The myth of core and non-core pricing
When is a good price not a good price?
Recently I have worked on a number of projects where the core vs. non-core pricing split was far higher than the client imagined, or indeed should be. This reflects how difficult it is for companies to accurately track what is a fair price for office supplies.
The office supplies market is a complex one. Large, multi-site organisations often require a diverse product mix spread across many locations and multiple order points. Procurement teams face an uphill battle controlling expenditure and rogue ordering — even when systems are in place.
In addition, there is a ‘smoke and mirrors’ culture within the market, where suppliers routinely use different pricing terminology to inflate prices and obscure comparisons. Red herrings anyone?! This is just the type of distracting activity that inspired my business name, and one that I help companies to avoid.
The ideal split
Gaining total visibility of the order process and product range is critical, but so is keeping a tight rein on your core vs. non-core spending. A recommended split would be 80/20 core/non-core, but this easily slips. A recent client suspected that their split had fallen, but was surprised by how much — it had dropped to 55/45. Just by managing this split we were able to make substantial savings, amounting to 25% off annual expenditure (45% of which came from adjusting and managing the core list).
Of course, some suppliers are happy to let the core split slide and raise their profits. Others will be more proactive, using loss leaders to ensure that you receive a fantastically cheap price for copier paper, but charge absurd amounts for anything off-core. Understanding the market and your suppliers’ pricing strategy is crucial.
You will see the following terms used by suppliers:
- SSP — suggested selling price
- MRP — manufacturers retail price
- RRP — recommended retail price
Catalogues are routinely priced with a combination of the above, as pricing strategies look to move customers to non-core products.
One study charts the average catalogue inflation on top of manufacturer RRP among some of the larger suppliers in the industry and lists one supplier at +65% and another at +61% in 2015. This highlights how inflation is part of supplier pricing strategy and is something to be mindful of when managing your core vs. non-core expenditure.
Keeping costs down
In fact, procurement teams face similar pricing challenges when purchasing any multiple commodity products. This makes pricing management a time issue, vying for attention among multiple projects and priorities. If you are unsure of your supplier’s pricing strategy, ask yourself:
- Do you have the time to monitor off-core expenditure?
- Is your supplier proactively managing this for you?
- Do you know what your actual core split is, rather than the expected?
If you need to manage pricing we can help. We proactively manage suppliers, ensuring regular pricing and core list reviews to keep costs down. We also conduct audits and benchmarking exercises, so that you have complete visibility of your current expenditure and the market position.
Ensure that complex pricing and inflated RRP’s don’t result in spiralling costs for your business — get in touch for more information.
Richard Morgan is Managing Director of Red Herring Business Services, a niche procurement consultancy specialising in office supplies and services contract management.
Originally published at www.redherringbusinessservices.co.uk.