Everyone is out for a deal.  Is the lowest price always the best price?

Often, we fail to understand the fine print.  What has been removed in providing a low price?  It could be a slow-moving color that is not desired, a reduction in a warranty provision, gently used condition, or it could be a no returns provision.  Buyers should understand the item they are buying and its provisions.

Where to Buy

Today’s eCommerce has muddied the channel distinctions that have long been defined in the marketplace.  Retailers are quickly finding that their suppliers are becoming direct competitors.  It is important to understand the various product sources to determine the best price for you.

  1. Retail

    From a consumer perspective, the traditional physical storefront where the latest products (e.g. colors, form, and function) are offered in an appealing environment enticing consumption has been the most common means for buying goods.  By investing in the storefront and on-hand inventory, the purveyor has expected a sizable mark-up in return.  Of all of the channels, the immediacy of the product availability has made this the most expensive route from a consumer’s point of view.

    Mass merchants (e.g. Wal-Mart) have changed consumer expectations of cost by offering a narrowed, basic assortment at a low price in a less attractive environment.  They have effectively reduced the expected immediacy uplift through a barebones storefront and narrowed assortment.  While, traditional retail has used the basic items as traffic drivers, the advent of mass merchants has narrowed their appeal to fashion items.

  2. E-Tail

    eCommerce has effectively removed the overhead of the storefront, while offering the latest fashion items at reasonable prices.  Where they fall short is their inability to allow you to try it on before buying the item.  Lenient returns policies have removed this fear at a sizable cost to retailers.

    These purveyors have eroded the margin the traditional retailers need to sustain their operation.  As a result, traditional retail is left struggling to find a place to play.  As traditional retail struggles, it will be interesting to watch how the lack of access may impact the success of eCommerce retailers.

  3. Wholesale Distribution

    The wholesale distribution player provides a bridge between the manufacturer and the end retailer when the volume is low, or the consumer does not have a distribution network to handle direct buying.  In this space, the player provides client unique services (e.g. pick pack, labelling, order picking, etc.) to provide the supply chain that the consumer is not willing to develop.  In effect, the distributor is the consumer distribution network.

    In completing their role, the wholesale distributor competes on service and meeting the needs of their customers.  This makes price a lesser factor and focuses on the exact services that needs to be provided.  The end consumer becomes heavily reliant on the distributor by developing business processes that expand to a wide assortment of items as needed.  In many cases, they pass these elevated costs to their customers without their customers realizing it.

    By design, this is an expensive route of purchase.  Those that rely on this network get access to a wide array of products without having to source them or manage them.  The costs-benefit to them is well worth the higher costs.

  4. Manufacturer
    Direct manufacturing sourcing is the lowest cost of any channel.To get this access, often you must agree to a defined purchase level and a distribution increment that is convenient for the manufacturer.This puts a heavy burden on the customer to get inventory planning right and have a distribution network to manage and distribute the goods purchased.

As you move up and down the supply chain, cost changes based on the services provided and the investment made by the purveyor to sell their goods.

Where to Buy

As you move down the supply chain, profit is taken along the way by each provider.Maximizing your profit opportunity may require you to work all the way back to the manufacturer of the part offered to harvest maximum profit.With retail margins narrowing, businesses must devise a procurement strategy to minimize cost and maximize profits.

Are you procuring your goods where you can make maximum profit?Is your business delivering a margin greater than the industry average?

Margin…. Margin…. Margin

It is important to recognize that each player in the supply chain must collect their share of margin to sustain business.This means that the further down the supply chain you procure, the higher the inherent price based on the margin realized by the upstream partner.

Each business must make the trade-off of inventory (i.e. investment, control, distribution, handling, etc.) management and price.The more accurate you can define your need, the better you can match demand and supply.Conversely, very uncertain businesses delay the buying decision as a result of the uncertainty and thereby reduce the overall costs.

How well can you predict your consumers’ demand?How much infrastructure does your business want to invest in?Is the benefit of lower cash outlay worth the increased cost of goods purchased?

Finding the best price is based on your infrastructure and how much you are willing to invest to manage the products handling and distribution.A consume only as needed world is a driver of cost versus buying in bulk and managing your own consumption.What is the right price for you?

As traditional retail struggles, can eCommerce continue to be successful?Will customers need to touch and feel and item before they purchase it?Are you leveraging your position to get the best price?

More Resources

About the Author
Scott Moon
Scott Moon