It's Not What You Sell it for that Counts, It's What You Buy it for

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, Uncle Charles, and Uncle 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.

They called this concept “Buying Right” and it is by far one of the most important lessons to learn in the business world.

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!

More Customers

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. Although I make the same ratio of profit per sale as you, I will have more overall profit than you because I make more sales. I’ll also 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.

Greater Flexibility in Bad Times

I can be more flexible on my prices if the market turns sour (as markets tend to do from time to time) because I have less tied up in each product. If we both have to liquidate product due to any number of business reasons, I can lower my price to your cost and still be making a small sliver of gross profit on the sale.

Let’s suppose that both of our delivery vehicles wear out and we need to replace them, and we decide to pay for the new vehicle by quickly selling inventory. If you have 20% more tied up in each inventory unit, your “super-low sale price” is not nearly as profitable as mine. Therefore, I can provide operating capital for my business through sales much more quickly and easily.

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. You won’t know if you don’t ask.
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. Give them a good reason. Maybe you heard that they are looking to buy a new delivery vehicle or they are re-locating the showrooms. They can turn their sitting inventory into cash quickly to get what they want.
8. Barter or Trade. If you’re a car dealer and I’m a piano dealer, and you want a piano and I want a car, let’s make a deal!
9. Consignment. If you are buying a product for resale, offer to sell on consignment. This means that you don’t pay the seller until you sell the product for them. This way you are not “out-of-pocket” for any cash and you can offer a higher return to the seller if they are willing to wait for their cash.
10. Be a Great Customer. Offer to give referrals to your supplier—actually give them right then if you can. Pay on time, as agreed. Promote your suppliers business in any way that you can.
11. 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.

A Few More Tips

Here’s a few more tips to put into practice when making business purchases: Remember the words “too little” and “too much” when negotiating. Let the other party talk as much as they want while you talk as little as possible. Listen as much as you can and then listen some more. Don’t be afraid of silence. Be very calm and never get angry. Get them to move first. If you can, get them to move second… and maybe even to move third!

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.