How Much Can Suppliers Reduce The Price?

Once you have checked all the competition and learn that your suppliers’ prices are reasonable, you may still be able to obtain savings if the suppliers are willing to reduce the amount of their profit. However, you usually don’t know what actual profit they are making.

Most organizations will not divulge that information, but you can make an estimate by calculating all their costs. The amount of profitability varies by industry and you can estimate it by checking online. One site is businessinsider.com/sector-profit-margins-sp-500-2012-8. which shows data from RBC Capital Markets Research. It gives you the current rate for return on equity (ROE) and the current net margins. The net margins for the S&P 500 range from 4.0% to 20.2% depending on industry. The return on equity range from 6.6% to 26.9%.

Another source is www.forbes.com/sites/sageworks/2016/08/06/the-most-profitable-industries-in-2016. The site lists the net profit margins by industry.

Of course companies are likely to balk about either disclosing their profit margins or reducing them. Your ability to obtain a reduction is likely to depend on how much you buy from them as well as your skill with negotiating.

Always keep in mind that price is not your only objective. You don’t want to lower the quality you need. In addition, if you are too aggressive with suppliers, they may decide that it is not worth it to do business with you.