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Last updated on 2024年3月28日

What do you do if your profit margins are being squeezed?

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When facing shrinking profit margins, it's crucial to act swiftly and strategically. Contract negotiation skills can be your lifeline, allowing you to navigate through tough economic times by securing more favorable terms that protect your bottom line. Whether you're dealing with suppliers, customers, or service providers, understanding how to effectively negotiate contracts can make the difference between sustaining growth or facing financial difficulties. In this article, you'll discover actionable steps to take when your profit margins are under pressure, ensuring you stay competitive and profitable.

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Harri V.

Executive Procurement Leader | Driving Strategic Sourcing, Operations & Supply Chain Innovations
Komal Bagri

Legal counsel

1 Assess Costs

Begin by conducting a thorough review of your current costs. Identify areas where expenses can be reduced without compromising the quality of your product or service. Sometimes, the solution may lie in renegotiating contracts with suppliers to secure better rates or payment terms. By understanding your cost structure in detail, you can pinpoint exactly where adjustments are necessary, providing a strong foundation for any negotiation.

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Harri V.

Executive Procurement Leader | Driving Strategic Sourcing, Operations & Supply Chain Innovations
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Understand the variable and fixed costs of your pricing, because unlike fixed costs, selling more units won't resolve a margin squeeze caused by high variable costs. Reducing Cost: ① Standardise, simplify & automate the design & manufacturing of your product using Design for Manufacture, Design for Service and Design for Delivery ② Reduce resources wasted making the product using Lean Six Sigma ③ Reduce the cost of resources needed to make the product by re-negotiating pricing with your suppliers ④ Reduce delivery costs by using 3PL, Vendor Management Inventory, consignment, lowering service levels ⑤ Reduce scope and prune features being delivered but not required by customer, using Value Stream Mapping, Kano Model, MoSCoW

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2 Value Leverage

In negotiations, your ability to leverage value is key. Understand the unique benefits you provide to your suppliers or clients and use these as bargaining chips. If you have a long-standing relationship or purchase in bulk, these factors can be powerful incentives for the other party to offer you better terms. Highlighting your value proposition effectively during negotiations can lead to significant savings and improved profit margins.

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3 Alternative Options

Always have a backup plan. Research alternative suppliers or clients to ensure you're not overly reliant on any one partner. Knowing your options strengthens your negotiating position, as it sends a clear message that you have the capability to walk away if terms are not favorable. This approach not only provides leverage but may also uncover more competitive offers in the market.

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Komal Bagri

Legal counsel
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Focus on value-added services or products that can be offered. By emphasizing the unique benefits or added value that your offering brings, you can justify maintaining or even increasing the prices.

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4 Negotiate Terms

When entering negotiations, focus on the terms that impact your margins the most. This could be payment terms, bulk discounts, or minimum order quantities. Approach the negotiation with clear objectives and be prepared to make concessions on less critical terms to gain ground where it matters most. The goal is to create a win-win situation where both parties feel they have gained value from the new agreement.

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5 Long-Term Relationships

Consider the long-term implications of any contract negotiation. While immediate gains are important, maintaining healthy relationships with suppliers and clients can lead to more favorable deals in the future. Communicate openly about your needs and listen to theirs. Strive for agreements that support ongoing collaboration and mutual growth, which in turn can lead to more stable profit margins.

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6 Continuous Review

Finally, make contract review a regular part of your business process. Markets and costs can change rapidly, so staying on top of your agreements and being ready to renegotiate when necessary is crucial. This proactive approach not only helps in maintaining healthy profit margins but also ensures that your business adapts quickly to any economic shifts, keeping you ahead of the competition.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Contract Negotiation

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What do you do if your profit margins are being squeezed?

1

2

3

4

5

6

7

1 Assess Costs

2 Value Leverage

3 Alternative Options

4 Negotiate Terms

5 Long-Term Relationships

6 Continuous Review

7 Here’s what else to consider

Contract Negotiation

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What do you do if your profit margins are being squeezed?

1

2

3

4

5

6

7

1 Assess Costs

2 Value Leverage

3 Alternative Options

4 Negotiate Terms

5 Long-Term Relationships

6 Continuous Review

7 Here’s what else to consider

Contract Negotiation

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