The Power of Price Benchmarking to Improve Profitability and Reduce Costs

Is your organization unsure if your prices for supplies and services are competitive? In this article, we’ll outline strategies to take back your purchasing power with suppliers using various quoting and benchmark strategies.

Click here to learn more about why dealers are overspending.

Table of Contents

What is Benchmarking?

Types of Purchasing Benchmarking

Why You Should Use Price Benchmarking

Price Benchmarks and Where to Find Them

Where to Obtain Benchmarks

Benchmarks and Quotes

What to do After Benchmarking

Don't Have Time to Find Benchmarking Data? We're Here to Help!

What is Benchmarking?

Benchmarking is the practice of comparing processes and data sets against a standard or market leader who performs the same processes or has the same data sets. The objective of benchmarking is to identify opportunities for organizational improvement, including cost reduction and profit improvement. By incorporating benchmarking into your purchasing strategy, your team can gain a competitive advantage over others who don't perform benchmarking.

Types of Purchasing Benchmarks

There are four primary types of purchasing benchmarks:

• Indirect Expense Categories – Over 200 categories of consistent indirect expenses categories where dollars are spent regularly.
• Category Spend Benchmarks – Data showing what organizations spend annually by expense category based on size and revenue band.
• Price Benchmarks – Competitive pricing at the item and service level for categories, from office supplies, to waste, to credit card processing and more.
• Supplier Audit Benchmarks – Benchmarks showing supplier price, contract compliance, and reliability for many of the largest local, regional, and national suppliers.

Why You Should Use Price Benchmarking

Organizations that don't have centralized purchasing functions cost their organizations 25% on average by overpaying for supplies and services. Most people will wing it or estimate a target price when they negotiate with suppliers because they don’t have solid data resulting in overpaying for supplies and services.

A request for quote (RFQ) is the most reliable method to gather current market pricing for supplies and services. A recent quote is the best way to obtain competitive market pricing data and reveals truth in the marketplace.

Conducting an effective quote process, combined with a strategy of locking the price for 12, 24, or 36 months saves time, eliminates the need for constant negotiations with multiple suppliers, and provides peace of mind that forecastable cost savings will occur.

Price Benchmarks and Where to Find Them

Price benchmarks are a collection of pricing data related to those items that might represent the best and worst pricing for items in the marketplace.

Using a shop towel example, obtaining benchmarks on supplier pricing might look something like this:

This would be a good example of benchmarking for both services and supplies. With a range of prices for the same item, you’re comparing apples to apples and will arrive at the best, most competitive market price.

Your target pricing is now $.06 for a shop towel based on these benchmarks, and the high-priced outlier is $.16. Negotiating a deal for $.14 for a shop towel might be a win to some people, but you’re still paying far too much for the product based on benchmark data. The unfortunate reality is that this situation happens most often, negotiated pricing that falls short of the mark without the power of benchmark data behind it, will result in overpaying for the item.

Where to Obtain Price Benchmarks

Obtaining benchmarks takes some time, but these options can speed up the process.

• Request for Quotes (RFQ) - The most efficient way to determine the true price in the marketplace is to develop a well-designed request for quote and target 3 to 4 qualified suppliers for quote participation.
• Internal Benchmarking - Compare prices for services and supplies within your dealership group to obtain “target pricing” by gathering other supplier invoices.
• External Benchmarking – Obtain benchmarks for supplies and services from members of your networking groups or friends in the industry. Make sure to review a broad range of items rather than just a few to make the time and investment worthwhile.
• Purchased Data – There are some sites where data can be purchased to accomplish benchmarking but won't be available in all expense categories.
• Supplier Websites – Some suppliers publish discounted or regular prices, including discounts, on their websites, which can serve as useful benchmarks.
• State Associations – Your state Association might be a good source of benchmarks and price offerings in expense categories, but keep in mind that their pricing usually reflects a rebate paid back to the Association which might average 5% of the purchase price.

Benchmarks and Quotes

Using RFQs as part of your purchasing strategy is uncommon due to lack of time and expertise. While many managers suggest they’re “going out for quote”, what that generally means is that they asked the supplier to quote a small selected group of items that will not have a material impact on cost.

It's important to find many RFQs in order to collect multiple quotes. This will help alongside benchmarks to give you a picture of what's happening in the supplier industry.

Smart suppliers take advantage of untrained dealer personnel involved in the pricing of supplies and services. They want you to:

• Quote a small group of items vs. a large group
• Provide you with an “unlocked” or floating price that can increase whenever they want
• Win your account without going against any competitive suppliers (no benchmarks or comparisons)
• Insert burdensome terms and conditions into agreements that aren’t in your favor

What to do After Benchmarking

Developing an effective strategy to drive down costs and improve profitability is to utilize the time honored request for quote (RFQ) or price benchmarks. Using an RFQ is the best method to drive down prices and supplier costs. It allows you to negotiate with confidence and embolden you to pursue changing suppliers if your incumbent supplier is not competitive.

Click here to find more ways to reduce costs.

After you complete your quote or obtain your benchmarks, there’s still work to be done: 

• Price Locks - When you obtain the right benchmarks and prepare to renegotiate with your supplier, be sure to “lock” the pricing and business terms for the life of the renewed contract or length of the pricing agreement.
• Broad Range of Supplies and Services – Renegotiating supply and service prices for a broad group of items you use will effectively put a dent in costs and improve your profitability. If you only renegotiate a few items or categories, the savings won’t be enough to reduce overall costs.

Don't have time to find Benchmarking Data? We’re Here to Help! 

Finding price benchmarks on your own takes a lot of time and effort, but StrategicSource can make it simple. Our results produce an average of 25% cost reduction by developing and executing a sourcing plan. If you’re planning to take control of your spend management, you don’t have to do it alone. StrategicSource’s Profit Improvement Program helps you identify areas for long-term improvement.