By David Lindley
President, EXIM LLC

One of the first negotiation encounters many foreigners have is at the tourist market. The seller proposes 200 RMB, you counteroffer 50, and end up some where near 75 for a jade carving or whatever.

The tourist market is fun and assumes a business model where the buyer has no idea of the input cost. The transaction is non-critical and consummated quickly, and both sides feel amazed by the exchange. The tourist thinks: “Wow, I bought this for $1, it would have cost $15 back home,” and seller is amazed some one would pay 20 times what it cost. Ah, if only the tourist market could be strictly applied to large-scale buying.

The reality is that setting price, by either buyer or seller, takes place in the current world of global capitalism. Information is nearly instant and almost always available, which means competition for better pricing is also always hot. Consumers of your products expect the lowest price, knowing if you don’t find it your competition will.

So good negotiating often depends as much on the type of business you are in, as well as having some specialized skills. Here are a few broader negotiating broader strategies we see in foreign trade today.

1) Reverse auction method: Often talked about, but only used effectively by a few of the largest retailers, commodity electronics and commodity goods buyers. When done in person, there literally will be several factory representatives on site with the buyer. The suppliers will be in different rooms and the buyer will go from room to room asking who can make a given product for the least money. After a few hours, only one factory has the contract. There is no relationship building here, only a transaction for product and payment. This model assumes there is a vendor willing to enter the fray and, most likely, an endless supply of vendors for your item(s).

2) Declining price method: Often a buyer has come to trust a supplier or group of suppliers. Maybe there has been substantial plant and equipment investment. Or there has been significant worker training taking place. It’s always possible to change factories for a better price, but both sides know starting over will be time consuming and represent a quality risk. In this situation, the buyer will ask the factory to commit to lowering the price by a set percentage amount (e.g., 3%) each year during the contract. Buyers win because they are seeing lowered costs each year without have to retrain a new vendor. The factory then has to become more efficient and lower their profit or input cost to retain business. But in exchange for doing this, they retain the loyalty of the buyer during the contract period, which may give them the confidence to invest in new equipment or make structural changes need to retain the business. Again, big volume drives this forward.

3) Comparative pricing: Most of us do this everyday. You don’t have all the information you need about the input cost for the item and you don’t have the time or capacity to gather the information. But you do know that six vendors have given you prices for the item. Three vendors were very close in price. Two others are substantially higher, and one was 30 percent less than everyone else. You weigh quality and other issues, and after a little back and forth between vendors you arrive at the one you like.

4) Reverse input method: You know what you are doing. You make the item yourself at home. You live and breathe this item. You know your input material cost, labor hours, waste percentages, delivery charges, everything. You also know what the raw material cost China for the item, factory labor rates and so forth. You are now working with multiple vendors to see who is really giving you the best offer with the least waste in the price.

5) The less-than-what-we-are-paying-now method: You are in a hurry. Maybe you shopped around some, maybe not. Maybe you are not coming to China at all. You don’t know what the best offer truly is, but it cannot be too bad because it is less than is less than what you paying now. Maybe on your next trip you’ll have more time to visit other vendors, you tell yourself.

6) The it’s-less-and-meets-our-percentage-target method: A variation of the above, but the price has to be a certain percent less than the current cost or it isn’t sensible to change from your current vendors.

Regardless of which price negotiating posture you find yourself in, remember that the more you know the stronger you will be. Working hard to learn as much as you can about the raw material and input cost will always serve you well and reward you with a fair and reasonable price.

Other articles by David Lindley

• Negotiate the entire transaction, not just the price
• An American buyer offers insights on avoiding trade fraud in China

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