An importer asked me what he should do when Chinese factories ask for his “price targets”.

I think it is a legitimate question from factories (when it comes to trading companies, though, it makes sense to be suspicious).

Here is the sequence I advise importers to follow, when they source new suppliers:

• Get in touch with at least 10 potential suppliers, and ask some questions (about their main market, their size…) to evaluate if they are good fit for your needs.
• Request quotations (FOB, in USD) from them, to get a first pricing (without giving any target).
• Be in touch with them briefly on the phone, if possible. Human contact will show them that you didn’t sent that RFQ to 100 suppliers, and they will be more inclined to give a fast response.
• You will likely see several very similar quotes: that’s the “market price”. Eliminate all the “outliers” that gave prices 20% higher or lower than the average. (If you are consciously looking to buy above the market price to get above-average quality, keep the highest quotes).
• If you have a team on the ground and if all candidates are in the same area, this is the best time to visit their factories. If this is not easy, continue discussing via email and phone, and pay for factory audits once you have narrowed your search down to 1 or 2 candidates.
• Give more information about your product and your quality requirements to the most interesting candidates. Don’t hesitate to give them your target price if it is very different from what they offer you. Ask them to justify their price level precisely.

Don’t forget, in China price is very closely tied to quality. If you negotiate a very low price, most suppliers will end up saying yes. Then they will wonder how to make your products. They will probably use the very cheapest materials and subcontract production in a small workshop. You will get what you pay for.

One last piece of advice: if you pay 20% above market price, all you risk is wasting 20% of the money you disbursed for your project (and actually it is closer to 10-15% because the FOB price is only a portion of your total landed cost). If you pay 20% below market price, you risk getting something that can’t be sold at all (which means you risk losing all your investment).

Do you agree?

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UPDATE: you can read a good commentary on the ChinaLawBlog: How To Buy Product From China.