Question:
How does one respond to companies that are now participating in “on-line” auctions? It is basically a 30-minute bidding war and the low bid is presented. One needs to decide, (auction style) how low to price the product. Specifications and drawings are provided prior to the on-line auction.
Answer:
Good question. We all know that that this phenomenon is appealing to a certain segment of the market. Because it is a relatively new buying method, it causes us to stop and consider how to handle it.
Here are some of my thoughts….
First, I think you have to decide whether or not you want to do business with this customer. It seems to me that those companies who engage in online reverse auctions are the ultimate example of “price buyers.” In other words, they assume that there is no valuable difference between suppliers, and therefore the low price is the only factor to consider. With that mentality, they are unlikely to prove to be good long-term customers. In fact, if you win this piece of business, it’s likely that they will continually shop for a lower price. So, you will likely never develop this customer into a loyal customer. In fact, just the opposite is true. You will be assured of a customer who will leave on a moment’s notice for the next lowest price.
Given that set of circumstances, should you do business with this customer? I don’t know the answer to that, because there are dozens of other factors that could enter into your decision. However, I do think that you should carefully consider the question.
Now, let’s assume that you have decided that that you would still like to win this business. How do you handle the reverse auction?
Let’s go back to the assumption with which we began. This is a price buyer, who only values the lowest price. That means that if you want to win this piece of business, you must be the lowest price. And, if you want to handle the business profitably, you must reduce your costs, so that you can be the lowest price and be the lowest price profitably.
That means that you must look at your operations and determine if you can reduce your costs in the way that you process this order. For example, can you have the goods drop shipped from the manufacturer instead of receiving it into your warehouse? Can you stipulate larger quantities per invoice? In almost every piece of business, there are some ways to reduce the operation or production costs when you focus on that as your highest priority goal.
After having examined your costs of handling the order, its time to look at sales costs. Based on years of analyzing sales costs in literally hundreds of companies, I can confidently say that your cost of sales is somewhere between 10% and 30% of the total gross profit. To illustrate, let’s assume that this piece of business is worth $100,000 in sales over the next 12 months, and that you would normally sell it at a 20% margin, yielding a gross margin of $20,000.
Figure that your sales cost is somewhere between $2,000 (10%) and $6,000 (30%). (By the way, if you’d like a formula for calculating these costs, click on this link and download a free copy of ‘How to Kreate Kahle’s Kalculation.’ It’ll show you exactly how to work this out so that you know for sure what your sales costs are.) For purposes of our example, let’s take a half-way point, and assume that your sales costs are $4,000.
Now, suppose you made this a house account, removing it from the sales person’s territory, and assigning it to an existing customer service representative or inside sales person to handle? You could cut $4,000 off your sales price, without impacting your after-sales-cost margin. Your price could be $96,000 instead of $100,000, and you would not jeopardize your bottom line.
The account has said, by virtue of its involvement in this reverse auction, that it doesn’t value the sales person. It only values low price.
Let’s consider the consequences. If you remove this account from a sales person’s responsibility, you gain the ability to handle it at a lower margin than normal. That’s a good thing.
You also allow the sales person time to focus on some other account that isn’t so price-sensitive. So, instead of a frustrated sales person wasting his/her time on an account that isn’t interested in anything other than price, you have redirected the sales person’s time and efforts to someplace where it will be more effectively applied. That, also, is good thing.
“But wait,” you’re thinking. “This isn’t how we operate.” I appreciate that may be the case. I believe that it’s time to rethink a one-size fits all approach to sales. Reverse auctions may be a growing methodology for price buyers. Regardless of the technology, price-buyers will always form a certain segment of the market. If you want to profitably handle this portion of the market, you’ll need a low-cost way of doing so. Eliminating or reducing sales costs can make a dramatic impact on your ability to do so. Having in place a low-sales-cost option for price buyers gives you the ability to profitably handle this growing segment of the market.
At the same time, you should be examining team-selling for high-potential accounts and combinations of inside and outside sales people for low volume accounts, as well as the traditional one sales person per territory structure.
Markets are becoming increasing splintered and a single sales approach is rarely the wisest approach.
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