Large enterprises commonly focus on using their size to drive price reductions when purchasing consumable materials. This practice has been successful but is reaching the point of diminishing returns. Years ago, companies could generate savings by running bids, reverse auctions, and other price reduction techniques designed to generate more competition. The research shows that the average amount of savings from a sourcing event now totals less than 4% and that amount is trending down. Ouch! If you really want to drive savings, you have to find a lever you can pull other than price.
Ask yourself this question…
Consider how most individuals get savings when they are spending their own money. How do they find savings as they shop for goods for their own households when they don’t have the size to negotiate prices like a big corporation? They don’t have the leverage to get individual price reductions but they still find meaningful savings by engaging in comparison shopping.
They may search the internet, visit multiple stores, or even just compare the labels of a few (or more) boxes to make a decision about which product is the best one for their family at the best price. A consumer will consider purchasing several items that have similar specs and functionality, even if they aren’t the same. This allows them to get the functionality they need at an attractive cost, without respect to the brand of the product.
The Knowledgeable Consumer
This practice was explained in a study by Dutch economist Bart Bronnenberg of Tilburg University and three colleagues from the University of Chicago and featured in Bloomberg News. Bronnenberg defines the knowledgeable consumer as someone who buy products for their personal use for which they are an expert in their professional field. These people are far more likely to buy store brands when they comparison shop and save significantly more money than the average consumer because they are more informed about those products related to their field. Some examples would be when a chef buys flour or a pharmacist buys aspirin, they are more likely to buy the generic brand over the nationally recognized ones and can see 15-25% in savings.
However, for most shoppers, their buying experience looks closer to this. For example, a typical consumer may need a flashlight. That person will consider multiple manufacturers’ brands offered by multiple retail outlets for the same purchase. This comparison shopping based on product functionality is what drives savings for the consumer, not compelling the seller to lower the price. It is not uncommon for consumers to save double digit percentages utilizing this method.
Here is the problem for large enterprises. In a consumable supplies catalog, there are tens of thousands of items, in some cases nearly millions of items. Large organizations often have hundreds or thousands of people who can purchase these products, frequently located in multiple different places. In some cases, the enterprise may have multiple suppliers selling the same or similar products, even across multiple supply categories. These factors make the simple task of comparing items extremely complex…unless you have the right tools.
Utilizing a product comparison spend management platform, there can be huge savings available by doing comparison shopping, 15%+. In some cases, we’ve seen 50% savings over the course of a year in a large enterprise environment when comparison shopping is employed correctly. This equates to millions of dollars in continuing year-over-year savings. This includes vertical comparisons (matching products to the functionality needed) and horizontal comparisons (looking for similar quality products with other brands). We’ll explain more in an upcoming blog post.