If you’re like many other FBA sellers, you’re probably sourcing product from overseas where it makes sense in terms of supply and pricing.
In the highly competitive environment on Amazon, you’re looking for any advantage you can get which allows you to be competitive and even outdo your competitors. One of the fastest ways to be competitive is to have better margins than others. You’ll give yourself more room to price competitively and be in a position to win the buy box.
How can you achieve those better margins? There are a few ways you can look at it, but one of the fastest ways to gain an advantage is to negotiate better terms with your suppliers. Here are a few areas to examine:
Probably one of the most obvious and direct ways you can save some money is by negotiating your product costs. It’s important to remember here, as a rule you should try to negotiate the best possible price right from the beginning, but in practice, you might not get their “best” until you’ve been with the supplier for a while and increased your volumes of orders.
In fact, this should be a trigger for you to talk pricing with your supplier; any time you’re increasing order volumes, most suppliers should have some room to offer a better deal on price. Large volumes work out better for the supplier and good ones will be keen to nurture the relationship with you as a buyer.
You’ll find that if you can get your cost per unit down, you’ll see other cost savings, such as a reduction in duties paid overall. If you wanted to lower your price on Amazon and keep the same margins you were using previously, your FBA seller fees will also be lower. You can easily see how high-volume sellers manage to consistently win at the buy box and keep a high best seller ranking if all of these factors are running in their favor…
If you’re just starting…
If you’re just beginning with buying in products, you’re probably looking at the idea of getting discounts for volume and thinking that might be a long way off. Maybe, but you should still use some negotiating techniques to get the best possible price for your product.
Here are a few pointers for negotiating your first product:
- Always get multiple quotes and create a shortlist from those. Request samples from those on your shortlist. (To determine your shortlist, look at aspects such as pricing, prompt communication, recommendations and ease of communication).
- Next, take the quality of the product sample into account. Of course you want high-quality, just beware that if you try to go too low on price you’ll probably end up “getting what you paid for.”
- Other factors to take into account include manufacturing lead time and the quality of product packaging. Does it look professional and are you able to create your own label for it?
- Leverage other supplier’s quotations to try to negotiate your price down. For example, any of the above factors could come into your negotiations: “Factory A will offer me the same price per unit as well as custom packaging.”
For many sellers, shipping costs can often be more than the cost of purchasing the actual product. Look at any invoice from a shipping company and it is loaded up with all sorts of charges, many of which you probably won’t understand what they’re talking about. (In fact, a friend of mine who worked in shipping outright told me that there are often “made up” costs on invoices, yet they’ll find a way to justify them somehow).
When you’re purchasing products to sell on Amazon, you can either arrange product manufacture and shipping separately (so you organize transport from the factory to the Amazon warehouse), or you can look for a factory which also handles the logistics of moving your products and will quote you a “landed cost”, the cost including getting your products to an Amazon warehouse. The advantage of doing this is often twofold: 1) you can take advantage of special rates they have negotiated for shipping as high-volume shippers and 2) you don’t have the (often considerable) hassle of organizing shipping yourself.
If you’re going to organize shipping yourself, you can get multiple quotes as you do with sourcing products, but look into the “landed cost” option too. It may be that you just can’t do as well as the discounts which manufacturers, as regular shippers, will be offered. You also need to consider the following:
- Does the shipping include delivery to the door at your warehouse? Sometimes this will be a separate cost and road freight can be expensive from the air or seaport.
- Does the shipping cost include customs brokerage? All these charges add up if you’re unaware of them from the beginning, so you may find what you thought was a good deal isn’t great once you add in the additional costs.
- Does the shipping include customs fees?
- Compare types of shipping. Seafreight tends to be more economical for larger shipments, but you’ll typically need to allow 30 – 45 days for arrival of goods, including the time to go through customs. Airfreight has different grades of service, including “Air Express” which includes customs brokerage and 3-4 day delivery, or “Air Cargo”, which is cheaper, but usually takes around 10 days longer and doesn’t include brokerage.
You won’t always know details such as how much you’ll be charged in duties ahead of time, but always get in writing a detailed agreement which includes all costs that can be determined ahead of time. You don’t want to be surprised by extras at the time of invoicing.
Another option is to have shipping built into your contract with your supplier, particularly if you’d like to take advantage of any deals they get on shipping. You can include in the agreement that the supplier will take care of any duties and fees associated with the shipment, as Jungle Scout does in a sample agreement here.
Negotiating payment terms is important for the overall financial health of your business. It’s about ensuring you have sufficient cash flow to actually run the business, rather than emptying all your financial resources on invoices at one time.
Payment terms also help to afford you some security. If you’re going to hand over a whole lot of cash upfront, that’s not the most comfortable position to be in. How do you know the supplier can be relied upon to do the right thing?
This is why you need to be negotiating your payment terms with suppliers; to maximize your own cashflow, give yourself some leverage over suppliers should anything go wrong with the order, and to give yourself some security. Ideally, you want to put as little cash upfront as you can get away with as this provides you with more financial security.
Your payment terms should be a set agreement about intervals or milestones at which you will make payments to the supplier. The exception to this is usually sample orders. Usually these are so small that the supplier will expect 100% payment upfront.
For regular orders of your products, a typical scenario might be that you pay 50% upfront, then the remaining 50% after inspection of the finished product and before shipment is made (you are probably paying an agent to inspect the goods for you, and requesting photos. A tip is to request photos throughout production so you can be on top of any issues early).
As you grow, you will have more leverage to negotiate better terms, particularly if you’ve proven to be reliable yourself at paying up. Remember, suppliers are equally concerned with ensuring their own cash flow. You might work your way to paying less upfront, or some larger businesses may be able to negotiate net 30, 45 or 60 payment terms, meaning they pay the entire balance up to 60 days after shipment. I had an arrangement for shipping payment where the balance wasn’t due until the 20th of the month following shipment.
The point is that you should be taking steps to protect yourself and your cash flow. Don’t make the mistake of paying 100% upfront – suppliers expect you to negotiate on that anyway.
One of the most common reasons for small businesses to fail is over management of finances. For FBA sellers, this means negotiating terms with your offshore suppliers is vitally important.
Negotiating favorable terms can help you to:
- Operate with greater margins.
- Offer lower prices and win the buy box.
- Get optimum terms for shipping.
- Maximize your cash flow.
- Gain financial security.
- Have leverage over suppliers should anything go wrong.
Worth negotiating? We think so!