Why Price Is the Most Important Factor in Procurement
This company article from Serge Milman delivers a pragmatic approach to pricing and why this is as true for corporate procurement.
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 bought the 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?
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.
Key points include:
- Negotiating multi-million deals
- Low price and high-quality, risk avoidance
Read the full article, PRICE ISN’T JUST IMPORTANT … IT’S ALL THAT MATTERS!, www.SourcingAdvisorsGroup.com.