I recently had a client seeking some advice on combating a price increase. He was dealing with a supplier who was raising his rates for their next contract. The justification was that the cost of materials as well as delivery & installation costs were increasing and therefore they had to pass the price along to him. Here’s what I advised him to do.
This is a common situation. You have a contract with a supplier and upon renewal, prices are going up because of external factors. (I’ve never heard a supplier say, “Prices are going up because we want to make more money!”) When that happens, particularly if the external factors seem beyond anyone’s control, it’s a difficult situation to handle.
In this case we started with the basics, “What do you want?” My client wanted to minimize the cost increase. He was in a position to accept the price if he absolutely needed to but it would have an impact on the budget and he was concerned about setting a precedent for future negotiations.
I also asked, “Besides the price decrease, is there anything you’d like to change?” He expressed that he was overall happy with the relationship but some of the deliveries and installations of the products they were buying didn’t go as planned. Otherwise the relationship was good and there was nothing else he wanted to change.
The next questions was, “Do you understand the basis of the price increase?” We both agreed that it was strange the supplier was non-specific and using averages with suspiciously round numbers like “$1,000”. He had received some information on the price increase but no real details.
The final question was, “Are you willing to change vendors if you can’t get the price lowered?” I wanted to understand how important this was to him. He said they weren’t willing to walk to today but a price increase would weigh heavily on the next contract renewal and they would probably put it out to bid.
After a few other questions we developed the following strategy:
- Get more details. Go back and get more details about the price increase. Since they’ve been vague to date, he’s going to want to make sure the quoted increase is valid and not just a “nice to have” amount. He needs to look for the details and see if everything makes sense and push back on the elements that are fluff, overinflated, or unjustified.
- Trade the price increase for better service. Once they’ve been able to validate (or even reduce) the price increase and since they could afford a price increase, I suggested that they trade any price increase for improving service by getting better compliance on delivery and installation. Something to the effect of, “If you agree to ensure compliance on all delivery and installations, then we will agree to the price increase for all deliveries and installations that meet our compliance standards.” This way they are only paying for the agreed service level and not paying for bad service levels.
- Manage expectations for how price increases are to happen in the future. No one likes the “Surprise! Prices are going up!” conversation. However, when it happens it’s an opportunity to negotiate against future price increases. Therefore, I suggested that whatever the price increase will be, they negotiate that prices remain flat for a reasonable period of time.
The strategy helped my client more confidently deal with the price increase and it definitely moved the conversation forward in a positive way. It kept him out just arguing about the increase and gave him the ability to leverage their demand to get something he wanted in return. That’s how skilled negotiators think… how do I give them what they want on terms that are acceptability to me?