At Thriving at the moment, we’re just completing a study on the ways in which major companies select and evaluate suppliers (in a particular professional/financial service sector).
In a good proportion of cases, even if there is an explicit tender process, the incumbent firm is successful. In these cases, the decision makers note that the length of relationship has enabled them to better evaluate the technical expertise, and business knowledge of the supplier. Moving to another firm creates uncertainty. Thus there is a material (though undefined) “switching” cost.
This perceived risk gets greater if the incumbent firm has been flexible in its dealings with the client, based on understanding needs and a real ability to tailor what it does.
The role of “price” in the decision is also interesting. When participants scored the importance of 10 factors, price only came in 9th of the 10. HOWEVER (and its a big however) when participants were asked about the key difference between the firm they chose and the “next best”, price – together with flexibility – was one of the two most commonly mentioned factors.
How so? On several occasions participants said that where they cannot differentiate between suppliers based on their performance in all other aspects, price becomes the “de facto” driver of the decision.
What does this mean for firms?
Firstly, think about whether you are exploiting the advantages of incumbency with your clients consistently enough. The best way is through driving value for them, building a hurdle which is difficult for competitors to overcome.
Secondly, unless you can differentiate by performing better than competitors on one or more key areas when tendering, you are damning yourselves to win only on price. Fine if that’s your strategy and on a sustainable basis, you are more efficient than any other competitor, but a recipe for decline if not. You’ll need to drive performance on what your targets truly value.