It's Not What You Sell it for that Counts, It's What You Buy it for
Author: Paul D. McDonald, MBA
Those of you that know me probably know that I worked my way through college in the music industry. Not as a performer, but in sales. I sold pianos in Manhattan, Kansas. It was fun and I learned a lot.
The owner of Mid-America Piano & Organ was (and still is) Dan Murphy. Dan had two uncles in the area also that were in business--Uncle Charles and Uncle Fred. Charles Schurle owned a janitorial supply company (to my knowledge he has now retired) and Fred Schurle owns and operates Mid-America Office Supply. From Dan, Charles, and Fred, I learned one of the most important rules in business--It's not what you sell it for that counts, it's what you buy it for.
The Importance of ""Buying Right""
Here's a real simple example using hypothetical numbers. Let's say that you and I are competitors, and we're both in the piano business. You've got a prospect, I've got a prospect. You got a piano, I got a piano. And let's say that you got your piano wholesale for $500 and I got my piano wholesale for $400--but for all practical purposes they are identical in features and quality. You might price your piano at a retail price of $1,200 and mark it on special for $1,000. I'll do the same: I price my piano at retail price of $1,200 and put it on sale for the same $1,000.
Now the real catch isn't that I'll actually sell my piano at $1,000 and make $600 compared to your $500--that's not what's so special about ""buying right."" What really matters is that if I need to, I can come down on my asking price to give a better offer to the customer.
It's in the Ratios
When I come down on my price to sell my piano for retail, I obviously want to come down as little as I need to in order to make the sale. But let's say that things are really competitive. I have so much more room to negotiate in price because I have less capital in the original purchase.
Most people would look at this situation and think that I could come down $100 in my price to $900 and make the same amount as you... we'd both make $500. While that math is true, I would be making more. I would make a greater percentage on the sale. A higher ""cash on cash"" return. At your price of $1,000, you are doubling your money in the transaction. If I wanted to match you for profitability, I could lower my price to $800, or be 20% less than your retail price and make the same return!
Make no mistake about it, if you sell your piano for $1,000 and I sell the same piano for $800, I'll make more sales than you. I'll have more profit than you. I'll get more referrals than you. And, of course, I'll make more money than you.
Less Risk and Less Capital Tied Up
But that's not all. I'll have less risk than you. I'll have less money tied up in inventory than you will, thus allowing me to gather more inventory for a wider selection or otherwise use that capital in fixtures or other areas of the business. I'll have less money sunk into inventory for the same amount of inventory, and any business owner will tell you that's always a good thing.
Faster Inventory Turn
Because I have the ability to lower my prices more, I can sell more quickly and thus turn my inventory faster than you. The faster I turn my inventory, the more return I can get in a year's time and the greater profitability I have in business.
How to Buy Right
Here are some pointers on learning to ""buy right."" 1. Ask. Don't be afraid to ask for a discount. Once, Charles Schurle got Wal-Mart to come down on their price of garbage cans (he was buying 20) and I have gotten Sears to come down on the price of clothing (a sale was starting the next day and they gave me tomorrow's sale price). If they will do it, so will others.
2. Shop. Shop around with other suppliers. Get bids from other suppliers. Have them submit those bids in writing. Also, look for alternate sources (auctions, classified ads, even other businesses in your industry--you might have the buyer for a product that they can't seem to sell.)
3. Pay Cash. There is no substitute for cold-hard cash in negotiating power. I'm not saying pay by check--use actual cash. Buying furniture? Wave about three thousand in cash in front of the store manager. Say something like, ""I know you are asking four thousand for this furniture set. Which would you rather have, this furniture set or this three thousand dollars in cash?"" You'll probably get the deal.
4. Buy in Volume. You'll be more likely to get a discount if you buy large quantities (either immediately or over time) than if you buy only one.
5. Be Prepared to Walk. This is harder than it sounds sometimes. If they don't take your offer, be prepared to walk away. That doesn't necessarily mean that you do walk away--just that you know that you can at any time.
6. Move quickly. The longer you take to negotiate, the less likely they will be to come down in price. Offer a low-ball price to move fast so they can move on to another customer.
7. Be a Great Customer. Offer to give referrals to your supplier. Pay on time, as agreed. Promote your suppliers business in any way that you can.
8. Play Fair. If you don't play fair, they won't want to do business with you long-term. Sure, you might take advantage of the moment, but you might also burn your relationship with the supplier. They have to make money too.
Now it's your turn
Now it's your turn to be the business owner that buys right. Negotiate. Ask for a lower price. Shop with other suppliers and get quotes. Take a course on negotiation.
Sure, every business could use more sales and more sales skills. Selling is important, and no profit will be made until a sale is made. But BUYING RIGHT will allow your salespeople to be more competitive, more flexible, and more profitable in the marketplace. There is no substitute for buying right.
It's not what you sell it for that counts, it's what you buy it for.
About the author: Paul D. McDonald, MBA, is in business in Overland Park, Kansas. He specializes in Life Insurance, Annuities, and Long-Term Care Insurance. He welcomes contact at 1-877-711-1264 (phone or fax). He maintains several financial and business websites at http://seniorfinances.blogspot.com/, http://smallbizfinance.blogspot.com/, and http://small-biz-center.blogspot.com/.