This is a presentation by Steven Selikoff, Negotiation Expert.
Kiss, Bow or Shake Hands, great book on negotiating with suppliers from other countries.
“When negotiation is successful, you not only get a fair price, it also builds trust and fosters a strong relationship between you, and your factory.” done for you system Amazon program
Guanxi,
You want to build Guanxi with the Chinese, that is good will, relationship, going over and beyond.
Once you have built relationship/guanxi, you get them to do favours for you, get them to send you free samples,
A Small % of buyers at the Canton Fair are Amazon sellers, you see lots of new products.
When sourcing, the first step you’ll be doing is gathering information and establishing interest, making relationships.
You will negotiate with multiple factories before you choose the one who will eventually do business with.
You can give decoy product info so that all factories have the same base to negotiate from. When you give them a decoy, you don’t have to tell them what the product does, it serves a base to start from.
The reason for that is if you are talking with multiple factories but only will use one, if you give them all the details about your idea/product, then that means that other factories will also have the info about your idea/product. You don’t want to give away your ideas left and right. So you start off with a decoy product to protect yourself and your idea.
You let the factory know that this is just a decoy product. If everything goes well and we go with your factory, we’ll sign an NNN, then we’ll give you the actual CAT design and drawings and what we want to do. But until then, everyone is getting the same information. What can you do on this?
NNN: Non Disclose, Non Use and Non Circumvent. NDA in the Western countries, meaning you cannot disclose any confidential info as far as customers/ who/where you’re selling, your trade secrets etc…until it is disclosed publicly. If you’re selling on Amazon, the moment your product goes live, you are disclosing your product and that NDA is no longer enforceable.
In China, you do not want to do that for 2 main reasons:
- If you’re selling on Amazon, the moment it goes live on Amazon, that NDA is no longer enforceable.
- An NDA is about not disclosing information publicly. China doesn’t do that, it doesn’t apply. What you’re concerned with is that the factory is going to disclose it privately and create a product like yours or sell your product to someone else.
So instead, in China, you want an NNN, which covers Non Disclose, Non Use and Non Circumvent.
That’s the kind of conversation you have with the suppliers initially.
Download WeChat.
Be familiar with your product, required tech/materials, processes and components. Know your customer, your distribution, your business plan (including growth), know your SRP and therefore, your target price and know your budget.
Know what is important to you, besides price.
Know what your showstoppers are. What will make you abandon the negotiations and be prepared to walk away if showstoppers cannot be resolved. There are always other factories!
An example of the non Circumvent would be say during a family dinner in China with immediate and extended family and close friends, the factory owner could quietly and casually mention that he’s developing such and such product at his factory but he’s not allowed to do anything with it. But if you were to create a product like that, you might have a great opportunity to make a lot of money and sell to big box stores in the US. By doing that, they’ll be circumventing the agreement.
By having an NNN, you’re protecting your intellectual property in 2 ways:
- with the agreement
the fact that the factory knows that you do know what you’re doing and as
result, they’ll respect you and take you more seriously.
However, if you go to them and tell them “I have an NDA that is in English, that you’ve probably downloaded online, they’ll know that you’re a clueless rookie and they know that they can simply ignore it.
Download a reference NNN, in chinese and english. Chinese is the language that it’ll be enforced in.
Recommended to have your NNN written by a Chinese lawyer, so that it is specific to your supplier.So that your supplier takes you seriously and the chinese lawyer will do the negotiations for you on your behalf of the NNN.
Should you get an NDA or an NNN?
Once you are dealing with an NNN, your factory knows that you are serious, that you understand the game and are experienced and they will take you more seriously and respect you more and they’ll be less tempted/likely to screw you over. They’ll also consider you more professional and will also be open to extending terms faster to you as a result of this.
Before starting negotiations, know your product inside out! There’s a TV show called “how is it made?”,
Reference NNN link in Chinese/English, can you share that please?
The number rule to be successful at negotiations is to be prepared, to be familiar with the your product, required tech, materials, processes and components.
Know your customer avatar, their pain point, your distribution, your business plan, including growth), know your targeted selling price and know your budget. You don’t have to tell them your real target price, that’s for you to know.
It’s very important that you know your selling price, so that you know at what price you should get your product. And what point the price is no longer profitable and for you to walk away from the negotiations.
Know also your showstoppers/game breakers. Know at what point is the negotiation not worth it any more and to walk away. Remember, there are other factories and it’s important for you to be talking with multiple factories and not just one.
For ex, let’s say the product you’re looking to source, the factory is telling you it’ll cost you $3.50 and you know ahead of time based on your research that you’d need to have the product at no more than $3, then you’ll have to let the factory know that $3 is the max price and if they cannot meet that, then you’ll have no other choice than to walk away.
That price is your raw cost, not landed cost.
Know what’s important to you other than just the price. Quality can be very important too. If the factory cannot meet you price wise, then it’s perfectly fine for you to walk away. There are other factories.
Don’t be the first to ask them what is your price. When they ask “what is your price?” your answer with: “I am looking for a price that is going to make my customers happy, that’s going to make me happy and that’s going to make you happy.” And when you say that, say it sincerely as you do not want your factory to be going out of business. I want them to make money. And if they can’t make money, then let’s keep talkingmake money and I can make money and that my
If they insist that you name a price, start with a lowball number.
Negotiate more than just price. Perhaps the placement of your logo on the side instead of on top, if that’s a bit less expensive, spare parts, an extra long life battery can be given up during negotiation.
Know what you can give up. This is why it’s SOOO SOOO Important that you understand your product inside out, know your numbers inside out so that you can make those crucial but informed decisions at the key moments of the negotiations phase.
Watch for clues like body language, which is universal. Watch for phrases like “It’s impossible!” or side conversations.
When you talk about pricing, if they look up or to the side before giving you an answer, they are more than likely, just making up the number! However, if they start looking in a list, that’s more accurate as they’ve researched it. A price is never just a number by itself. It’s made of labour, materials, IP, R&D etc.
When they quote you a price, ask them clarifications, details on how they reach that price. “why is this $4?” Then, they’ll explain to you that this part requires a special material/design/style/colour that is more costly etc. And each of those details can be negotiated. If things are stuck, ask the supplier what other options are available for the component you are discussing.
Ex” this part is made of a pink colour”. Ok, then, let’s make that in a colour that is not as expensive as we don’t need it to be pink.” By doing that, you can start the negotiations and know that you can give up some features while not affecting the main functionality of the product.
If some part of the work is outsourced to a 3rd party, ask how much is that cost. The more you ask those probing questions, the more you can find opportunities to even better understand your product and to ultimately, save more money.
If they keep on saying “It’s $4” and you keep on staying, we can only o $2, keep at it until they say “It’s impossible”, then respect them for that and you can start digging for those details and what you can do to bring the price down.
Keep asking to bring the price down until they say “it’s impossible.” Keep in mind: Make it a Win/Win.
The factory wants you to be successful.
Their goal is to make money today but keep you in business so they can make more money tomorrow and every order after that. You both want each other to be successful so that they can keep on making the products you need and they want you to sell as many of their products.
If it’s not impossible…
Do NOT be afraid of silence. Listen more than talk!
Listen as carefully and intently as possible!
Shut up and win!
If they say “its $4” and you say “It’s $2”. then just stay quiet. It’s very uncomfortable to stay quiet!
They WILL say something. Or they will get up and leave. And when they come back, that’s when you start digging into how they come up with that price.
This applies to not only in person negotiations, but also video calls and even on WeChat through texting! Don’t reply to their message for a while!
Start your negotiations on WeChat Video. That will allow you to see whether you’re dealing with a factory, how big it is or with a trading company. After 1-2 video calls, you can ask them during a call, I’d love to see your factory floor, if you could walk into the floors and show me how you guys make the product, that’d be awesome. If it’s a real factory, they’ll have no problem showing you the floors. If they say, “we can do that tomorrow or next time,” then, that’s a sign that it could be a trading company.
Yes and Know.
Yes doesn’t not mean Yes. Ask questions differently.
When they say Yes, it doesn’t mean they agree with you, it means yes I’ve heard you, I’ve acknowledged you. It may not even mean they understand what you’re saying just to save face. Ask the question differently to ensure they understand you. Get them to confirm what you said and agreed a few times and at the end, get it in writing!
Contracts In China:
When you’re dealing with a factory, not a trading company from which you’ll be buying multiple containers, you want to do more than just shake hands and sign a deal. Yo want to start with a general conditions contract which will extend across every order you will make from that point forward. It will cover everything from each party’s responsibilities, product ownership, who owns the product, (if they were to modify the product, before that, make sure you sign an NNN with them so that they don’t go behind your back and register a patent on that product in China, thus taking ownership of the product of your OWN idea!, which happens a lot in China unfortunately!). As well
as details on QC inspections, what happens if they fail inspections, pre-during and post production, pre-shipment etc. what happens to the defective products, are they destroyed? Timeliness, what happens if they miss deadlines etc. All of these details apply to every order you make with them from that point forward.
Get a General Conditions Agreement first! Use an Attorney for that.
Also, just because you’ve found a factory, doesn’t mean that your products will be made at THAT factory! Maybe they don’t have the materials or they have already fully booked or some of their materials break down, then they will outsource your work to another factory!
To avoid that and being shipped to a lesser reliable factory, having a General Conditions Agreement will protect you as you’ll be harder to move around. They’ll look for an easier customer to ship out to another factory.
Peer to Peer.
It is expected that you will make an agreement with your PEER. After all, Kings negotiate with Kings.
Some so called “gurus” recommend to identify yourself as a purchasing agent for a large company. This is very bad advice! It establishes you as weak and deceptive. They know that trick already!
If you identify yourself as a purchasing agent, 3 things will happen:
- They will believe you as it’s the first time they interact with you. The will pair you
with a mid level manager, not a decision maker since you are not a decision
maker. - They know that you are lying from the start and they’ve been given a green light
to be deceptive themselves by you being deceptive. They also know that you are not experienced in negotiation and doing business with China/Chinese. That trick used to work 3-5 years ago, but not anymore! - They’d rather deal with an owner of a company who’s new to a certain product.
If you have to consult a partner before making a decision, that’s fine, just let them know, they’ll understand that.
Identify yourself as the Founder/CEO or President of the your company. You are a decision maker, a partner.
This applies to most of Asia, not just China. Cross Your T’s and Dot Your I’s.
Components: hidden cost savers and hidden cost traps. MOQ: What, why an how much? Surcharges.
Price Breaks – Economies of Scale.
Future Orders – Be Optimistic, realistic and honest. Save Face – Yours and theirs.
MOQ: Say you don’t want to buy 1000 units, but only 400.
Say that to them: “I don’t know if this is going to sell to my customers. I like it, you like it, I think your quality is good, I’d like to get 400 to start with and test.
They will not be happy with that as their MOQ is 1000. If they say “It has to be 1000 units”, ask them why does it have to be 1000 units. To which they will probably respond “we need to buy a special material that we can only get a good price for a large order of 1000 units. Now you know why the MOQ is 1000 units.
Of if they say “that’s our MOQ, that’s what we always do for our customers”, then you that might be your cue that they may be bluffing you.
Ask why the MOQ is that high, that number.
At this point, tell them: “I only need 400 units, what’s the surcharge?” Don’t even ask if there is a surcharge. Ask them confidently what’s the surcharge that’s going to be added on if I ordered only 400 units?
They’ll reply with:” It’ll be an extra xxx surcharge. BE QUIET at this time. Then ask them, “Can that surcharge be applied to my future orders?
After asking that questions, 2 things will happen most of the times:
They’ll answer yes, when you order over a 1000 units, we’ll refund the surcharge
and will apply it to the next order. This is great as at that time, you’ve ordered your 400 units, and that surcharge will be refunded back to you when you add up the first and the 2nd order and put the positive of the surcharge and the negative of the refunded surcharge back to you and it all comes down to 2$/unit. Which is exactly what you negotiated.
When you say what is the surcharge, more times than you can imagine, they’ll just say: “ok, don’t worry, we won’t do a surcharge, you can order your 400 units.” This is because now they see you as a knowledgeable, experienced business person and are taking you seriously. Kings negotiate with Kings.
Then you tell them, “I’m excited! On the 2nd order, It’ll be 100 units. What’s my price for when I place an order for 5K, 10K and 15K units? I expect a lower price as my quantity increases. They’ll be scratching their heads to which you’ll respond with ”Let’s talk about that when we get there, but I do expect my price to come down as my orders increase and I’d need that price to come down to at least 1.50$ or less.” You can tell them that now. One thing to always keep in mind is do NOT promise them future orders.
You can talk about future plans for future products but do not promise them future orders!
Save face for every one, for them and for you. Meaning, give them respect.
Always write down specs!
Include COO (Country Of Origin).
Include UPC.
Discuss Packaging (if still in decoy stage, you can say 6 per case pack).
Discuss cartons (if still in decoy stage, you can say 5 case packs per master carton). Always discuss payment terms (How much, when, method etc…).
During a meeting with suppliers, the chinese will be writing down and taking notes on a notepad. Do the same, that shows that you are serious and that you understand their culture.
Payment terms:
Most commonly used terms are: 30% downpayment and 70% when goods are completed.
Instead, tell them you’ll pay 20% up front, 40% upon pre-shipment inspection and 40% upon BOL (when the goods have been loaded onto the ship and the ship has left the port).
The 30-70% has become popular due to so many Amazon sellers not knowing any better! It’s your job to ask for better terms and you’d be surprised how often you do get them!
Then tell them that “with all the factories that I deal, by 3rd order, I’m down to 10% up front, 30% upon successful inspection and 60% 30 days after receipt of the goods. The worst they can say is No and you simply respond with “let’s talk about that when do get there, because that’s what my other factories do. By saying that, you’ve set the stage with them from the start and they know that they are dealing with a pro, not a newbie. And the best part is that there is no reason that by the time you are ordering 3 containers, that shouldn’t be paying only a fraction up front and the balance, 30 days, 60 days after receipt. Because you’re doing good business with them nd you’ve proven that you are successful and the products are doing well and that you do pay on time.
And by the time you’re on the 3rd or 4th order, you’e already set the tone on what you’re expecting.
Close the deal with agreement on: Price
Quantity
Specs
Deadline (including review deadlines.
Delivery Type
Certifications (if needed).
Terms. (they will request DDP, which is not good, suggested FOB or EXWORKS or FAS (Free Alongside Ship), meaning your freight forwarder will pick it up from the factory or the factory will deliver it to the port but the name of the factory won’t be included in the shipping records. That is something people may not be aware of.
Future concessions (if applicable).
If You Are Stuck
Price isn’t everything.
Don’t force them to agree to a price they cannot afford to fill.
Ask questions. (why is this 2.80$ instead of 2$?
Learn, don’t challenge!
Dig deeper into the cost of components and alternatives. This is how you save money! Make MOQ concessions part of the conversation.
Ok, I’ll 800 not 400, which is close to your 1000 MOQ and I’ll do the surcharge, now can we do business?
When you develop your product, you don’t have competitors, you can sell to retailers beside Amazon to stores, chains etc
