Part 1 – the pricing practices that could cost you dearly

In the current economic climate ‘price’ is often an important consideration when choosing an office products or business products supplier. Many buyers believe (as do we) that it should be quick and easy to identify ‘the best deal’. Sadly it’s not, and choosing the most cost effective supplier could be much more difficult and confusing than you might imagine.

Independent research conducted into pricing practices within the industry suggest that pinpointing the best deal is made all the more difficult because a handful of very large suppliers seem to be manipulating the sensible and logical tests that are often used to evaluate price competitiveness. These practices are potentially misleading and even the most seasoned procurement professionals are not immune.

For many people this can be an uncomfortable, potentially contentious topic to consider, especially where the finger of blame points at suppliers they might use. However an understanding of these issues is crucial if buyers want to be certain they are being offered the very best deal, not just the deal that has been deliberately designed to look the best.

Getting best value and making savings is simple…isn’t it?

Buyers tend to measure up to three quite reasonable criteria when evaluating competitiveness:

• the net prices suppliers submit for a basket of core products (the total price for a selected range of regularly used goods);
• the catalogue discounts suppliers offer (the percentage discount off a supplier’s catalogue retail price for items that don’t form part of the basket of core products); and
• the rebates suppliers offer (the value a supplier is prepared to give-back, sometimes based on spend thresholds and which may even be paid up-front before an order is even placed).

The first two criteria are nearly always relevant; the third is less commonly used. These are sensible and logical tests that really should allow the most competitive overall deal to be identified. Unfortunately these tests appear to be open to manipulation and abuse by suppliers whom, despite appearances, could be distorting competition and costing customers dearly.

What’s really going on?

Independent research concludes that the approach being used is simple but very effective.

• Some suppliers offer extremely low prices for a basket of core products and they encourage buyers to focus on the total price of this basket. This is because these suppliers know the total cost has to appear ultra competitive where ‘price’ is a key component in the decision-making process. If buyers looked at the individual prices of items contained within this basket they might be surprised to find these could represent 70%, 80% or 90% off that supplier’s normal catalogue prices and they might raise questions as to how the supplier could sell these products so cheaply.
• Knowing that this basket is unlikely to represent everything that will be bought, then to further tempt buyers, some suppliers offer exceedingly generous-sounding, high percentage discounts off their normal catalogue prices for products not contained in the core basket. This is because these suppliers know that big discounts tend to appeal. As a result, some suppliers commonly offer catalogue discounts of 40%, 50% and 60%.
• Some suppliers offer attractive-sounding rebates that are often based on the amount the customer spends with them. These suppliers believe that the larger the rebate offered (as a percentage or as a monetary value) then the more appealing it’s likely to be.

What’s wrong with that? Aren’t buyers guaranteed to get the best deal when they are offered low prices, big discounts and generous rebates? Well no, not necessarily. Where price is an important consideration then the offer that’s being made could merely be designed to look good and sound impressive in a bid to lure buyers and encourage them to award their business to that supplier. Research into these pricing strategies suggests that some suppliers are using techniques that can unfortunately manipulate logical price-competitiveness tests without automatically providing the most cost-effective outcome.

They key question to ask is “How can suppliers offer prices that are so very low, combine them with discounts that are so very high, potentially pay a rebate and still make a profit?” Some may claim that their size and scale gives them the buying power to offer such a great deal. Is this true or is there an alternative, more sinister explanation to which these suppliers aren’t prepared to admit?

It’s this alternative explanation we’ll consider in our next post. But be warned, you may need to brace yourself because the insight we’ll be sharing is contentious and may make for an uncomfortable read. Nonetheless, it’s an insight that could save customers a vast amount of money and bring a level of transparency into the market that we fear is sadly lacking.