Best Value: Why the Cheapest Is Often Not the Best Option

Best value is critical.

Value is more than the cost. It is the additional tangibles and intangibles.

According to the Oxford dictionary, value is defined as “the regard that something is held to deserve; the importance, worth, or usefulness of something.” According to Warren Buffet, “Price is what you pay. Value is what you get.” We all want to spend our money wisely. As these definitions show, the cheapest option is not always the wisest monetary spend .

Best Value Procurement

In government contracting, contracts are often not chosen based on the cheapest price but on the “best value”. For procurement purposes, best value is defined by several government agencies as a “procurement process where price and other key factors can be considered in the evaluation and selection process to minimize impacts and enhance the long-term performance and value”. A selection process that utilizes best value allows other factors, such as qualifications, quality, and performance-based criteria, to be used in the evaluation and selection of a service. In the words of the Massachusetts Department of Administration and Finance, it is in your best interest to include other evaluation criteria than cost. You do not want to save money on the unit or line item only to then experience much higher costs due to factors such as poor quality, low reliability or complex administration processes.

Best Value – Simple Illustration

Best value is a very important concept to understand. Why? Because, as noted above, solely focusing on the cheapest price typically overlooks areas that are often critical to your business. For example, the cheapest headphones cost $3 at Big Lots or Five Below. However, they have poor sound quality and either fall apart or fail within 3 weeks to two months. Over the course of 1.5 years, a typical life span of good (but not great) headphones, you would have spent $36 to $48 on poor sound quality headphones, when you could have simply purchased a reliable pair with good quality for $30 to $40. Although the cheap headphones may work perfectly as backups or for small children, who often destroy headphones, this illustration shows they don’t work best for your typical use. This is the difference between cheapest and best value!

Another General Illustration of Best Value

If you are an athlete, you know the value of good athletic shoes. They provide support, foot and ankle stability, cushion and traction. Although it may be tempting to buy cheaper shoes, the result can be calamitous for your lower limbs and on your performance. Poorly constructed, cheap athletic shoes can lead to poor alignment, shin splints, knee problems and more. Hence, the best value is to buy the well-made, more expensive shoes.

The best value is a fulfillment service that makes you a priority.

The best value service will be one that makes your order a priority.

 

Fulfillment Services

Fulfillment service companies were previously known as warehouse firms prior to the development of strategic supply chains. These firms enable you to outsource your warehousing and related order fulfillment services – including picking, packaging, and shipping – to another entity. Outsourcing this services allows you to focus on those components of your operations that are strategic and core to your business, such as design, customer service, or supplier relationships.

Best Value in Fulfillment Services

You may have grown so much that you are now considering outsourcing this service or you may be considering switching. Most fulfillment companies quote their costs per line item. One company’s per line item cost may be $0.05 to $0.10 more than another’s. If you sell 1,000 items per month, this could translate into a difference in cost of $50 to $100. If you sell 10,000 items per month, this difference would grow to $500 to $1,000 per month or $5,000 to $12,000 annually.

However, you want to ensure that you are comparing apples to apples and obtaining the best value, not just the cheapest cost. Therefore, you need to ask certain questions to find a well-run fulfillment service that is committed to quality and excellence.

Questions to Ask

Especially if it’s your company’s first time shopping for such a critical partner, understanding the best questions to ask a fulfillment company is the best first step. What happens if your product does not arrive to your customer in the timeframe you promised in the condition you promised? How will your customers react? What will be the impact on your customer satisfaction, repeat business and referrals? What would be the impact on your customer service providers’ time spent on responding to complaints and attempting to track packages? What would happen to your return rate? How many reshipments would you need to provide? If a long-term customer experiences poor customer service, how many times will they go through that experience before they decide to take their business elsewhere?

Additional Impact

Poor customer service and reliability by a fulfillment service provider can cause additional headaches and operational issues for you. Two of the most impactful of these are a reduction in operational cash flow and a decrease in customer satisfaction.

Business funding and business financing cash flow

Poor performance will impact your operational cash flow.

 

Decrease operational cash flow: If you are a retailer, your operational cash flow is generated by selling items that customers pay for, in advance with credit cards. These credit card “receivables” are typically converted to cash within 1 to 3 days, depending on your merchant service provider and bank. If items are returned, you must refund these funds. Excessive refunds and chargebacks can result in higher fees from your merchant services provider, thus reducing your operational cash flow.

If you are a distributor, you generally bill customers for payment upon receipt of the goods or shortly thereafter. Therefore, if your customers receive your items late or receive the wrong item, you must wait extra days or weeks to receive your funds. Before you finally receive the funds, you will likely need to discount a portion of the monies due you to appease the customer. If this happens repeatedly or with large orders, these occurrences can cause your weekly operational cash flow to be negative in any given week. You’ll then have to utilize your line of credit or other financing cash flow options more.

Reduce customer satisfaction: If you use a cheap fulfillment service with a high problem rate, your customer service representatives (CSRs) will be taxed due to the increased number of irate customers calling in to complain about missing or erroneous shipments. If this trend continues, you’ll either have to hire more CSRs, extend the hours they work, or have other employees temporarily add “customer service” to their long list of other duties. This costs you money.

If your CSRs or other staff respond swiftly and kindly, you can salvage your reputation for good service. However, if the problems continue, your customers will doubt your commitment to good service and begin to shift their business elsewhere. According to a survey by Pacific Crest Securities, the cost to retain a customer is 11% to 24% of the cost to acquire a new customer. In other words, you will need to pay four to nine times as much to acquire a new customer to replace the one you lost!

 In Summary

Asking the “questions to ask” of yourself and your business needs will help you determine just what is the most critical features of a good fulfillment service provider for your firm. Then use those answers to help you formulate the questions to ask of the companies on your short list. Remember, the key is to obtain the best overall value for your company, not just the lowest price.

 

  • Jonathan Council

    Nice articel! Price point leaders don’t always make the customer better. Many times it ends up costing them much more in the long run