Suppliers hand out umbrellas when it is sunny, then charge you for use when its raining – or indicate that it is always raining, or stop helping when its raining because you bought the wrong type of umbrella, and that one doesn’t come with a useful rain support contract.
I can see some smiles, some exclamations and some “not in my supply chain” responses to the above, but the fact is that it is 100% true.
I have seen two different organisations in two different sectors using the same supplier for the same product. Although one is paying 10 times more than the other. I know, you could say that the one paying more clearly doesn’t have efficient procurement, or their supplier management are “not at the races”.
This is my favorite reason, and that is because it indicates that you need professional negotiation to get the right outcome, which in turn means that some clients get better deals than others. Or, one is a tiny company and receive concessions, or they might be a government or non profit, or educational establishment, or something else.
But if you can find a good reason for someone to pay more, or less, for something, and also the reasons you can see seem legitimate, then that surely means that pricing is irrelevant and based solely on what the sales guy negotiates at the time.
So, I have decided to give you a quick glimpse into what happens in supplier land that drives some of the value you have spent when you didn’t have to.
The following is based on an actual situation, the numbers and industry have been altered.
Company A has spent £100,000 on their product and company B has spent £10,000 on theirs. The product choice, volume and version are identical, and that is where the similarities end.
Company A:
Company A is a Banking group. The software it is using is to store and retrieve customer data. As this is in the Banking sector, they have to ensure that the software is secure and able to scale, and also that it is stable while the support has to be top notch from the supplier.
Company B:
Is a small company that installs blinds for its customers. The software is used to store and retrieve customer data, and it has to be secure. Support is also important as although they are not regulated in a way that means they have to be able to fix things quickly, they do however adhere to the Data Protection act, and they do publish customer fairness as a KPI.
Larrycle:
Is a Multinational United States headquartered software provider. They have a database that enables customers to store and retrieve data. Larrycle have many different licensing models that range from technical functionality availability to what industry you work in. Larrycle builds all their databases the same, the software is the same irrespective of what functionality you chose or what industry you are in, as is the stability and security.
Larrycle has a published price list too although no one ever bought anything based on this list price, it is merely used to show the world how valuable their software is (*Perception of Value) – pricelist isn’t the only price metric!
The Larrycle Blinds installation industry sales rep understands that the pricelist is a tool for him to show Perception of Value. And he does – he gets the most out of the blind installation company that he guestimates he can – then wraps it up in a “special” contract that allows no movement and collects the cheque every year.
The Financial Services sales rep for Larrycle also understands his industry and the prices they are willing to pay, especially when someone quotes: banking regulator, fines, data security and customer remediation. So, he gets ten times more than the other guy because he also understands how to use Perception of Value to get the most possible cash per customer.
Summary Findings:
Both Company A and Company B use and utilise the exact same list of software components from Larrycle. Both can be optimised.
Lets say for a moment that on the face of it, it looks like the small company benefited from being small and unable to pay large sums for their software.
Lets also say that the financial services company think they got a great deal because they got their discount level infinity and therefore got a 70% discount off list price.
We call this silo selling, ie the supplier keeps the industries apart so they cannot compare notes easily. The supplier calls it value based selling, ie, we worked out how much it was worth to you and used that as our end point.
Now lets add that the small company was based in the United States, and the Banking group was based in the United Kingdom. This is cross border price listing, and stems from the practice of charging more in Europe because the supplier has to theoretically post CD’s to the client in the UK. This practice ranges from 5% to 25% uplift depending on the supplier.
The point is, is that there are many ways suppliers approach how to charge the highest possible price From a supply perspective there is no value left on the table, so why should you leave any.