CASE STUDY

Identifying Strategic Negotiation Levers for eCommerce Retailers

Aug 4, 2021

How Important are Negotiation Levers for eCommerce Retailers?

Expanding a business requires deliberation, comprehensive information, data-driven strategies, and an unprecedented understanding of the market, supplier relationships, and importance of proper negotiation. In the eCommerce industry, the role of vendors and suppliers has become increasingly crucial, leading to many contracts, deals, and the need for clear insight into negotiation levers. Manipulating and controlling levers during contract negotiations can be challenging, require in-depth insights into the relationship between the various levers, and the ability to differentiate and prioritize. As eCommerce retailers cope with the rapid surge in online shopping, rising consumer demand, and increasing competition, they must ensure their supplier relationships, contracts, and business partnerships are based on fair, mutually beneficial, and sustainable terms. Negotiation levers can include various facets of a contract, including cost, lead time, quality of service, and the basic demands for the product being procured. To ensure suppliers meet stipulated targets and expectations, companies must closely assess and understand the relationship between all levers, and find a sustainable, beneficial, and achievable balance between all.

What are 5 Key Negotiation Levers in the Retail Industry?

Cost: When entering a new partnership, cost of services, product, delivery, production, and certain materials are on the forefront of discussions. All parties involved aim to reduce costs, improve prices, and achieve high levels of profitability which can be challenging when multiple businesses are interacting. Suppliers must quote a certain price to deliver products at a certain quality and speed, while maintaining profitability and charging for services offered. Simultaneously, businesses must maintain low costs, identify opportunities for improved prices, and procure high quality products while matching industry standards for competitive pricing. Paying low prices to suppliers can lead to low quality, reduced delivery speed, and quality of service, causing a long chain of reactions along the supply chain and leading to customer disappointment.

Quality: In a competitive market, particularly with high demand, quality can be the most significant differentiator for various target groups. In certain categories, consumers will willingly forfeit low prices for high quality products, requiring companies to understand their target customers, and determine the industry standard to match or surpass. When negotiating with suppliers, expecting a certain level of quality can immediately correlate to higher prices, the need for materials that are difficult to access, and other cost related challenges. Additionally, high quality products may require companies to adjust delivery and lead time, reducing speed-to-market, and causing another obstacle in the supply chain. Making quality a crucial but challenging negotiation lever to manipulate.

Delivery: Lead time, speed-to-market, and production time are major contributors to overall efficiency, inventory management, and consumer satisfaction levels. A slow supply chain can directly or indirectly lead to customer attrition and dissatisfaction. Therefore, delivery is a crucial negotiation lever that companies must discuss in-depth when developing contracts with new suppliers. However, maintaining a certain speed of delivery or production, may require a compromise on quality, cost, or service from the vendors. To maintain a balance between all these factors and levers, businesses must understand the expectations of their market, ability of their business partners, and standards within the market.

Service: Supplier relationships play a crucial role in the efficiency, profitability, cost, and sustainability of partnerships. Ensuring a certain supplier service quality and compliance rate is essential to successfully keeping pace with demand, maintaining reduced costs, overcoming industry risks, and receiving products that meet contract standards. When demand for increase speed, high quality, and lower costs combine, it may lead to a complex or strained relationship with suppliers, by setting unachievable or taxing expectations for them, and providing limited room for error and adjustment. Therefore, when drafting a contract, companies must ensure the terms permit for error, enable a certain level of service from the suppliers, and provide the time, costs, and facilities to deliver products as per demand.

Product: Depending on the market, eCommerce retailers often need to produce at a rapid speed, meet quality standards determined by industry leaders and competitors, meet consumer demand and expectations, and match competitive pricing. Finding a balance between these factors, as detailed above is a highly challenging task, and cannot come at the cost of the product itself. During contract development, the product to be procured, serves as a negotiation lever itself, as it significantly influences the various other levers being discussed and manipulated. For instance, generic clothing requires lower costs, can be at a higher quality, and delivered faster than customized artefacts, specific products such as memorabilia, or cosmetic items. The nature of the product, requirements of the market, and other logistical factors also significantly impact the negotiation and contract development process.

Success Story

In the evolving eCommerce retail market, consumer expectations, range of products offered, and variety of pricing has expanded rapidly over recent years, particularly since the significant decline in customer interest toward brick-and-mortar stores. Struggling to keep pace with the market and overcome these challenges, a renowned eCommerce retailer of organic and eco-friendly cosmetic products struggled to maintain a positive relationship with suppliers and witnessed a decline in compliance rates. Unable to understand the cause for these challenges, the company approached SpendEdge and sought to develop more robust and reliable contracts. Our experts assessed the company’s contract drafting, negotiation, development, and management processes, and identified a lack of comprehensive understanding regarding negotiation levers, the relationship between them, and prioritization. With a comprehensive report, in-depth insights, and actionable recommendations, the company gain a more complete and effective understanding of the negotiation process, enabling robust contract development and increased compliance rates.

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