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Posted: 2005-11-21 / Author: Charles Dominick

Small Business Pricing: Is Successful Selling All About Lowest Price?

Small Business Pricing. In most of my public speaking appearances, I speak to groups of corporate purchasers. However, I recently had the enriching opportunity of speaking to a group of sales professionals.

I asked them to tell me about the experiences they've had with purchasing groups that have frustrated them the most. I got some interesting responses!

One phrase that was repeated often was, "It's all about price!" These sellers felt that many purchasers do not seek the supplier that will best serve their organization, but instead always seek the cheapest supplier.

I assured them that this was not the case in most progressive purchasing and supply management departments. However, that is not to say that their perspective did not have merit. It does.

I summed up why they had the experiences that they had in this blurb: "It all comes down to what can be quantified in financial terms. When price is the only thing that appears to be quantifiable then, yes, it does all come down to price. However, when paying a higher price can yield a quantifiable return (e.g., minimizations of other costs), a well-trained purchaser will make the decision that has the most favorable net impact on the bottom line."

There are many other aspects of doing business that affect the bottom line. Are you, as a seller, considering them in the same way that your potential customers are?

If not, consider evaluating how these costs of doing business with you differ from the costs a customer may incur when doing business with a competing supplier:

- The cost of acquiring a product or service
- The cost of using a product or service
- The cost of supporting a product or service
- The cost of maintaining a product or service
- The cost of disposing of a product or service
- The cost of poor performance

Just to illustrate the detailed analysis that a corporate buyer may do, I'll provide the steps that he or she would follow to take into account the estimated cost of a seller's poor performance. This approach is most commonly used by large corporations who are doing business with two or more competing suppliers and wish to consolidate their supply base.

Here's their 6-step process.
1. They define "events" that constitute poor service, poor delivery, and poor quality. For example, a poor quality event may be receiving an incorrect invoice.

2. For each event, they determine its average cost to their organization. For example, an incorrect invoice may require their accounts payable and purchasing staff to dedicate 3 man-hours at a rate of $30 per hour to resolve the problem. Thus, the average cost is $90. They apply the same average event cost to all suppliers.

3. For each event, they determine the percentage rate of occurrence using historical information. For example, if 10 of the last 1,000 invoices that a supplier provided were inaccurate, the percentage rate of occurrence for that supplier is 1%. They express the rate of occurrence in a decimal format (e.g., 0.01). Each supplier will have a different rate.

4. For each event, they determine the number of opportunities for the event to occur. If suppliers will invoice them weekly over a two-year deal, there will be 104 opportunities for an event. The number of opportunities will be the same for each supplier.

5. To estimate the cost of poor performance for each event, they multiply these three things together: the number of opportunities, the rate of occurrence, and the average cost per occurrence. Cost of poor performance per event will differ by supplier.

6. For each supplier, they add the cost of poor performance per event for all events to the corresponding supplier's price. The supplier with the lowest total cost after factoring in the cost of poor performance will generally be the ideal choice, considering price and performance.

So, you can see, it is not all about price in all situations.

Knowing how the buyer will evaluate your proposal is a big advantage in successfully selling to large companies. Helping the buyer understand how your company minimizes the total cost of doing business is the key to getting your proposal evaluated favorably by today's sharp purchasing professionals.

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This article was written by Charles Dominick, C.P.M., SPSM. Mr. Dominick is the president of Next Level Purchasing, Inc., a company dedicating to helping purchasing professionals have successful careers. Next Level Purchasing can be found on the Web at http://www.NextLevelPurchasing.com


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