Discover the Pitfalls of Price Comparisons and how to avoid them

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The number of price comparison websites have exploded over recent years; comparing insurance, mortgages, electricity and holiday prices with each other to hopefully secure the cheapest option. But the question has to be asked, even though a supplier may be cheap, ‘are you really getting the best overall deal’?

The same applies in business as naturally companies do not wish to pay more than they need when acquiring new purchases. The vast majority of contract awards are based solely on the cheapest bid in a way not too dissimilar to that of comparison websites.

Care needs to be taken when following this practice however. Often it is certainly the way to go as comparing pricing between suppliers does have its advantages. It is a very measurable factor for award selection and is an easy comparison, in the first instance at least, to determine which bid is 'best'. This article will cover 5 key points to consider when comparing pricing, to help ensure you always get the best deal.

 

Your 5 Considerations using Pricing as the Award Decider

1. Focus on cost as well as price.

Very little consideration is put on the suppliers own costs when comparing prices alone. These supplier costs can include their own raw materials, internal direct labour and overheads.  Opportunities can arise from gaining and insight into your own suppliers’ cost base, namely ascertaining your suppliers’ own margin which proves useful in your negotiation planning and comparing tender submissions and quotes. Being armed with this information can also lead to possible make or buy situations where it could be more cost efficient producing the item yourself rather than rely on third party providers.

Conduct cost analysis and price analysis - the former doesn't go far enough.  

 

2. Have the best possible suppliers included in the selection process.

This seems quite obvious but is often overlooked for a number of reasons; time, market knowledge etc. Planning your sourcing exercise pre-contract is essential and this includes scouring the marketplace for opportunities. Have any new suppliers popped up in your local area or any strategic sources of supply such as purchasing from lost low cost countries been considered? 

You may be able to choose the cheapest price of the suppliers that are in the game but you also need to be sure that the best players are on the pitch!  It can be all too easy to reach for search engines but don’t forget traditional methods which include networking events, trade fairs and industry magazines.

Don’t always rely on your existing supply base to deliver the best deal

 

.3.  Price is not the only factor.

There have been many cases selecting the cheapest price has not resulted in best overall value. Indeed, risks are taking into the organisation due to price taking priority.  This is especially true during challenging times such as the present reduction in the oil price and the credit crunch from ten years ago.

Price itself has to be considered with many other factors during bid selection, the main others being quality (in its many forms) and time  (how quickly can the supplier satisfy your procurement requirements). It’s important to recognise that any criteria used is co-dependent with each other. For example, if you want your  goods or services quickly then the price will increase, similarly a high specification will also cost more as well as possibly having to wait longer for delivery.

Take whole life costing into consideration and not just the purchasing price

 

4. Be confident a cartel does not exist.

A cartel, of course, is the illegal practice where a group of companies get together that protect their own interests by fixing prices. This results in competition based on price alone virtually being eliminated. Often cartel's are tricky to expose but these are some tasks that can be carried out to give an indication:-

  • Check if your supplier and their competitors increase prices at the same time and analyse the differences between pricing with a benchmark quote request
  • Consistently analyse pricing trends and compare the pricing to industry indices to expose and irregularities for unexpected price decreases, often if it’s too good to be true it isn’t!

  • Do not assume that just because the prices are similar that there is a cartel in place, there could well be other drivers that impact all the suppliers such as the costs of raw materials

Be aware of pricing trends between competitors and link to current market dynamics

 

5. Specification has to be consistent. 

If price is being used as a comparator it then follows that the bids received should be the same and be easily comparable. Often opportunistic suppliers’ provide their costs in their own format, which aren’t easily interpreted by the procurement professional. Even worse, not all the costs are identified and established which could lead to nasty surprises for later. This is especially true if the scope of work is definitive by the procuring organisation.  Is the cheapest bid really what you want and does it conform to your requirements? Is anything left out or modified to arrive at that low price?

A quality tender should include a framework to which the procuring organisation has the opportunity to establish their requirements accurately but also provide an opening to the supplier to provide any innovative suggestions.  If this framework is too loose an opportunistic supplier will submit a bit containing a scope that they want to provide. This consequently will result in difficult comparisons, even based solely on price.  Always have an idea what you want and communicate this clearly in the tendering documents.

Ascertain needs before approaching suppliers' with a firm and consistent specification