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Values Up or Prices Down

The Internet, enabled by cool applications, has brought the process of competitive bidding to an entirely new level. Reverse auctions, for example, have squeezed savings out of suppliers in every situation I am aware of. But it’s getting worse for suppliers.

Some companies are using bidding to gauge a supplier's competitiveness. That may be clever and effective for component buyers, but it is tough on suppliers. Two-step bidding may not be new, but using the Internet changes it significantly.

I have written before about the need for companies to be the low-cost producers in the market spaces they choose to be in. (See: Eventually, It All Boils Down to Cost.) These new approaches make cost effectiveness even more important. Without cost effectiveness you won’t generate the cash to fund product or service differentiation or, when these aren’t enough, to compete against aggressive tactics like two-step reverse auctions.

The Internet also brings price competitiveness visibility to a new level through various online applications. Faced with better-informed customers and aggressive negotiation tactics, how does a supplier respond? Customers need to see, appreciate, and pay for your value. This is easier said than done.

It helps to remember that your customer is likely not the end consumer. Your customer is just a conduit for getting your product’s function into the end application. If your product or service makes no difference to this final user, you have a problem: Your product is a commodity. You are competing on price.

Describing your product in the value terms of your customer’s product can help you assess your own differentiation. There should be some distinct value, and it should have stickiness. Remember: Your customer is someone’s supplier, so it faces the same fundamental problem as you do. Can you increase your customers' value and stickiness?

Supply chain professionals understand supplier value as it relates to your needs. They know they can squeeze weak value assertions and pay higher prices for solid ones. These same professionals can easily assess your value proposition’s strength against customers' needs, and highlight areas of weakness for possible value creation investment.

As I see it, it’s either values up or prices down!

6 comments on “Values Up or Prices Down

  1. Ashu001
    December 2, 2010

    Ken,

    These were the best parts of your article(beyond any doubt).

    “Describing your product in the value terms of your customer’s product can help you assess your own differentiation. There should be some distinct value, and it should have stickiness. Remember: Your customer is someone’s supplier, so it faces the same fundamental problem as you do. Can you increase your customers' value and stickiness? Supply chain professionals understand supplier value as it relates to your needs. They know they can squeeze weak value assertions and pay higher prices for solid ones. These same professionals can easily assess your value proposition’s strength against customers' needs, and highlight areas of weakness for possible value creation investment. “

    As someone who has to deal with suppliers very regularly I know exactly what you mean by stickiness when it comes to Value.If your supplier provides you with excellent quality and top-class/hassle-free service levels at a competitive price(need not be the cheapest);you will tend to stick with them through thick and thin. This comfort factor (especially when it comes to executing High-pressure projects) can't be underestimated at all.

    Regards

    Ashish.

  2. DataCrunch
    December 2, 2010

    Hi Ken, reverse auctions are becoming increasingly popular and not only affects the margins for suppliers, but also for resellers of finished products.   The traditional hardware equipment resellers are getting squeezed as well and will have to provide additional higher margin value added services in order to survive going forward.   

    Out of curiosity, does your company’s benchmarking services take into account reverse auction pricing opportunities and considerations?  

  3. Mydesign
    December 3, 2010

        Now a day’s production companies and marketing guys are struggling too much to find out a place to sell their products. Because of globalization ‘n’ number of products are available in the same category itself. So auction, online sales and bargaining are the different options in front of the marketing people to promote a sale. In one way it’s gives a cost effective end product to the customer, who care least about the quality.  Those who are really bothered about quality may get suffered. By reducing the price either by auction or bargain, the seller or company can compensate only up to certain extent in their margins. So the next option for them is to compromise in terms of quality, up to some extent and this is the usual thing happens in marketing side. 

        So it’s the hard time for companies, to come up with some cost controlling mechanism rather than compromising the quality.  In my opinion they can collect the necessary components from different countries, where they are cheap and finally assembling in another country where labour cost is less. In this way they can also have a global presence. But this may not be suitable for all cases and may vary from case to case.

  4. kumar1863
    December 3, 2010

    According to me if someone come into market with high quality product there is no guarantee that customers will go for it as they will look at the price first. If one wants to improve his sales first thing he has to look at the various price and quality levels already in the market for that specific product. Then he has to come up with final quality and price numbers ( obviously higher in numbers to get profits and to give quality products to customers). Globalization will always improve the profits by improving the demand profile. 

  5. Ken Bradley
    December 3, 2010

    Our company’s benchmarking service through FREEBECHMARKING.COM does not take into account reverse auctions as a direct price lowering tactic but section 7 of the Gold report does talk to the impact of creating supplier leverage as one of several factors that affect price. A reverse auction is one of many ways of creating leverage. Putting ones company in a position to achieve better pricing from suppliers is important.

    Our benchmarking reports on what others have achieved; not how they got it, although Gold report section 7 addresses some hows.

    As the theme running through many of my comments, suppliers must be cost effective to remain healthy against aggressive techniques. It’s even better if they are differentiated so as to create enhanced real and perceived value to cushion them from aggressive commodity tactics. There are many examples with cell phones and semiconductors where a few companies command high prices and the majority struggle on cost. Most readers could list the differentiated ones from the commodity grouped ones.

    Ken

  6. Ariella
    December 5, 2010

    I believe that businesses have to bear the greater access their customers have even with respect to keeping them on.  I'm thinking about my own experience with web host providers.  I'm on my third in 3 years now.  In that case, I wasn't shopping only for price but also for a good record of uptime and customer service.  The first company had horrible customers service at the point I left.  I even had time left on my prepaid contract but couldn't stand waiting on the phone for over an hour just to get someone to pick up the call; getting the problem solved could take far more time than that. Company number 2 started out with very good customer service, though that did erode somewhat over the 2 years I was there. I would not necessarily have left over it, if they would have continued offering a competitive price.  However, when I inquired they told me the pricing I had was promotional and was not going to be extended with renewal.  So when my contract was close to expiring, I shopped around.  I found much better pricing with companies that offered a comparable level of service.  So I took my business elsewhere. 

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