The Winner Is...

And the Winner Is Low Price. Wait – No…

It’s a time-honored business strategy – low prices. Michael Porter codified Low Price as one of three generic competitive strategies, but it’s not like it wasn’t already commonsense in  every business culture. Still, it’s remarkable to see the over-reliance on this particular strategy in our “modern” times.

Which leads me to ask: Just what is it with low prices?

You see products and services being sold on the basis of low price every day, all around you. Yet you’re also well aware that you shouldn’t compete on just price—that price competition is ruinous and that low prices suggest the absence of larger value.

But just what does that mean for your business? Don’t take my word for it; find out for yourself. Are you in a vicious, cut-throat, price-gouging business? Or are you in one of those cushy, big-margin, fat, dumb and happy businesses that doesn’t have to worry about price competition?

You may be surprised at where you fall on the continuum.

The 3-Question Price Competition Quiz

First, make a subjective estimation of where your business stands on a price sensitivity scale of 1 to 10, with 1 being “price ranks very low on the scale of our customers’ concerns” and 10 being “low price is just about the only item our customers care about in this business.” On which side of 5 does your business lie? And how far over toward the end?

Second, make a list of the last 25 competitive bid jobs your company bid on—and lost.

Third, make a list of the last 25 competitive bid jobs your company bid on—and won.

Now, for the “lost” list: in how many of the 25 cases where you lost the competitive bid did the client say something like, “Nice job. Thanks for bidding, but, well, you were just a little too far out of line on price.” In other words, how many jobs did you lose on price? What percent is that of the 25?

And finally, for the “won” list: in how many of the 25 cases where you won the competitive bid did the client say to you, in effect, “Congratulations, you won the job; looking forward to working with you. By the way, the reason you won was you were the low bidder.” In other words, how many jobs did you win on price? What percent is that of the 25?

And the Winner Is …

Let me guess: your percentage lost on price is larger than your percentage won on price.

Let me guess again: your percentage won on price is closer to zero than it is to 25%.

Another guess: your percentage lost on price is less than half.

Another: the ratio of your percentage lost on price to your percentage won on price is 2.5:1 or more.

And finally: looking at your subjectively estimated ranking of your business’s level of price competition, does it fall on the same side of 5 as your estimated wins and losses based on price?

Now, if those guesses are wrong, please write me. I want to know what business you are in! Because for most B2B businesses, particularly those with larger, more complex sales and services offerings, those guesses are well-based on historical data (my data, that is, from giving the quiz in classes).

The Pricing Conundrum

Assuming your results look like my guesses, that raises several conundrums.

One conundrum is this: “If we’re such a price-competitive business, why do both wins and losses appear to be less often based on price than on something else?”

The other is this: “Why do we seem to lose on price more often than we win?”

The answer to both conundrums is that price is overrated as a factor in buying decisions. The real question is why? The answer has mostly to do with buyer psychology.

How Buyers Think about Price

One level of buyer psychology is available to us simply by asking, or by envisioning, what goes on in client organizations. Many consultants and accountants I talk to (and nearly all lawyers) have a tale about how the client’s procurement process is destroying quality—”all they care about is price.”

That is not what the procurement people will tell you, however. Procurement specialists have little interest in incurring the wrath of internal clients with legitimate quality concerns just to be able to say they got the lowest bidder. Value and quality are hardly irrelevant to their concerns.

And assuming your data is like I suggested above, the low bidder doesn’t always win. In fact, the low bidder, it would appear, wins considerably less than half the time, even judging from the higher of the two numbers you estimated (percentage of time you lost on price). And considering the number of times you won on price, one has to wonder how the myth of price competition arose in the first place.

The answer goes deeper into buyer psychology. Suppose you worked for a client and were charged with telling the losing bidders the bad news. How would you deliver the message?

Perhaps you’d prefer to do nothing and just skip the unpleasant task. But you know someone has to do it, and you owe it to the bidders to give a decent explanation.

You don’t want to share too much about the decision process, however, for a variety of reasons—chief among which is you chose the winning firm because, frankly, “we just feel more right about working with them.” You can’t saythat, for heavens’ sake!

So, you end up with several generalizations. Your team wasn’t quite as qualified, the winner had a really strong track record, and that game-ending no-appeals-allowed reason—your price was just a little too high.

Price is an enormously appealing excuse. It’s quantitative (and we all know numbers are good, right?). It’s completely opaque—the proposer has no way of knowing anyone else’s price and would never ask (and only partly because of legal issues).

But most important of all, the bidder wants to believe price was the reason they lost. Because the alternatives are unpalatable: they don’t have good people, they don’t have a good reputation, they don’t appear trustworthy, and so on. No selling team, particularly a team that would be involved in delivering the work, is interested in a message like that!

So, price becomes their refuge. “Darn! If we just could have priced it a little lower. I knew it. The market is tough out there; next time we can’t afford to be so choosy. We need to get in there and fight. And if we have to lower prices to get the work, well maybe we need to do just that.”

And that’s how the myth of low prices gets perpetuated. The moral of the story: if you think you lost on price, think again. Price is just the most convenient excuse for something more fundamental.

 

This post originally appeared on RainToday. 
3 replies
  1. Rich Sternhell
    Rich Sternhell says:

    Charlie,
    Very useful and well done post. One of the more interesting issues you touched on was the role of procurement people. My experience is that procurement people definitely raise the cost of sale for the seller and also raise the cost of buying for the purchaser. They do make you take a sharp pencil to your price and often force greater disclosure than you as the seller would like. Like many corporate initiatives, procurement functions were created to solve real problems. Unfortunately, like many corporate initiatives, they have acquired a life of their own. Standardized contracts, insurance requirements, a level of detail often uncalled for by the project. Both sellers and buyers have to get better at pushing back on procurement functions where standardization has overtaken good sense.

    Reply
  2. Ryan Nied
    Ryan Nied says:

    As a leader & practitioner in the procurement space over 18 years, this article struck a chord with me. If buyers are inauthentically using price as the reasons given to unsuccessful bidders, then they need to clean up their act. Any effective procurement manager should be able to articulate the factors influencing the decision to the suppliers. If there is a discomfort to be frank, or a preferred relationship due to past performance, then they better be able to put that into clear value terms for the unsuccessful bidders. The behavior characterized by Charles in the article is that of an “old school” purchasing team, far from the advanced organizations that are making huge value-generating impact at leading firms.

    What’s lost in all of this has to do with how buyers segment purchases for their firms. If it’s a transactional buy for, say, pens, then of course, price is going to weigh very heavily into the decision. If it is the semiconductor inside a pacemaker, then it’s going to be handled differently.

    We also have to recognize how organization evaluate procurement. For years, we have attempted to shift the performance metrics away from only price. Some organizations have not progressed. Procurement needs to be rated on total landed cost; as well as incremental value delivered through risk mitigation, speed, quality and innovation, corporate citizenship, diversity, etc.

    Reply
    • Charlie
      Charlie says:

      Ryan, thanks for this note. I couldn’t agree more with you about the professionalization of the procurement function.

      My post was aimed almost entirely at non-professional buyers (though as you point out, it may also be true of old-school, un-evolved procurement functions). Buyers of professional services are still, in many organizations, the ultimate clients themselves, and procurement functions may be limited to contractual issues (which, as Rich Sternhell points out in the above comment, can be trivialized and abused).

      The procurement function is still evolving when it comes to purchasing of professional services, though obviously inroads are being made. But sellers should make no mistake: the future of services buying is in the hands of procurement professionals, not the traditional end-clients. The sooner services providers recognize that the procurement function represents a legitimate co-client, the better for all concerned.

      Among the ranks of professional services providers, there is still a belief that procurement professionals are obstinate, price-obsessed, determined to break down all relationships and buy solely on price. As you ably point out, this is far from the truth. And, as you also point out, even with procurement the best practices are moving well beyond the old obsession with savings, to include management based on total spend and even ROI.

      Reply

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