The Central Fallacy of Price Shopping

January 26th, 2012

By Tom Reilly, author of “Crush Price Objections”

In his book, Value-Added Purchasing, Dr. Eberhard Scheuing wrote, “Looking only at a product’s acquisition cost is like looking only at the tip of an iceberg. Below the surface of the acquisition cost lie the treacherous costs of owning and using the product.”

This is wrong on several levels. First, cheap connotes inferior, substandard quality, and cut-rate. There are few positive associations with cheap. Something that is cheap to acquire but fails to perform is a lousy value at any price. So, cheap cannot necessarily mean best in this case.

Second, this fallacy begs the question, “What is the best price?” A well-conceived response to this question exposes one fallacy—that the best price must be the cheapest to buy. Buying is the act of acquiring something. Acquiring is an act of immediacy.

In this context, price is an acquisition term. This means that the buyer makes a decision based on short-term acquisition concerns, overlooking usage and ownership. Decisions based on immediacy focus only on the cost of acquiring something. These decisions ignore long-term ownership concerns like energy consumption, serviceability, maintenance intervals, efficiency, up-time, sustainability, and leverage. The buyer may purchase an alternative that is cheaper to acquire but more expensive to own and operate. The buyer unnecessarily restricts his definition of success and profit potential with a temporal bias for the short-term. Buyers that limit the definition of the best price as the cheapest price deprive their companies of the profit opportunities of a lower overall cost structure or a product that may offer a greater productivity yield.

Third, this fallacy begs a second question, “For whom is a cheap price the best price?” If price is used an acquisition term, who benefits from a cheap price? In a business-to-business sale, where an agent purchases for another entity, whom does the lower price benefit? The people who are responsible for buying, but not using, the product benefit the most. This is the third part of the fallacy: Agents do not buy products to use themselves; they buy products for other people to use. Therefore, an agent can purchase something cheaply and meet his objective to minimize acquisition cost but fail to meet the organizational goal to achieve an overall lower cost. In any organization where purchasing operates in a functional silo, there is a danger of making one-dimensional, imprudent decisions.

Value-added salespeople must educate buyers about this short-sightedness and narrow definition of success to guide the discussion down the path of greater profitability for customers.