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Negotiating
with Chinese Suppliers
• Quickly find the right price that you should be negotiating for
When you think of negotiations what’s the first thing that comes to mind… PRICE?
Did you know that price is not necessarily the most important thing you can negotiate
for with Chinese suppliers? Besides price there are at least six other things that you can
negotiate for when sourcing products from China. And if if you do it right, the impact can
be bigger on your bottom line than just price alone.
The art of negotiating with Chinese suppliers isn’t just about dollars and cents. Many new
sellers are worried about negotiating with Chinese suppliers without offending them. Or
saying the wrong thing that can make them think you’re small and new… even if you are.
The good news is that with this Guide to Negotiating with Chinese suppliers you will:
• Understand the mindset of most Chinese suppliers so you can negotiate more
effectively
• Learn six things you can negotiate for besides price
• Learn when you should email, call, or meet a supplier face to face when negotiating
• Quickly find the right price that you should be negotiating for
• Recognize “who’s the boss” in a Chinese Factory so can negotiate the outcomes
you want
• Avoid common mistakes that both newbies and veterans make that can leave money
on the table
• Be prepared with all the tools you need to negotiate with confidence
Lesson 1: Mindset 7
In China negotiations are a way of life 7
Money ain’t a thing — Be THICK-SKINNED when negotiating 7
They EXPECT you to negotiate 8
Avoid analysis paralysis — Enter the 70% Rule 8
Lesson 2: The six things you can negotiate for besides price! 9
Price: You get what you pay for! 9
Payment terms 10
Sample costs 11
Product quality 11
Freight costs 11
Packaging and labeling 12
Product quality issues and compensation 13
Case Study 1: Problems discovered at the factory before shipment 14
Case Study 2: Problems discovered after product lands 14
Monetary compensation 14
Product compensation 15
Lesson 3: The art of negotiation 16
Prepare yourself 16
Market pricing 17
Bottom-up pricing 17
Your desired outcome... and theirs 18
Tell them your story… and what’s in it for them 18
The offer 19
The reaction and response 19
Bring something new to the table 20
They EXPECT you to negotiate It’s human nature but this will not move your
Negotiations are EXPECTED. Like the Polo shirt business forward.
street vendors, Chinese suppliers expect you
to negotiate. In fact they’ve already added a To avoid analysis paralysis, collect enough
premium in their opening price as a cushion information, about 70%, to take a smart
against your negotiations. So if you don’t ask decision and move your business forward.
then you’re leaving money on the table. Be
sure to negotiate before accepting their first I love Jeff Bezos’
offer. 70% rule. As
the founder of
How do you negotiate this? We will cover this Amazon.com he
in a later section in this guide. clearly knows a
thing or two about
So remember that Chinese suppliers expect doing business. In
you to negotiate for a lower price. They his 2016 Annual
are thick-skinned and are not likely to be Letter to Amazon
offended. Shareholders
he wrote, “Most
Finally when preparing to negotiate, you decisions should
should cast a wide net and ask many suppliers probably be made
to learn of the range of prices of the market. If with somewhere around 70% of the information
you’re not sure how to do this, I’ve prepared you wish you had. If you wait for 90%, in most
a bonus webinar video which walks you cases, you’re probably being slow. Plus, either
through the process which you can access at way, you need to be good at quickly recognizing
the end of the e-book. and correcting bad decisions. If you’re good
at course correcting, being wrong may be less
Avoid analysis paralysis — Enter the costly than you think, whereas being slow is
70% Rule going to be expensive for sure.”
After you get a rough estimate or “ballpark” Secondly, you will not get the best pricing
pricing, then you can use this as a on your first order. When you place a trial
benchmark to begin negotiating price. order normally your order volume will be
quite low to the supplier. With such a small
Two key points that will save you time and order there’s little chance they can leverage
help you focus on the right suppliers: economies of scale to offer a great price. As
First there’s no need to negotiate with a rule of thumb as your order volumes go
everyone on the longlist. Another rookie from 500 pieces to 5,000 pieces then you can
The Online Seller’s Guide to Negotiating with Chinese Suppliers 9
expect to negotiate for better pricing. On the other hand, better payment terms
will mean you can hold off on paying your
Similarly as your relationship with your supplier until later when you’ve had more
supplier grows stronger, so will the pricing time to generate more sales. You can read
that they can offer you. This concept is more about Payment Terms in a post I wrote
known as “guanxi” in China. here:
So remember with your first order, there’s Payment Terms and how to negotiate them
no need to be a hero and go for the home to increase cash flow, reduce your risk, and
run in your first at bat. You are more likely to gain leverage if problems arise
strike out or frustrate your supplier if you try
to nickle and dime them back and forth for a Normally most people will negotiate
couple more pennies. payment terms of 30% advance payment
and 70% before shipment
So if the pricing or upon copy of the Bill
is in the ballpark of Lading. But you can do
for the trial better as your business
order, aim for grows, your relationship
a base hit first gets stronger, and as trust
to get on base develops with your supplier.
and score later.
You will be able Better payment terms
to get better you can negotiate for can
pricing as your include:
volumes increase and relationship grows.
• 100% payment upon shipment
1) Payment terms • Net-15
Payment terms are another very important • Net-30
item in doing business that I see if often • Net-60
overlooked when negotiating with suppliers.
The reason is because as you grow your In each of these scenarios you are
business you will need to put more cash into negotiating to pay your supplier LATER so
inventory. This comes down to cash flow. you will have more cash on hand to reinvest
into your business.
So in a nutshell, the earlier you pay your
supplier, the less cash you will have for other How do you get suppliers to agree to this?
expenses such as shipping, rent, Amazon The key is trust. If the supplier trusts that
PPC, adding new product SKUs, and even you can a reliable client and that you have
paying yourself a salary. potential to grow their business then they
10 The Online Seller’s Guide to Negotiating with Chinese Suppliers
may be willing to offer you better terms. 3) Product quality
TRIPLE CHECK YOUR SPECIFICATIONS - I’ve
Note that with the Net-X pricing these means said before that quality control is a “Never-
that the payment is due X number of days ending Story”. When initially placing your
after the order is shipped. For example if order, make sure to TRIPLE CHECK your
your order ships on Jan. 1st and you have specifications. You must make sure that the
Net-30 terms then the payment is due on Jan specifications are right. A tiny difference in
31st. This means that you have an additional the thickness of piece of stainless steel that
30 days to generate more revenue to pay for is 0.3cm versus 0.5cm thick will have a huge
the order. This will reduce pressure on your impact on your customer experience. For
working capital so you can pay for your other example the difference between something
expenses (and pay for your salary!). being a piece of “Made in China” junk
versus something that feels like a quality
Note that these terms are not set in stone. It product.
really depends on
your business type, Best Practice: Be sure to keep Sometimes if one part
the type of products track of this agreement via of your widget can
you’re dealing with, be of lower quality to
email or in writing somewhere
the suppliers’ risk save costs, tell your
tolerance, TRUST,
so you can refer to it later.
supplier! They may
and guanxi. You can be able to use a lower
negotiate a combination of terms as well — priced component to save you money!
for example 30% deposit, 70% net-30, etc. The opposite is true of higher quality
components however.
2) Sample costs
Before placing your first order, it’s a good So remember product quality is tied into
rule of thumb to order a sample to evaluate product cost and this can be a sliding scale.
product quality and service level. As a general You can use it to lower cost but beware you
rule, sample costs can be returned to you get what you pay for.
when you place your first order. Normally
ordering samples is part of the initial vetting 4) Freight costs
process. When you order a sample be sure to Did you know that you can negotiate
ask that the fees be credited to you when you pricing and payment terms with your freight
place your first order. Not only does this save forwarders when shipping your product?
you $50 to $100 this also incentivizes them
that you are looking to do business together. Shipping costs may vary somewhat from one
So this is a no-brainer. freight forwarder to another. So you can and
should shop around to find out the market
All you have to do is to ask them. rate of shipping 1 cubic meter of product
The Online Seller’s Guide to Negotiating with Chinese Suppliers 11
so you can use that as a target price to prepared to spend more on shipping as well.
negotiate with your forwarder. Some forwarders require a monthly spend of
$20,000 before allowing payment terms.
Be aware that ocean freight is only one part
of the equation. I didn’t realize this until just But the key thing is to be aware that you can
recently that some forwarders make next to negotiate and ask! Otherwise you won’t get
nothing on the ocean freight but the rest of any of these benefits to lower your costs and
the logistics supply chain — e.g. trucking, increase your cash flow and working capital.
warehousing, unloading, palletizing, labeling, Remember the worst thing that can happen
etc — is where they make most of their is they say no. Just ask!
margins.
5) Packaging and labeling
Be aware that shipping costs can fluctuate Packaging options can range from a simple
widely. This is especially during peak season PP bag to a luxurious Apple-esque box. The
in the months leading up to the 4th quarter pricing on packaging is based on a sliding
and Chinese New Year when shipping rates scale as well. Often times if you want a
will skyrocket. simple package or box that the factory has
done before, they will be able to include it at
Besides pricing, don’t forget that you can little or no additional cost.
negotiate payment terms with your freight
forwarders as well. Though you they might Note: They don’t manufacture this in-
not agree to this when first starting out when house and will outsource it to a packaging
you are only shipping Less than Container company which is normal business practice.
Load (LCL) shipments. As your volumes grow
forwarders may be able to offer you better So it’s up to you do decide on your
terms for example; Net-30, Net-60, etc. But be packaging quality that strikes a balance
between the added value that the
packaging brings to the customer and
enhancing your brand image. Because
this will come at a cost and also the time it
takes to develop it.
But be careful going with packaging that is In fact all the suppliers I’ve worked with
too “cheap”. This will diminish the image of have agreed to add FNSKU stickers at no
your brand and make a bad first impression additional cost. This saves you at least $0.20
when your customers receive your product. per product and that’s money back in your
PP bags or plastic bags are an example product.
of this. Though you can cheaply and
quickly get these made to package your You may have some concerns about them
products, it doesn’t do anything to help the being able to do it correctly. But by sending
customer experience and in fact might even clear guidelines, properly monitoring the
“cheapen” an otherwise quality product. production process, and arranging a pre-
This may even leave a NEGATIVE first shipment inspection you can reduce this risk
impression in the eyes of your customers to nearly zero.
and make them more likely to look for
problems and leave you a negative review. Tricks of the trade: When initially creating
barcodes, ask suppliers to send a picture
of their barcode. If you don’t have a
barcode scanner, Jungle Scout founder
Greg Mercer shared that he uses the
app “Shop Savvy” on his smartphone
to test if barcodes scan correctly before
proceeding to full-scale production!
If you know yourself but not By getting quotations from 10-20 suppliers
the enemy, for every victory you will quickly learn what the market price
gained you will also suffer a will be. And this way with your shortlisted
defeat. suppliers, you will instantly be armed with
the price you have targeted to negotiate for.
If you know neither the enemy
Bottom-up pricing
nor yourself, you will succumb
Another method is bottom-up pricing. This
in every battle.” takes more time since you will have to do
your homework. In a nutshell, you will break
Sun Tzu, Author of The Art of down the product price into individual
War component costs, labor costs, rent and
utility costs, transportation and fuel costs,
etc.
online seller, these are the two main
strategies for negotiating price. Not recommended - I don’t recommend
this method for most Amazon sellers
Market pricing because it can be very time consuming and
For market pricing you want to learn the not worth it.
average cost of your product by casting a
wide net of suppliers initially and sending Some may think you can ask for the Bill
them Request for Quotations. By doing this of Materials (BOM) but if you’re placing
you will have a quick gauge of the market orders of less than $100,000 annually most
price. Think of it as going shopping for a factories may not be willing to provide a
camera. By doing research on Amazon.com, detailed list of components for you. It’s
Bestbuy.com, and calling your local camera usually much quicker to use the market
shop, you will get a good idea of how much pricing strategy to get a quick snapshot of
the camera should cost, right? Similarly by the pricing you can negotiate for.
contacting numerous suppliers you will
learn the market price. If you are PURCHASING (not selling) more
If you can’t make it to the factory then a On the other hand there are several
trade show is a good way to get a snapshot disadvantages to phone calls. There can
Sales representative — The they can do. Normally they don’t have the
messenger ability to decide lower pricing below what’s
The person that you deal with day to normally offered, offer extended payment
day from the factory is likely the sales terms, or agree to your modifications
representative. They handle inquiries from without permission from above.
online platforms like Global Sources, and
they normally make the rounds of trade If you are negotiating one of these things,
shows like the Canton Fair. Normally this normally they will have to report this to their
person is a millennial, has a basic if not good supervisor or to the owner directly. And he
command of English, and is eager to do or she will then make the final call.
business with you.
In fact within the organization that’s a
You probably have a positive relationship Chinese factory I consider it a DICTATORSHIP.
with them as you are dealing with them day-
to-day. Factory owner — The emperor
Put simply, the owner is the EMPEROR and
However it’s important to know that THEY he or she calls all the shots whether a deal
ARE NOT THE DECISION MAKER. There is a can go through, whether to offer a “special
severe limit to their power and how much price”, extended payment terms, or any
Remember “good things come to those who So in cases of going below the price floor,
wait.” Build up your relationship, build up your they may substitute components for lower
order volumes, build up your trust, in order to quality components without telling you and
build up your business and benefits will come. not think that there’s anything wrong with
that.
3) Going below the price floor
As a rule of thumb you get what you pay Doing business with Chinese suppliers, it’s
for. The supplier has their own costs and important not to assume anything. I’ve had
expenses. If you try to be really aggressive these problems arise in my experience. So
with your negotiations and go below their it’s important to ask even seemingly obvious
price floor, then they will have to sacrifice questions to ensure you’re getting what you
quality and may cut corners as a result. think you’re getting.
In my view you can’t blame them. They are 5) Forgetting to negotiate better
in business just like you and need to make a payment terms to increase cash flow
profit to stay in business. At the end of the day this is an inventory
business. So your cash flow is your life
Moreover another cultural factor is that blood. Rather than “30% advance 70% upon
Chinese businesspeople may not be as openly shipment” table stakes, as your business and
In closing, thank you for reading this guide. To help you take action I’ve
prepared some special bonuses which you can download from this page:
www.8020sourcing.com/negotiate
• RFQ script to quickly contact suppliers and learn the marketing pricing for
your product
• Checklist of the six things you can negotiate for besides price
• The 7 Deadly Sins of Negotiating - Commit them at your own risk!
• Know when to use face-to-face meetings, calls, and emails
• Bonus Video: “Secrets of Successful Sourcing” Masterclass: How to find the
right supplier from China