Compete On Cost, Not On Price

In today’s competitive global market, effectively competing on price is a consistent theme. The ability to access information is changing how customers buy and it is shifting more power to the consumer. Customers have become market savvy, and companies in the distribution industry are in a constant battle to remain relevant. Companies have been groomed to believe that the only way to compete is to be the lowest price supplier of their goods or services. However, “unit price” is only one factor in the decision.  The more compelling factor is referred to as “total cost.”

To illustrate, imagine you need to get your car repaired.  Ask yourself:

  1. Should I go to the person with the lowest quote, even if they are located in a city four hours away?
  2. Should I go to someone locally, solely because they have the lowest cost?

Your answers to the questions in this simple illustration are probably, No! The old saying, “you get what you pay for” comes to mind.  Similarly, distribution companies that emphasize a total cost approach recognize critical questions such as:

  1. Will the unknown service provider use quality parts?
  2. Will they deliver timely service?
  3. Do they extend credit terms?
  4. Can I trust them to do the repair well?

We cannot always put a financial price on each of these factors. However, they do impact the perception of the total cost. The bottom line is that the lowest unit price does not always equate to the lowest total cost. Distribution companies utilizing the total cost approach are normally more prosperous and do not tend to compete on unit price.

In recent years, distributors were tempted to source their components from emerging nations such as China and India, only to find that there was a discrepancy in unit price and the total cost. Factors such as communication barriers, quality, on-time delivery, minimum order quantities and freight added to the unit price. Many distributors have subsequently brought their business back on-shore because of these extra costs.

Take this opportunity to think about your own business. What unit prices and additional costs can you manage to reduce your total cost? Companies should work on making the total cost of buying from you lower than purchasing from your competitor even when your unit cost is higher. If a lower total cost cannot be created, perhaps you need to change the way you price and pull waste out of your processes. The worst case scenario is that you withdraw from that market, but the need to do that is rare.

Start with the price that you need to be competitive and work backwards to determine your target material, labor, and overhead costs. A key point for distribution companies when speaking with your customers is: Focus on total cost rather than unit price. You are less likely to compete with poor quality and unreliable competitors.

Robert S. Olszewski can be reached at Email or 215.441.4600.