How to thank a vendor, while turning them down?

I know how you feel - I've had to do this several times in my day job.

I also know how it feels from the other side, where I've spent a lot of time on a sale prospect, so I always feel like I've wasted their time when I'm the one being sold to.

It's a reality of doing business though, and something I've come to accept from both sides of the fence - as long as you are polite, and let them know why it's a 'no', I'm sure they will understand. It wouldn't hurt to also mention that you appreciate their time and assistance (I know that always helps 'soothe' me when I'm playing the role of the vendor :)

Most companies won't want to ruin their future chances of a sale, so it shouldn't ruin your relationship.

Be up front with them as to the reasons you can't use them. Sometimes, they might even come back with a more equitable solution, given your constraints. You should also make sure to let them know that you would consider them for other jobs as they come up.

I would make a personal phone call and send a thank you letter to let the vendor know your decision. I would tell them what you told us. Something similar to:

Thank you for taking the time to go the extra mile to accommodate our needs, learn what our project really was about, and to work out a good solution. Unfortunately your offer comes with high start-up costs that make it infeasible for a test marketing production run, though it's very attractive in the longer term when we'll have much larger orders.

We wish you the best and look forward to possibly working with you in the future.

This leaves the door open for the future. They will be disappointed but if they want your future business they will also want to keep the door open with you.

If you want to do business with them then tell them how they need to modify their offer to win your business. Be honest and tell them you will go with "Plan B" if they cannot make these changes. It doesn't sound like you have a best and final offer from them, be direct and give them a chance to win the business.

I am sure referrals would always be appreciated.

I agree that a transparent, truthful approach is best. People constantly try to "soften the blow" by responding with a less than truthful reply. This doesn't help the vendor overcome obstacles in the future or perhaps come back with a more favorable offerings (in terms of price or service).

Things would be much better if we lived in a world where we can be up front and honest with our reasons, while at the same time being respectful and polite.

Sorry for long post. I my work of sales in Japan, we are turned down many more time than we win. Many reasons , cost, schedules, quality, solution misfit,competition. I would like to tell you that when we are turned down late , we definitely feel disappointed, but not as bad when we are not in race. The very fact that we were serious contenders is satisfying. And the key take away in failed deal is the relationship with customer and chance of winning business next time. So as a customer you have to be fair to them by telling them what is lagging in their solution. A very good solution that does not fits into customer's budget is not good enough. And moreover one trait which is must in any good vendor is to remain on the side of customer , today or tomorrow customer would come to them. So , make them mature, by telling them their weakness and to improve themselves.