Will ‘Least Cost’ always be ‘Best Cost?
A response to last month’s article on Brand Loyalty suggested whatever marketing might say or do, at the end of the day, products or services are sourced primarily by cost and therefore those that cost least will gain business.
Given the popularity of comparison web sites for various services and the growth of low cost grocery retailers such as Aldi and Lidl at the expense of the established supermarket chains, there’s no doubt that price is always a significant factor in purchase decisions. In addition, price isn’t the deciding factor just for everyday groceries or anonymous services such as utilities but plays a major role in virtually everything we purchase and has done for many years.
Possibly the best illustration of this comes from a sector where it might reasonably be expected that quality would be the ultimate factor for procurement, aeronautics and space travel, but not so. John Glenn, the first American astronaut to orbit the Earth in 1962, famously expressed his doubts about least cost in his autobiography, “As I hurtled through space, one thought kept crossing my mind - every part of this rocket was supplied by the lowest bidder.”
The downside of such a policy was tragically seen five years later when the three astronauts in Apollo 1 were burnt to death on the launch pad following a fire in a wire bundle inside the capsule, and again in 1986, when a rubber ‘O-ring’ seal failed just 73 seconds into the space shuttle Challenger’s flight, with the ensuing explosion killing all seven astronauts. Closer to home, and equally tragic, the cladding for Grenfell Tower was also sourced by competitive tender with vital aspects of fire resistance given less importance.
Extreme examples, certainly, but the old adage of ‘getting what you pay for’ has always been true.
An alternative differentiation is by quality – yes, the product or service may cost more initially, but will be better quality and will last longer. This introduces the concept of lifetime cost which is often used to market products in both the consumer and commercial sectors. A branded television, for example, may be more expensive, but purchasers have faith in the brand’s quality and the guarantee. In the industrial sector, this becomes even more important – if an industrial process has to be temporarily shut down to fit new pumps or lighting, engineers make sure the products chosen will last the longest and will prove best value because they reduce downtime in the process industry.
Japanese manufacturing, globally renowned for its efficiency, takes this a step further by suggesting ‘Highest Quality is Lowest Cost’ based on the premise that manufacturers of high quality goods will earn a superior reputation which means they will sell more and thus benefit from economies of scale and be able to accept lower profit per unit. Highest quality goods therefore drop in price and drive lower quality products out of the market. Great theoretically, but the market place is not always a level playing field…
It’s also worth considering whether the product is actually least cost? Amazon, for example, is renowned for its loss leaders whereby it reduces best sellers to lower prices than its competitors, but other goods are actually priced higher so that having attracted buyers for the original offer, it recovers its profits from other goods.
The same tactic is used extensively by high street retailers, including the ‘low cost’ grocery chains, who aggressively price their staple products which are situated on the edges of stores and reinforce the perception of consumers that this particular store is the lowest priced retailer. Amazon simply brought this strategy to online book selling whilst it enjoys far greater profit margins from other goods.
The market for services is not so price dominated with quality of service and, just as importantly, perception of quality of service, often being more important than price.
We’d therefore suggest that ‘Least Cost’ is not always ‘Best Cost’ and purchasers of both products and services should take a view on other factors such as quality, lifetime cost, and, particularly in the case of the recent decision by Nexus to purchase Swiss made replacement trains rather than ones produced in Newton Aycliffe, perhaps an element of local interest? It is interesting that trends for purchasing changed dramatically after the 2008 Financial Crash when every sector had to tighten its belt – what may happen in this increasingly unregulated post–Brexit world remains to be seen…
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