Monday, December 05, 2011

The list price conundrum

With the economy tightening again and uncertainty across geographies, enterprise spending is once again under focus; this is giving rise to some interesting discussions. Driven by the CFO, CEO, and CIO who are exploring deferred investments or the usual doing more with less, the discussions translate into unrealistic (as griped by vendors) expectations from suppliers, vendors and partners to provide goods and services at higher discounts.

Result is rounds of moaning and groaning from either side citing their versions of reality and pushing the limit beyond the last transaction. The promise of future and making up the deficit in the long term does bend most; few who do not oblige sometimes are rewarded and more often it is an opportunity lost. The resultant business creates suspicion if earlier everyone was enjoying higher margins than they should.

In the IT world, I never heard of anyone paying list price on anything that they bought. In normal times discount levels used to range from the nominal 10% to in many cases as high as 70%. It was a rare one time transaction that enjoyed higher numbers. The list price was a marker to decide whose need was higher and who had more patience. Month end, quarter end and year ends provide opportunities offering higher levels of business and discounts. Again almost everyone recognizes this and plays the game.

In the last slowdown or recession depending on which part of the world or which industry you belonged to, a few companies breached 90%. There are anecdotes about free solutions being provided to a few marquee customers either as an entry price or to sustain business. Free is a paradigm shift though the way some vendors are hiking their annual maintenance charges, free does not seem too unreasonable considering that in 3-5 years you have paid as much as the initial acquisition cost.

So why do vendors continue to print a list price which has irrational numbers and then offer a discount ? Maybe to acquiesce human nature which revels on a deal ? Purchase managers and CIOs work on reducing prices every year. Volume typically adds to the discount but is not the only determinant. Benchmarking across the geographies I find that the level of discount rises from west to the east and then again slides with India and China being the trough. Despite this trend, I haven’t seen a gold rush to shift license contracts from other countries to take advantage.

The current uncertainty has once again brought budgets into focus. Slowdown in customer spending is already impacting retail consumption and thereby every industry. Going into budget sessions, the expectation is to once again lower expenses and investments. We still have inflationary trends is many countries and wages are going up for some, while cost of living continues to go up. But the question that haunts me is if there is indeed so much of buffer that every time the challenge is thrown, people find a way of adjusting to new baselines, then how did the same people allow higher expenses in easier times?

As goes the proverb, “Mother is the necessity of invention”, I believe that with every challenge new opportunities are explored and leveraged on operational efficiency. Technology evolution with new disruptions contributes to improvements; return ratios are however reducing and we are reaching a point where the stretch will reach a break point. We will achieve the pit bottoms sooner than later; the list price will then have to change. Whether it will go up or down is another debate.

1 comment:

  1. Like they say "work expands to fill time", so too is it with expenses - they expand to reach budget limits. There are always smarter ways to cut costs - cheaper products, faster rollouts, smaller teams, but not all people are willing to stick their neck out and take those hard decisions. So I think those list prices are as much to give buyers a feeling of 'getting a great deal' as much as it is an opportunity for the sales guy to dip into the customers pocket fishing for more money than he should honestly get.