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| Negotiating Sales Contracts with Resellers and Chains |
As your business grows and you are able to attract larger retail accounts your negotiating
skills will become critical. Designers clamor for lucrative contracts from franchises,
department stores and televisions shopping shows. However, the big business they fight so
hard to get all too often ends up being the end of their companies. That is not to say you
cannot work with these heavyweight partners successfully, but take the following advice to heart.
Based on our experience, we have found that many designers fail to prepare for the contract phase of
their purchase arrangement. The two topics of returning goods and pricing merchandise leave many
designers particularly vulnerable. Some basic business analysis and preparation in these areas will
go a long way in protecting your company and establishing long-term sustainable relationships with
your new accounts.
Return of goods clause
This is the killer section of contracts that we have seen destroy many small businesses.
Here is what happens. Many standard volume contracts include a clause stating that the buyer
reserves the right to return any unsold merchandise without limitation or penalty. New jewelry
designers are so excited to get a franchise deal that they take the buyer’s assurances that their
jewelry will exceed all sales forecasts and this clause will never be used. Unfortunately, sales
forecasts are forecasts, they are not guarantees. Small designers will take out loans and overextend
themselves financially to purchase materials for the sale. Several months later the buyer will
exercise their no penalty clause and return half the merchandise they ordered. They have lost
absolutely nothing and suddenly the jewelry designer has large debts they cannot pay, a destroyed
credit history, and a mountain of last spring’s hot necklace they cannot possibly get rid of
elsewhere.
We have seen this exact situation put many of our customers out of business. Keep a level head when
negotiating the terms of sale. Buyers will try to brush over this type of clause and insist that it
is standard. Be firm and negotiate reasonable return terms that will protect you from losing an
exorbitant sum.
Most buyers will negotiate this section if pressed. Agree upon a contract with set delivery dates
and cancellation of delivery deadlines. Also include a specified return period on each transaction.
If they refuse to do so, try insisting on a smaller initial purchase contract.
Always think of the worst case scenario and plan accordingly. If they return 90% of the merchandise
in three months, will your business survive? How will you pay your vendors and other bills? If the
buyer remains inflexible and you know you cannot absorb the costs of a default, do not pursue the
deal. It is very difficult to turn down a large buyer, but it is sometimes the smart thing to do.
Pricing
Volume buyers will expect to receive optimum pricing on your items. This is a reasonable expectation,
but you will need to perform careful analysis to determine what fair pricing is without selling
yourself short. Do not just agree to a blanket percentage discount off your list price without
performing a cost analysis first.
First, calculate your fixed costs by totaling up your monthly rent, supplies, marketing costs,
travel expenses, and the labor time you spend on bookkeeping, purchasing and strategy. Divide this
total by the number of items you sell in a month to get a rough idea of the overhead component
you should be including in the price of each piece. Do not forget other expenses that may apply
to your business such as accountant fees, packaging, freight and shipping etc…
Second, consider your variable costs per each item including your labor and the cost of components.
The tricky part of this equation is valuing your labor time. One option is to use what you would
be paid on an hourly basis if you were working in the last job you had. Another option is to use
market rates for the work you are doing. For example, the national average for jewelry
manufacturing employees is $11.00 per hour. This is an average net of years experience and across
disparate geographic regions. You would likely want to make this figure higher for the time you
spend on creative, design work and lower for stock production of existing designs.
Finally, add your fixed costs and variable costs per each item. This is your break even price.
By charging this price you will cover expenses, but not have anything left over to re-invest
in stock or future projects for your business. Therefore, you should add on a reasonable mark-up
that gives the purchaser room to add their margin on before selling to the consumer at a
competitive retail price.
If you cannot competitively price an item and still cover all your costs, reexamine the
components you are using and look for close substitutes that may be cheaper. Sometimes
changing just one component can move your items into a better price category.
Contracts are negotiable until they are signed. Do not be afraid to ask questions and request
alterations. Negotiations are expected. The bottom line is to know your expenses and what level
of risk exposure you can tolerate. These are your limits that you should not compromise under
any circumstances. Once you and your client have agreed on an arrangement that is mutually
beneficial, you can just focus on developing your business relationship and selling your
jewelry!
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