list of 20-100 of those products to the vendor and request “Core” or “Contract” pricing on those items
- Ask the vendor to add an additional set of products they see purchased frequently by similar companies.
- Use the finalized list as a standardized scope when requesting pricing from other vendors. Standardizing the list ensures an apples to apples comparison across vendors.
The goal is simple – find the absolute best, bottom-line pricing for the products you routinely buy to operate your portfolio. Of course there are other considerations beyond price; e.g. distribution, customer service, and workflows. If those considerations are vetted prior to requesting the price analysis, then it’s a safe bet you will likely choose the vendor offering the best prices on the Core products you identified.
Now put yourself in the vendor’s shoes – they know all of this. They go through this process for large and small customers on a daily basis and know exactly what these companies are thinking. To catch your attention, they provide blockbuster pricing on those products with high visibility to make you think you are getting an amazing deal.
But what pricing are you getting on the hundreds or even thousands of products you purchase less frequently? “Don’t worry, we can provide substantial savings on all non-Core products as well,” they’ll say. “We’ll get you 40% off MSRP on everything else.”
Blockbuster pricing on 20-100 core products and 40% off everything else – sounds like a pretty good deal, right? Well, it isn’t. In the vendors eyes, the core products are “loss leaders”, items that bring you in to the store or e-catalog to get you shopping. Once you are there, they know you will shop around for other convenience items or specialty products where their margins are higher.
Over the years, we’ve uncovered two particularly interesting secrets that shed light on the games most vendors are playing.
- Core items account for a small portion of a companies total spend. It’s the long tail – the hundreds or thousands of items you only purchase once or twice a year – that accounts for the majority of your total spend.
- 40% off MSRP is a terrible deal. MSRP is the Manufacturer’s Suggested Retail Price; manufacturers set this artificially high in an attempt to anchor value. At 40% off, you are likely still paying well above retail. This means you’d get a better deal on those long tail products if you visited the retail website or walked into a store. It may sound great, however when pegged to MSRP it’s not much of a deal.
How do we know this? At Purchasing Platform, our members turn to us as their Procurement Specialist. Our team has negotiated numerous contracts with national and local vendors over the years. Also, we routinely conduct detailed spend analysis for clients where we compare prices of products they have purchased in the past to prices on our Platform where we have negotiated pricing. Check out the details of one such analysis here.
Our findings indicate that clients vastly overpay for the “long tail” products that, while purchased less frequently, add up to a significant amount of overall spend.
So, what can you do about it? Well, here are two tips to negotiating vendor contracts: Procurement Services for Suppliers.
- Address the long tail – Negotiate “core” or “contract” pricing across a much wider swath of products that you are purchasing. This means thousands of core products rather than hundreds.
- Negotiate discounts off web pricing – not MSRP
We built Purchasing Platform as an eprocurement solution to counter the games vendors may play in contract management. Purchasing Platform does provide Procurement Services for Suppliers. The ideas we suggest above – core pricing across thousands of products and discounts off web pricing – are two components we have integrated into Purchasing Platform in order to save money and simplify the purchasing process for Property Management. Contact us to learn more.