Friday 5 July 2013

Calculating the actual outcome of a negotiation session - the real P&L of the deal...

As we begin (!) to emerge from the effects of the global financial crisis, survival-minded suppliers and retailers can benefit from maintaining strict financial measures and controls in optimising the joint-profitability of their trade partnerships.

One area that may need attention is ensuring that deal-evaluation includes the factoring-in of all concessions, both financial and non-financial. 

The following approach may help. 

As you know, negotiating a deal is essentially a process of compromise, in that instead of simply selling product at the regular price and making our normal supplier gross margin (50%) on the deal, we effectively dilute that margin by making additional financial and non-financial concessions to the buyer.

Financial concessions:
Financial concessions could include discounts, rebates, advertising & promotional allowances etc.

Non-financial concessions:
Non-financial concessions could include advertising & display material, POS, demonstrators, analyses of Sales, Promotional and Category data, etc.

We try to dilute the negative impact of giveaways by ‘insisting’ on receiving equivalent concessions from the buyer that ideally will replace any losses in negotiation.

For this reason it is essential to convert all concessions into their financial equivalents in order to keep a running check on giveaways and receipts during the negotiation process.

In practice, it is best to develop and manage a Negotiation P&L as follows:

Deal Analysis
Total sales to the customer in this deal at list price                             £250,000
Less Gross Margin of 30%                                                                 £75,000

Net sales to the customer                                                               £175,000

Less the Price concessions we gave:
- Quantity discount 3%                          £5,250
-   Advertising allowance 7%                   £12,250
-   Early payment discount 1.5%              £2,625
-   Listing fees                                         £6,500

Less the non-Price concessions we gave
-    POS material (estimate £5,000)          £5,000
-    In-store demonstrators                        £3,500
-     Samples                                            £2,500                                                

Total given away                                                                              £37,625

Less Concessions received from the customer
-  Earlier payment                                      £2,500
- 20% increase in facings                           £8,750  (estimate 10% sales increase)                                                                                                i.e. assume supplier 50% gross margin                                                                          
-  Exclusive in-store promotion                   £10,500 (estimate 12% sales increase)
i.e. assume supplier 50% gross margin

Total received from customer                                                          £21,750    

Net amount given away in negotiation                                            £15,875 
i.e. 9.07% of sales given away in negotiation

The above application hopefully demonstrates why factoring in the non-price concessions and insisting on buyer reciprocation is vital in negotiation.

It then remains to add value and devalue to optimise concession-exchange in the process.....simple!  

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