Pricing strategy - business outsourcing
Business outsourcing industry insight
Business outsourcing covers many different product categories that are often considered indirect or overhead business costs. Categories include stationary, cleaning products, and facilities products such as laundry, bathroom, and catering products and services.
Business outsourcing has undergone many changes over the last 10 years. Purchases of outsourced services have been centralised under a procurement function with dedicated category buyers who are able to negotiate aggressively with suppliers.
Procurement teams often compare invoice prices paid TY vs LY to identify savings and demonstrate their function’s value to their employers. However, invoice value comparisons alone present a limited and incomplete picture of total value. Poor quality products, longer lead times requiring the customer to hold greater levels of inventory, a lack of technical expertise, and a lack of support to solve problems or provide product or service customisation all represent additional risk and cost to a business. These complications are often not factored into the invoice price.
In essence, lower prices mean greater risk. Lower prices often result in an additional set of hidden costs not measured by procurement and for which they are not held accountable.
Outsourced services and products have usually been categorised as either high or low supply chain risk importance, and high or low impact to profitability. The implication for outsourcing companies is that they may have their products or services pushed into a commodity status with the result being margin contraction.
Companies that rely on product and feature selling end up in the low impact quadrant, are considered non-critical and become the focus for invoice-price-only negotiations. Other significant margin risks come from the increased number of product ranges and complicated inventory and stock movements.
Many companies are now carrying thousands of products. Up to 90% of these are considered slow-moving, making up just 10% of the revenues. Outsourcing companies that use cost-plus mark-up methodologies severely restrict their ability to improve profitability.
Through detailed analysis of products at a line-item or SKU level and the use of algorithmic pricing models, incremental margin opportunities can be identified.
Using a sophisticated customer value driver model, customer price and contract negotiation strategies can be developed to move the conversation with the customer away from price only or commodity-based discussions to a more sophisticated value-based approach to price setting.
Our experience with outsourced products and services ranges from: stationary, IT, printers and toners, laundry and facilities, cleaning products, hospital supplies, food and beverage, media, logistics and freight.