Advice on negotiating from operations veteran Federica Nicolao, Executive Director and COO at Foundry Group
Startup Victoria’s Growth Club gives scaleup founders access to real-world experience on building a high-growth business, from successful founders, technology executives and investors.
This October, scaleup founders had the chance to hear from operations powerhouse Federica Nicolao, Executive Director and COO at Foundry Group.
Her passion for improving profitability has been honed through years of experience developing products, managing contracts and negotiating good deals. She now works to pass on that knowledge and experience to scaleup founders in her work for The Foundry.
“I end up in a rabbit hole helping people because I love operations and I love doing what I do.”
Read on to hear Federica’s advice on how founders can get more from negotiations to increase profitability and create partnerships that help you grow your business.
Using your most powerful asset in negotiations
Federica says that negotiating is about more than just the power of your wallet.
Instead of thinking about negotiations in terms of the immediate deal, think of them in terms of building partnerships that will help your business grow in the long run.
As a founder you should think of each deal, not only in terms about what’s in for you and your business, but also look to give suppliers what they need.
This comes back to establishing trust and growing your network, which is going to be worth far more to you than the dollar value of a single deal.
Trust can only be established over time, and relationships that aren’t built on a foundation of trust leave you more at risk to a partnership that could turn sour.
As Federica says, a bad partnership will always do more damage to your business than you’d receive from the benefits of a good partnership.
But how do startups approach negotiations when they haven’t yet had the opportunity to build these partnerships?
Federica says that startups can improve their bargaining power by asking for better terms and with in-depth knowledge of the product and all its componentry.
How to ask for better terms
You should be negotiating on terms with anyone you’re purchasing from, and push for the longest terms possible.
“If you don’t ask, you don’t get,” Fed says.
Often people make assumptions about what a supplier expects, but Federica points out that you’re not going to know until you ask them.
“Go and see what they need,” she says. “If they have cash flow, they may be willing to give you better terms.”
When you get a contract, Federica says that you should take out the things you don’t like and don’t assume that you have to accept them.
In most cases, they’ll accept your terms (as long they’re reasonable).
Even in cases where they don’t accept your terms, you open a dialogue that gives you an opportunity to find a middle ground, and in most cases you will end up with more than what the initial contract offered you.
Asking for longer terms of payment — 60 or 90 days as opposed to seven days or upfront payment, which Fed says is becoming increasingly common — can make a massive difference to your business.
You should also avoid signing longer contracts, which make it difficult to dial up or dial down. This is important for any business, but especially startups who need greater flexibility. As a startup, you’re constantly entering into new territory and shorter terms make it easier to adapt if your situation radically changes (for example, if a global pandemic comes out of nowhere to shake up your business).
Bigger businesses will have more muscle to renegotiate contracts because suppliers don’t want to lose them. Startups need to be more forthcoming in asking for better terms.
“You’ve got to set yourself up to win,” Fed says, but says not to underestimate your bargaining power in the initial negotiations.
“You are the customer, so you have the power. You’ve got the checkbook.”
Knowing your product as the sum of its parts
The other element of skillful negotiation, Fed says, is knowing your product and using that knowledge to make your business more profitable.
You can only increase your profit margin by cutting costs or increasing your price, so a deep understanding of your product is key. This means knowing the product that you sell, but also knowing every component of your product and how much each component costs.
Spend time working out your componentry and costs to get an idea of your suppliers margins and look for an opportunity to negotiate a better price.
“If you know what your supplier’s margin is, you can kind of workout what their overheads are and that will tell you if there’s room for you to move.”
Fed says she didn’t know the first thing about vitamins when she started at Swisse, but by working backwards was able to cut costs from 30% to sub 20%.
“I broke down the ingredients, worked out what each of them cost, and then I went OK, this thing costs $0.20. He’s charging me $1.20. What the hell?”
A better understanding of your product allows you to have more educated conversations with your supplier.
“All of a sudden they respect you on a level because they’re like, well, hang on a minute, she’s just gone and worked it all out so we can’t pull any wool over her eyes.”
It’s a mistake to simply assume that you’re getting the best price. Even if you supplier can’t budge on what they’re offering you, you’ve still opened up conversation and have a better idea of how to move forward.
In situations where your supplier can’t negotiate on price, you are then left with a choice to improve profitability by changing the supplier, the product or your price. You’ll decide which course you take based on a number of factors including what your competitors charge and your position in the market.
You will now have a better idea of what to change with a more comprehensive understanding of your product, its components and costs.
It all starts with conversations that turn suppliers into partners and build powerful assets that will sustain you as you grow.