How important is price against the other elements of the marketing mix? This article is based on experience from market research and draws a moral.
FIVE HYGIENE FACTORS DOMINATE the minds of buyers when they are screening potential suppliers. These are service (sales and technical), price, quality, reliable delivery and speedy delivery. Each factor covers a broad range and can be broken down into many component parts. Quality, for example, encompasses reliability, durability, finish and design, whilst price includes discounts, credit and allowances. If the limitations implicit in the broad headings are accepted, it is possible to compare their relative weight across a number of industrial products and services. Table I (below) shows findings taken from a number of surveys in which respondents were asked which factors they consider important when selecting a new supplier. It is apparent that even in a period of under used capacity, when some companies are prepared to cut prices to obtain work, it is quality that is ranked first almost every time. There are exceptions, of course, and these tend to be where products are undifferentiated, possibly because they are made to a common standard. Reliable delivery follows close behind price as the third most important factor in the buying decision. Ranking shows only a part of the story as there is usually a “distance” between each factor which can vary considerably.
TABLE 1: Factors considered important by decision makers when selecting a new supplier
This is demonstrated in Table 2 where, using the example of an engineering raw material, a substantial gap is seen to exist between quality (ranked first) and reliable delivery (ranked second). Price comes a close third whilst speedy delivery, technical and sales service lag far behind.
TABLE 2: Distance between factors which are considered important when selecting a supplier of cold heading steel
Although quality is seen to be important by nearly all industrial buyers who are seeking a new supplier, this may not be the case if a seller takes the initiative and approaches a company which is satisfied with its current suppliers in an attempt to open a new account. A buyer usually requires an incentive to change his source of supply, and over the last two years price has been the chief motivation. Table 1 showed that buyers of a finishing service ranked quality as the most important factor when seeking a supplier. When these same decision makers were asked which factors have to be offered to prompt a change in supplier, price emerged as the most important, although it is often linked with another benefit such as improved quality or delivery.
TABLE 3: Factors which may prompt a change in supplier of finishing service
The results of this analysis require further qualification as it is not sufficient to know a buyer is motivated by price or better deliveries – it is necessary to quantify these factors. Following on with the finishing service example, it is clear that small reductions in price are not enough in this market sector to prompt a change in supplier (see Table 4). The pattern shown in table 4 is of course unique to the finishing industry though many other surveys confirm that industrial products are insensitive to discounts of 10 per cent or less.
TABLE 4: Price reductions required to change supplier of finishing service
It is not unusual in industrial markets to find that quality is the factor most often sought by suppliers and price is the prime motivator required to prompt a currently satisfied buyer into making a change. Price cutting however has obvious dangers quite apart from the risk of starting a price war. Consider, for example, a product with a 25 per cent profit margin and sales of £100,000. A cut of 15 per cent of the price requires more than double the turnover to provide the original profit of £25,000 and involves handling two and a half times more goods!
Price cuts of 10 per cent are substantial in industrial markets, and it must be reassuring for existing suppliers at least, to know that most buyers will not move their source of supply unless the discounts are in excess of this figure. Buyers recognise that cut prices may mean a reduction in service or quality which could jeopardize their own production and profits. By sticking with the devil they know, decision makers have a measured level of quality, delivery and price which can be built into their production programme. A new supplier promises a better package which, from experience or fear, the buyer thinks may not materialize or be long lasting.
The buyer’s chief motivation in selecting a supplier is therefore security – for his company and his job. A relationship builds up between the buyer and supplier and over the years mutual trust develops. As a result, loyalty in industrial markets is extremely high and many examples exist of companies enjoying a chief supplier status for ten years or more. It is hardly surprising, therefore, that buyers only reject a supplier if they are repeatedly let down. Research shows that the most frequent reasons claimed for rejecting an established supplier of industrial goods or services are failures to meet delivery and quality specifications – price is very seldom mentioned.
Although the industrial buying decision is complex and varies widely between companies, suppliers could benefit by focussing their attention on quality: an aspect which has been shown to be of prime importance. It is the chief factor sought by buyers and very often quality failures result in supplier rejection. Despite these findings companies often undersell their products because they take them for granted or they do not realize the importance of stressing quality in the sales story. Manufacturers of products made to a common or British Standard are very often guilty in this respect. Fastener manufacturers may omit to tell their customers that the steel they use started out as ground billets thus eliminating surface defects and ensuring consistent first class quality in the finished products. Hose manufacturers should tell customers about their quality control procedures to reassure buyers that the greatest of care has been taken in the production of what appears to be a standard product. Every quality product has a story behind it and buyers are eager to listen.
Profits and market share performance could be improved by most industrial companies if they established themselves as quality suppliers rather than cut price merchants. Quality is what industrial buyers want. A few profitable minutes should be spent by marketing managers on the following questions:
– Are my products made to a quality demanded by the markets?
– Has my company got a quality image?
– Do I know in detail how the quality of my product differs from that of the competition?
– Can I improve my product, for a minimal cost, to differentiate it in some way from my competitors?
– Am I telling my customers and potential customers about every aspect of quality involved in the production of my product?
– Does the quality of my product command a premium price and is this reflected in our pricing policy?
– Is my sales force of a sufficiently high quality to represent my products?
– Is the technical service we offer commensurate with our quality product?
– Am I backing up my product with reliable deliveries?
– Is my advertising and promotion drawing customers to me that want a quality product