Dave Kahle - Should You Do Business With This Customer?

Published: Wed, 02/21/18

Question and Answer

By Dave Kahle

Q. How does one respond to companies that are now participating in “on-line” auctions? It is basically a 30-minute bidding war and the low bid is presented. One needs to decide, (auction style) how low to price the product. Specifications and drawings are provided prior to the on-line auction.

A. Good question. We all know that that this phenomenon is appealing to a certain segment of the market. Because it is a relatively new buying method, it causes us to stop and consider how to handle it.

Here are some of my thoughts….

First, I think you have to decide whether or not you want to do business with this customer. It seems to me that those companies who engage in online reverse auctions are the ultimate example of “price buyers.” In other words, they assume that there is no valuable difference between suppliers, and therefore the low price is the only factor to consider. With that mentality, they are unlikely to prove to be good long-term customers. In fact, if you win this piece of business, it’s likely that they will continually shop for a lower price. So, you will likely never develop this customer into a loyal customer. In fact, just the opposite is true. You will be assured of a customer who will leave on a moment’s notice for the next lowest price.

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Given that set of circumstances, should you do business with this customer? I don’t know the answer to that, because there are dozens of other factors that could enter into your decision. However, I do think that you should carefully consider the question.

Now, let’s assume that you have decided that that you would still like to win this business. How do you handle the reverse auction?

Let’s go back to the assumption with which we began. This is a price buyer, who only values the lowest price. That means that if you want to win this piece of business, you must be the lowest price. And, if you want to handle the business profitably, you must reduce your costs, so that you can be the lowest price and be the lowest price profitably.

That means that you must look at your operations and determine if you can reduce your costs in the way that you process this order. For example, can you have the goods drop shipped from the manufacturer instead of receiving it into your warehouse? Can you stipulate larger quantities per invoice? In almost every piece of business, there are some ways to reduce the operation or production costs when you focus on that as your highest priority goal...[Click here to read the entire article online]

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