3 Reasons Why Customers Commoditize Suppliers

Guest Post by Bob Rickert – CEO, PCS Strategies, Inc.

Profit HeroesI often hear salespeople and sales leaders lament that they are being commoditized by customers who focus only on price and unbundling the value of their solutions.  They don’t see this only from procurement but also from operational, functional and even senior-level economic buyers.  I hear the frustration from salespeople who work for highly differentiated companies with significant value engineered into their products, services and delivery capabilities.  They offer unique expertise and thought leadership in their respective industries, yet they get reduced to lowest price bake-offs that neutralize their competitive advantages.

This happens to them for three reasons.  First, it is a cost management strategy for buyers.  They know that one way to drive down their costs is to procure all services at the lowest price.  It works! For every dollar of cost they can remove, that dollar drops directly to operating profit.  Of course, it removes a dollar of operating profit for every supplier that participates.

Customers have installed business practices and incentives within their organizations to ensure that financial discipline and rigor is applied to every product or service acquisition.  This leads to a lowest cost mentality and a price-only culture.  When customers seek to diminish your “value,” it is because they believe it is your way of extracting greater price (supplier’s margin) out of each transaction at their expense.  In short, it is their strategy for controlling the relationship and dictating the terms of doing business in ways that benefit their business.

Suppliers understand that in this exchange the total cost of doing business is not factored in, and in most cases it is more costly to do business based on price-only considerations.  It is frustrating to know that you are delivering tremendous results and yet the customer is unwilling to recognize or reward you for the benefits you bring to their business.  Of course, unless you completely understand the difference you bring and can articulate it, the battle wages on, you lose margin and the customer “wins”.

The second reason customers commoditize suppliers is because salespeople let them.  If you can’t defend your price by demonstrating the economic impact of your solutions, then you are destined to compete on price.  Think about it, the constant in every product or service acquisition is the cost.  It is not up to the customer to define the specific economic factors that impact their business as a result of deploying your solution.  It takes time and effort to quantify the hard dollar impact that your solution has on the customers’ business. It is frankly the hardest part of selling profit impact.

The third and biggest problem with commoditization is the fact that when the focus is so narrowly defined around price, it becomes more difficult to leverage the total impact that a company offers.  For example, take a third-party logistics (3PL) and transportation company that provides services to thousands of customers.  Shipping and transportation are in and of themselves highly competitive and driven by lowest price decisions.  They are volume driven and highly transactional.

Over the years, the 3PL company has acquired and built technology solutions that can fully optimize the entire supply chain for a customer, providing visibility, lowest total cost shipping and expertise for global forwarding, compliance and other valuable services.  They offer a significant level of overall profit improvement for an entire supply chain from receiving supplier shipments to delivering finished products to customers.

Yet 3PLs often get into large bidding situations where the customer wants quotes on a trucking route-only basis (point A to point B).  To the customer, this is a way to micro-manage transportation on a line item basis and in a way that provides control and visibility into how they are managing their supply chain.  For the supplier, it is a quandary.  Do they take a pass on significant transportation business, or do they compete and maybe win at less than desirable margins?  The only other option is to take the opportunity to demonstrate that the customer’s approach sub-optimizes their transportation spend overall and diminishes their profit improvement potential.  That can be risky if the business case isn’t made.  Yet it is more costly if they don’t try.

Not every customer is focused on price only.  Many sophisticated or forward thinking executives understand that you get what you pay for and they can achieve better returns by allowing suppliers to have skin the game and make a profit as well.  They lead companies that understand how to identify and evaluate economic return-on-investment.  At least, they are open to ideas and new ways of thinking about their business and will entertain suppliers who demonstrate knowledge of their business and can articulate how their solutions impact profitability.  The problem is, even customers that operate on an economic impact basis will subscribe to price if there isn’t any other quantifiable way to evaluate an investment.

About the Author

Bob Rickert, is CEO of PCS Strategies and author of the new book on transforming sales “Profit Heroes – Breakthrough Strategies for Winning Customers and Building Profits which available at Amazon and Barnes & Noble. He lives in Chicago.

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