Innovation

Great Ideas: How to outnegotiate Wal-Mart

Written by ProfitGuide Staff

It sounds hopeless: getting the upper hand when you’re negotiating with a client whose revenue is more than 10,000 times as big as yours. Yet that’s exactly what Spitz International Inc., a Medicine Hat, Alta.-based processor of flavoured sunflower seeds, pulled off in its dealings with Wal-Mart.

In his new book Negotiating With Giants: Get What You Want Against the Odds, negotiation specialist Peter Johnston explains how Spitz managed to come out on top and the lessons this holds for other SMEs bargaining with giant clients. Spitz’s problem was that its sales head had jumped at a deal to get its products listed at Wal-Mart, but at a deeply discounted price. A year and a half later, the deal was generating sales at an annual rate of $1 million. But Spitz’s president Tom Droog discovered that the world’s biggest company was paying his firm so little on each package sold that Spitz was barely making any money on the arrangement. Sales through Wal-Mart represented 5% of Spitz’s revenue, and rising fast, but far less of its profits. So Droog set out to get Wal-Mart to up the price it paid Spitz by 15%.

He went into a meeting at Wal-Mart with a “take it or leave it” offer: raise his take by 15% within two weeks or he’d walk away. Wal-Mart offered 8% and Droog replied, “Let me know when you find the other 7%.” Wal-Mart stood firm, and Droog walked.

Six months later, Wal-Mart called back to say that customers were asking to see Spitz’s products back in its stores, and that demand was strong enough that the retailer could raise its own price and give Droog the 15% hike he wanted. Johnston, the Canadian founder of Cambridge, Mass.-based negotiation advisory firm NAI Ltd., says the key elements in Spitz’s winning strategy included:

  1. Send signals through how you negotiate: Droog knew that Wal-Mart sometimes uses tactics to rattle its suppliers, such as asking them to come for a meeting and then leaving them to stew for a long time in an uncomfortable chair in a waiting room. So he e-mailed before his meeting that he’d walk out if he were kept waiting more than 15 minutes. His tone made it clear he wasn’t bluffing, so when he arrived he was immediately ushered into the meeting. And he followed through on his threat to walk out if he didn’t get the 15% increase. If you don’t send this kind of clear, consistent signal about your intentions, giants might assume you’re like everyone else and take advantage of you.
  2. Know your strengths and build on them: Spitz continually innovates to set itself apart from its dozens of competitors. It regularly rolls out new flavours and was the first in its industry to introduce flavoured seeds and resealable bags. Its ability to offer a genuinely superior product made it hard for Wal-Mart to replace it with a supplier willing to settle for less.
  3. Know your weaknesses and counter them: Spitz’s sales head had agreed to the deal with Wal-Mart in the first place because the firm’s compensation structure rewarded him for boosting sales, even low-margin ones. Droog therefore rejigged his sales team’s compensation to reward them only for sales delivering at least a specified rate of profit. He also guarded against another vulnerability: that copycats would match his products. When Wal-Mart asked Droog to send it a detailed list of ingredients, saying that consumers required it, Droog knew that if he gave away too much the retailer might send this information to another supplier and try to bid down his prices. He therefore sent Wal-Mart an ingredients list reading: “1) Sunflower seeds; 2) Salt.”
  4. Set decision-making criteria to protect against being hurt by big clients: Droog was anxious to avoid any further deals like the original one with Wal-Mart, as well as overdependence on any one client. He therefore introduced two new policies. One was to offer all buyers the same pricing structure—including volume discounts for larger orders to reflect the money Spitz saves on administration, transport and supplies when it sells more to a given buyer. This means it won’t give big clients anything beyond standard volume discounts. The other new policy was to set a cap so that no single customer can account for more than 20% of Spitz’s total sales.
Originally appeared on PROFITguide.com