Not only is Price important, but it is THE most important factor. It is the ONLY way we quantify and dispassionately measure results – particularly so for Procurement and Strategic Sourcing results.
Price is King is as true for corporate Procurement, as it is in our personal lives.
Price is king in our personal lives
From our own personal perspective, the truism that ‘Price is King’ is as obvious as the nose on your face. Once defining requirements, price is the the only thing that governs the choice of a supplier, in most circumstances. Examples of this are everywhere, including
- Home purchase. We aggressively negotiate price and, in most cases, would never dream of paying asking price (unless the supply & demand equilibrium is disrupted).
- Car purchase. Most would not ever dream of purchasing a car without negotiating the sticker price, cost of accessories, and financing terms.
- Travel related services including airline ticket, hotel rooms, car rental, etc.. Unless someone else is paying your bill (which creates a moral hazard), most vendors differentiate based on price, and the dominance of aggregators (Travelocity, Expedia, Orbitz, Kayak, etc.) proves that price trumps brand in what is a commodity business.
- Anything that is a consumer-based product. Most retailers start with brand but ultimately compete on price.
- Online couponing 2.0. There is a reason for the numerous services to help you find the low-price vendor. Do you use Honey? Close to 20 million people do, and PayPal though it was such a good idea that it bought the service for $4 billion less than a year ago.
- Been shopping on Amazon or another product distributor? Would it surprise you to find out that most people choose the lowest price when multiple vendors offer the same product?
- Ever bought a white- or private-label product? Ever bough Kirkland brand ($39 billion sales in 2019) at Costco? AmazonBasics, Solimo, Happy Belly or one of the other 150 private label brands at Amazon? Great Value branded products at Walmart? 365 Brand at Whole Foods? Or one of Target’s 36 private labels such as Archer Farms and Simply Balanced? Did you know that ~25% of products sold are white or private label representing ~$170 billion in sales in 2019? (source)
It should surprise no one that huge businesses have been built on the premise that ‘Price is King’. Most of us would not dream of skipping price negotiations for the most of our purchases – ranging from every-day necessities to our largest purchases. ‘Price is King’ in our personal lives is well established truism.
Spend it like it’s your money
The same behavior should carry over to our business lives … particularly for Procurement teams and Business Unit Leaders who own budget. Except … for the Moral Hazard issue.
When it isn’t your money, it is so much easier & pain-free to waste it. Often, this isn’t intentional or malicious, but it happens frequently. Often, budget owners and procurement teams alike over-pay because they lack the necessary skills, knowledge, capability and/or influence to negotiate price.
Negotiating multi-million deals (and sometimes deals that exceed hundreds of millions) is far different than negotiating the price of a car or an airline ticket; it is exponentially more complicated. Often, it’s because buyers have accepted the ‘convenient lie’ espoused by some that price doesn’t matter.
Most corporate purchases are commodity products & services
First, let’s recognize that most products and services purchased by firms are commodities – that is, there are numerous competitors offering a (near) carbon copy product or service at same or remarkably similar terms. As such, given a specific set of requirements, including business requirement, technical requirements, T&Cs, risk metrics, SLAs, etc., the only factor that differentiates one supplier from another is price.
The challenge for many organizations is that their Strategic Sourcing teams struggle to develop the requirements needed to level-set across potential suppliers. Some procurement teams have been misled into believing that the commodity products & services they are procuring need a special ‘partnership’ with a vendor. Doing so, needlessly elevates vendors’ negotiating leverage and necessarily destroys the buying firm’s purchasing power, in many cases, resulting in substantial over-payment.
False dichotomy
Some say that firms must pick between low price and high-quality, risk avoidance, etc.. This notion arises from a total misunderstanding of what Strategic Sourcing is all about.
We would never consider purchasing a car without clearly specifying requirements. Do I want a basic car or a performance automobile? For example, asking for a car at a Ford dealer could get you a Fusion (retailing at $23,000) or a Mustang Shelby (retailing at $60,000). Requirements are essential in determining the car that best fits your needs and the requirements dictate price … are you willing to pay 3x premium when you have the option of a perfectly reasonable alternative? Well, the price you might be willing to pay will depend on your requirements!
Likewise, corporate Procurement bidding scope without detailed requirements is a pointless exercise. Seeking bids for a product or service absent detailed requirements will result in no-bids or high-premium bids that reflect a large contingency given the numerous unknowns. ‘Garbage In, Garbage Out.’
Experienced Strategic Sourcing professionals understand this, and negotiate price within context of requirements including SLAs, T&Cs, volumetric data, risk mitigation requirements, quality of service standards, among other factors. Level-setting initial bid responses is essential given that increasing or relaxing performance standards will have a direct impact on price.
Including detailed specifications, requirements, T&Cs, SLAs, and other expectations into the RFP will result in Strategic Sourcing team being able to negotiate pricing on a level playing field with numerous vendors, which of course, is one of the key value levers that delivers Strategic Sourcing value.
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Whenever someone tells you that price doesn’t matter, challenge them to provide their services for free … but don’t be surprised if the ‘price doesn’t matter crowd’ quickly disappears. ‘Price Is King’ is a truism, at least if procurement and business unit leadership are good stewards of their budget and corporate value creation.