Competitive Bidding Hurts More Than Profits
Day after day the news is littered with instructive pieces describing how all of your daily transactions should be conducted as if you are at an auction. Whether you are at an electronics store or online shopping for some clothes the economy is so bad you are supposed to be able to hammer any seller down on price at your leisure. As a wise person once said it never hurts to ask and as a consumer there is no harm in asking. As a seller and business owner there is harm in obliging bid requests and we will discuss the reasons why in depth.
Studies have repeatedly shown that the least loyal customers are those that shop purely on price. Although times have changed the traditional rule of 80 percent of your business coming from 20 percent of your customers is still consistent to some degree. Knowing that a majority of your business comes from a small portion of your customers typically means your most loyal customers are the basis for your success. The other 80 percent of your customers continually change as customers come and go. Studies have also shown loyal customers are much less sensitive to price so long as they are not being gouged and are instead interested in the business relationship, consistency and meeting of mutual goals. When a new customer calls or emails asking for your business to participate in a time consuming and lengthy bidding process that will come down to the lowest bidder you have to ask yourself is it worth the cost? Do you really want to establish a relationship and tie up financial resources on a customer who values you only for your price and what does that do to the industry you operate in as a whole? Take for instance the story relayed to us today of a customer that asked four different distributors to participate in a sealed bid. One distributor refused to participate probably having previous experience with this organization. Three others submitted bids. Two "finalists" were selected each likely being played off of one another and asked to bid again. The final outcome was a friend of the company President getting the order at between 0 and 5 percent profit not including carrying costs. The customer may think they have "won" in this case but in the end they too lost as there is no way that distributor can continue to effectively service that account at those margins and will either be out of business in a year or will be like the distributor that refused to bid. By the time they reorder that distributor will refuse to take the order or be out of business which means they'll incur new costs associated with acquiring a new distributor and likely expensive setup costs. If the customer saved $500 in real order costs but spent 10 hours of manpower to do it they too had a net loss as those hours should have been spent on revenue producing activities. Meanwhile in this era of decreasing credit the distributor that took the order at 5% is chewing up valuable capital resources to produce an order that they make little money on and are potentially on the hook for a five figure loss if payment is not made.
We will discuss this in more detail tomorrow, meanwhile take a look at earlier entries such as the arrival of custom bpa free sport bottles that we wrote about last spring and our post on retail brands crossing into the corporate channel.