What Commission/Sales Cut to Give to Large Company ?

[MarkPearson]

I am in advanced talks with a Leading online retailer about us (rosesbydesign) dropshipping our personalised roses to their customers.

We have come to a stage were I am going to meet them in their head office to talk facts and figures (which can be a bit daunting - me v large company)

They have also asked me if my company would be interested in supplying them via dropship plain roses.

Now this opportunity would be too big to just pass by, we are talking a very large deal which could take my new business to the next level within a few month of start up.

The logistics are managable and would require more staff, even if temp.

The main product RRP are personalised single stem rose £9.99 and 1 Dozen personalised roses £33.00. These price with increase for valentines day as red rose prices go sky high.

My main question here is I have to give them a % cut / commission in this deal on the retail prices above.

Now without going into a complete breakdown of costs etc... what kind of cut / commission would this company be expected.

They have said to me this Personalised roses and flowers will be a new line for them, so its not like they have other silmilar suppliers.

Anyone got any advice?

[Norseman]

The following advice is not based on experience, it's my business degree talking.

I would say that a you should start negotiating at 10%, and set an upper limit for yourself of no more than 20%. After all, you'll be the one doing the work, they just want a piece of the action. If a deal such as this goes through then your respective increase in sales should make sure that your profits are still increased even after the extra costs (staff and their cut) are incurred.

If I were you I would make a simple spreadsheet breaking down your costs and forecasting future sales. By deducting your forecasted costs from these figures using different commision rates you can find out where your limit is. There is no point in increasing turnover unless your bottom line profits increase too.


-Marius

[Steve Roberts]

Difficult one. If I were you I'd probably pitch high. A worst case scenario is that they say "thanks but no thanks". However, you can always call back a day or two later with a revised price. I deal with very large companies every day, and it's no different to dealing with small companies. People are always people!

[MarkPearson]

Some good advice so far thanks.

What would you class as a 'high' pitch? percentage wise? if we are dropshipping?

At the end of the day they are just people, it is a pretty big move for me.

[Steve Roberts]

Some good advice so far thanks.

What would you class as a 'high' pitch? percentage wise? if we are dropshipping?

At the end of the day they are just people, it is a pretty big move for me.
I know nothing about your industry, but I'd probably push for 20-30% in general. It all comes down to one question: "how badly do they want the product?"

[emubill]

you're going the wrong way with the pitch. This is their cut that you are talking about - start low. Would it be an idea to ask them first what they want - if they are forthcoming then you may not be too far away from what you are comfortable with. Obviously do this after you have talked up your service, uniqueness of the product and any other benefits that you can offer their site e.g. national T.V. exposure.

Nige

[MarkPearson]

Yes, this is the best way.

Ask them what they expect as THEIR cut/commission.

But I will need to prepare some resonable ideas in my head.

Thats why im asking here.

Whats normal for this type of deal.

I will be doing all the work.

they are just selling and taling commision.

[bwglaw]

Yes, this is the best way.

Ask them what they expect as THEIR cut/commission.

But I will need to prepare some resonable ideas in my head.

Thats why im asking here.

Whats normal for this type of deal.

I will be doing all the work.

they are just selling and taling commision.

I would suggest offering a small % for say 10 dozens, and increase the % based on quantity sold. This benefits both sides and it puts the onus on them to sell as many as possible to attract a larger commission.

If you go to Commission Junction where they pay cost per click etc they base the commission on the number of clicks.

Why not just ask them directly what they expect to be their commission and start from there by setting a minimum quantity to that level of commission.

It is all about the meeting of two minds

[cjd]

If they are a biggish business they will have standard deals and T&Cs, they do these deals day in day out - ask them up front and straight away for a pro-forma term sheet, it will save you time and heartache. If they can't give you one it tells you something about them.

Their standard deal will then be negotiable to some extent but you will know what you are negotiating around. Often the t&Cs around the deal are more onerous than the commission - be cautious of exclusivity and termination clauses.

I'm not too clear what the actual relationship is here but I'm imagining that they take the order and bill the customer putting the fullfillment to you? You then bill them? In that case you need to set your wholesale price at some % above your costs and on-charge that. Be careful with cash flow - they may stuff you will 60 day terms - a common trick.

If they are merely referring customers to you leaving you do everything else expect to 'kick back' of about 10% and be happy with 15%. Above that is getting pricey - don't forget you take a risk gearing up - they may drop you just as quickly.

Finally, it's unfortunately not uncommon for the deal to suddenly change right at the end just as you arrive at mega-corp to sign the contract. You will be told that someone 'upstairs' is insisting on "X". I have no advice for you at this point other than to be ready for it if it comes. Personally I'd tell them to stick it up their arse - but then I'd lose the deal ;-)

[epiphany]

Give them a performance related discount :)

[New Business]

It would be good if you bring somebody with you when you and the company are discussing terms i.e solicitor or someone you trust
these companys are clever, don't shoot your self in the foot

[MarkPearson]

Thanks for the advice.

CJD

Yes, that is the set-up

They will take orders and payment on their site/s and will forward orders to us to complete and dispatch. We will then have to invoice them at weekly, fortnightly or monthly intervals.

For me the only area im totally unsure about is the commission they should have on the products.

Don't was to do myself in by giving them too much or make it too small so they tuen down any potential deal.

[Steve Roberts]

Yes, this is the best way.

Ask them what they expect as THEIR cut/commission.

But I will need to prepare some resonable ideas in my head.

Thats why im asking here.

Whats normal for this type of deal.

I will be doing all the work.

they are just selling and taling commision.

Remember, as motivated as you are to sell for the highest price, they're keen to buy for the lowest price. I regularly buy and sell companies from large corporates and, trust me, they will want to "buy low and sell high". What makes you think that they will be honest with you if you ask them what percentage they need? They'll simply quote the one they think they can away with. And if they're canny enough, they'll know you've recently set up in business and that you will offer your best terms very quickly. I maintain my original position - pitch it high not low.

[Cornish Steve]

Mark,

The most important statement was made by Norseman: You must think in terms of costs and profit margin.

First, you need to determine what is the lowest figure you can accept without losing money. In other words, you must have a good idea of all your costs (including the costs of ramping up).

Second, you should decide what is the lowest profit margin you are willing to accept. In the negotiation, this will be your rock bottom price - and you would walk away from the deal if you didn't get this price.

Third, you must decide the profit margin you would like to achieve. From this, you can determine a good opening bid when negotiating.

The other company is going to be doing just the same. If you can, you should probe them with questions to determine the price at which they will walk away from a deal.

Don't be in a hurry. During negotiation, you're trying to find out their acceptable price range just as they are trying to understand yours. Of course, you want to achieve a price that's at the high end of your range. One of the keys for you, as the smaller party, will be to have the guts to walk away if you cannot achieve your desired profit margin.

Also, it's not all about price. You need to consider cash flow. How will you finance large orders because there will be a time lag between you paying your suppliers and you receiving payment. I've heard it said that cash flow is the single biggest reason that small businesses go belly up.

For sure, you can take into account the benefits that accrue from working with a large company, but in the end you're in business to make money. Whatever deal you come to you might have to live with for a long time. It's important to get it right.

[MinuWeb]

Interesting thread, I was wondering when someone would post comments as Steve did :D

I have to agree with him 100%, work out your costs, and the minimum you would be willing to sell from there.

If they will sell 1000 per week and you can make £1 per sale would that be so bad ?

You also need to take into consideration branding, will they sell using your name or theirs ? If yours then they may want a higher commision as they will be spending to market your name.

[creospace]

You do have the upper hand to a certain extent becasue you are the only one supplying these things.

Don't abuse this fact but bare it in mind.

Performance related is always a good way to go. Do som eforcasts based on say 100, 250, 500, 1000 units per week and see how it looks.

Gary

[Rob Holmes]

I can only echo the above comments, know your real costs now (include everything) and with increased orders - check with all suppliers that you could safely increase you sales and what the financial impact would be.

From there know your profit per item, there will also be refunds at some stage and this is part of your business that is a little unknown as it's early days. Know your capacities - work out a figure you would be happy to do business with them for.

I would usually set the price for 6 months at a time with the promise of a review after 6 months - that way it will limit your risk as you may well get intimidated in the meeting - if the buyer is good at their job <smile>

It would also work the other way if they feel the price is too high for them you can pull out the '6 month' card and promise a review in 6 months with a view to reviewing the price if things have gone as well as both of you think it's going to.

(nearly) Lastly I would be prepared to just walk away if they look like being too difficult customer or they squeeze on price too hard and dig their heels in with no room for negotiation. If you walk away the buyer could get pressure from the head buyer and come back being a little more reasonable.

Go in there with a list of benefits they would get for the higher price, if they start squeezing on price then you squeeze on the benefits - lower price = less quality when it comes to delivery times, packaging, responses to calls, working over the weekend, less credit (e.g. drop from 30 to 15 days) - I'm saying that they won't just be negotiating on the cost of roses and you need to be prepared to negotiate on other things too (you probably are) :)

If you feel you are getting squeezed into a corner then delay making crucial decisions - maybe use the first meeting to see what sort of people they are.

Hope this helps a bit!

Rob

[MarkPearson]

Thanks guys.

Some good advice to get mt teeth into this morning.

Looks like im set for a boardroom battle next week then.

Could go either way....

Will keep you updated

[Robert]

Think of their costs too. Handling orders could cost them 5% if they use Worldpay, etc.

[cjd]

Just a couple of points now that you've confirmed the business model.

1. As everyone says, knowing your unit costs and acceptable profit margin is critical. I imagine that your flowers purchases are your largest variable costs and will make up the majority of your end product cost. With low fixed costs and high variable costs you can relativley easily calculate your bottom line price to sell on to them, particularly if you seperate the delivery charge from the flower cost. So long as you only take staff on temporary terms it's a fairly low risk to gear up as you can climb back down if necessary.

2. The other company will set their own price - which may well undercut your own particularly if you give them a great deal! Be very carefull - they are unlikley to agree their retail price with you but it's worth asking. This puts you in an interesting strategic position - are you selling direct or are you a wholesaler or are you both?

3. Brand. Linked to 2. Will they be using your brand or white-labelling you? If you do an unbranded deal it must be non-exclusive as you reduce your market to them only. If it's your own brand you may consider a short time exclusive arrangement - but remeber exclusivity should cost them something - don't easily give it away even if you couldn't handle any more business!

oh and don't worry too much about it, only do a deal you are comfortable with - it seems you have a product people want, there'll be more offers.

Good Luck!

[directmarketingadvice]

I will be doing all the work. they are just selling and taling commision.

So, marketing isn't work?

I think there's a couple of htings that you need to get clear on and they are:

(1) The branding
(2) Whether or not you get to include any marketing material/sales offers in the shipment.

If the product is being issued in your name and you have the right to include re-sell/cross-sell offers, this is significant because you can take control of the back-end sales.

If it's going out in the name of the other business and you don't have the right to include offers, all the back end is going to go through the other company and you're going to have to pay them comission for the lifetime of that customer.

(plus they might not work the back-end very effectively/agressively, which would result in fewer repeat sales)

You've got to know what's on the table.

Once you're clear on that and clear on your costs, you can work out the expected profit per item.

Then ask yourself, how much would you expect to spend per item if you were marketing direct to the customer.

And that should give you some idea of how much you should pay this other business.

Steve

[SillyJokes]

Robert - a big company will not be paying worldpay 5% any more. Their transaction costs will be driven down quite a bit.

Mark, remember if this is the company I think it is, remember that they do have some major competitors so if you can't get this deal to work for you, there are others who might want to do it.

Plus, of course, there are all the major online florists.

[Norseman]

It'll be important for you in the meeting to gauge how badly they want your products. They may be able to keep a straight face but if you test the water a bit with them by having high demands then you might just notice them accepting your terms... although they would probably still try to give you a hard time :wink:

Also bear in mind how replicable your business model is. What's keeping them from starting their own 'designed roses' for instance?

[daveashton]

Wow lets just stop for a second

Though Steve has made some great points we need to stake a step back.

1: WE DO NOT KNOW ENOUGH TO MAKE ANY RECOMEDATIONS.

2: Neither do they!

So things that effect margin negotiations is what makes your agenda!

i.e. volume, payment terms, returns, support, marketing (yours and theirs), can they under cut you or is there a minimum sale price, is it exclusive with you or can they sell competitors products, will they inform you of any promo activity and will you have input into this ( this can be good or bad for your brand), can you sell to their competitors etc, can you make enough based on their predictions of sale volumes , is there anything else you need to provide i.e. packaging including seasonal requirements? Is there agreed minimum orders (helps you get better deals from your suppliers, contract notice periods, delivery SLA's, Quality SLA's etc. etc.


Now when we know at least the above we can offer good advice but there are to many unknowns to provide an accurate answer and without knowing your costs

Sorry but I hope this helps