Small suppliers can feel “powerless” in negotiations with big retailers. As a result, when those retailers decide to put the squeeze on to bolster their margins, it’s hard to resist, and what was once a healthy profit stream can very quickly evaporate.
In negotiation, power is a function of the dependency one party has upon the other. To strengthen your position, you need to make their dependency upon you, at least as great as yours is on them. There are three routes to building dependency, each of which has its pros and cons. Which one best fits your business?
Unique: Will consumers switch retailers to find your product when it’s out of stock, or will they stay where they are and pick up a substitute? To be sustainably “unique”, you either need to own the Intellectual Property and relevant patents; have outstanding brand marketing or a unique capability or technology. This route creates the strongest form of dependency, but it’s expensive, and your pricing must generate sufficient cash to maintain your position at the forefront of the industry.
Added Value: There are lots of ways to add value: giving service and reliability that’s streets ahead of your competitors; providing expertise and insight that consistently proves its worth; or maybe integrating your systems with the retailer to improve their efficiency. Whatever your angle, to create genuine dependency, it must be something that the retailer genuinely values, and something that they’re prepared to pay a premium to keep. This route has two main risks: copycat competitors undercutting you, and the retailer changing their people or priorities. Both can destroy the dependency you’ve worked so hard to build.
Lowest Cost: Lowest cost is a hard route to sustain. It requires relentless focus on continually reducing costs, unrivalled expertise at meeting briefs and winning tenders, and a sophisticated approach to pricing and contract management. Your power comes from your confidence that nobody can do it cheaper. Lose that confidence and you’ll lose your margins.
BOTTOM LINE: Creating a healthy degree of dependency is critical to sustaining a profitable trading relationship. Which is the right route for your business? How can you do it most cost-effectively, and how will you ensure you avoid the risks and pitfalls?