Price vs. Cost: Why it Matters
We often use the words “price” and “cost” interchangeably. It’s understandable. They’re similar enough that, in most cases, doing so doesn’t matter. When it’s your bottom line at stake, though, you must understand the difference between the two.
When we talk about prices, we mean the initial sticker price for a service. In many cases, it’s the only number considered when someone is making a decision. We will use a story problem to illustrate what happens when the price is the only factor examined.
For the sake of making the math easy, let’s say you have $1 million worth of inventory that you would like to outsource the distribution, warehousing, and fulfillment of to a third-party logistics company (3PL). For the product you’re working with in this situation, we will say that this amounts to 10,000 pallets.
In this scenario, you have narrowed down your options to two companies. Company A will charge you $5 per pallet. Company B will charge you $4.50. These numbers are made up, not accurate reflections of real-life pricing, but you can see the point. When you only look at those two figures, the choice seems simple.
An upfront price of $5 a pallet will mean you pay $50,000. If the upfront price is only $4.50, you’ll pay $45,000. Given the opportunity to save $5,000, who wouldn’t?
Well, it’s a little more nuanced than that. Life might be simpler if the price were the only factor that needed to be accounted for when making business decisions, but it’s not.
Cost of Doing Business
When we discuss costs, we’re talking about the total amount of money you end up spending on something. In almost every instance, everything costs more than the price implies it will. Think about loading up your cart while shopping online, only to discover that, between all of the extra fees and taxes, your total is far higher than you were expecting. That’s the difference between price and cost.
3PLs have to balance providing high-quality services with the cost of doing so. In an ideal world, a 3PL could offer the best service in the world for next to nothing while still turning a profit. Unfortunately, we don’t live in a perfect world.
To reduce operating costs and offer you a lower price, Company B has to cut corners. In doing so, the amount of your inventory that is damaged or otherwise lost increases. Let’s say that Company B can successfully manage 98 percent of your stock. That’s pretty good, right?
The two percent loss you’ll see if you choose to work with Company B contributes to an increase in the cost of doing business. Continuing with the idea that you have $1 million in inventory with them, you’re losing $20,000. The total cost of doing business with Company B is now $65,000.
By charging you a slightly higher price, Company A can minimize losses. They successfully manage 99.8 percent of your inventory, meaning your losses are equal to just $2,000. The cost of doing business with Company A now totals $52,000.
Higher Prices Lead to Lower Costs
Without considering inventory losses and the cost of doing business, choosing Company B appeared to save your organization $5,000. After factoring in the cost of doing business, choosing Company B will cost your organization $13,000.
Now, these numbers are just for the sake of illustrating the difference between price and cost and why it matters so much. However, consider the fact that even though Company A and Company B aren’t that different from each other, choosing to work with Company A will save you a decent amount of money. What could you accomplish with savings along those lines?
It seems counterintuitive but paying higher prices upfront does lead to lower costs in the long-term, particularly when you partner with the same company for an extended amount of time.
When a company cuts corners to save money on operating costs, they increase the chances of something going wrong:
– Employees might rush, pressured to accomplish more in less time to the detriment of the products they’re handling.
– Less care might be taken when order picking, leading to costly mix-ups.
– Cheaper packaging supplies may not protect your product, leading to damage.
– Without investing in the right technologies, issues are more likely to arise.
The above examples are just some of the problems that might arise. You’ve heard the phrase “you get what you pay for” before. It applies to 3PL services in the same way it applies to much of the rest of the world.
What Does Value Entail?
How do you define value? If you ask us here at Prism Logistics, it’s more than financial, although money certainly plays a large role in it.
Saving money without sacrificing the quality of your goods or services is valuable, and if that’s the only benefit that working with a 3PL offered, it would be worthwhile. However, if you find the right logistics company to partner with, you’ll do far more than save money.
Your organization might have specific needs that the right 3PL can provide for, including but not limited to:
– Break bulk cargo that has to be moved individually.
– Assembling displays.
– Taking several different SKUs and combining them in kits.
– Fast and accurate labeling.
– Light assembly activities.
– Packaging or repacking.
– Shrink wrapping if necessary.
– Inspecting and testing products.
By taking advantage of the extra services some 3PLs offer, you can save time, money and effort that you can then devote to driving your business toward further successes. With the right support, your business can grow and thrive.
The Importance of Relationships
Price and cost are purely quantitative, but they tend to influence other parts of your business that have less to do with numbers. Massive warehousing, fulfillment and distribution services can often offer far lower prices than smaller 3PLs, but their cost of doing business can be higher. In part, this is because you’re not their primary concern.
When you work with a big provider, there are countless other organizations just like yours among their clientele. It’s difficult for a large provider to get to know your organization, values, goals and people. At the end of the day, you’re a column of numbers on a spreadsheet. Few, if any, personal connections or meaningful relationships exist.
Family providers operating on a smaller scale are the solution to this issue. With a smaller provider, you’re not just a customer identification number. You and your organization are real people, valued clients that exist beyond an invoice and relationships that matter.
With a small family provider, you work directly with the people in charge of making decisions. That means that when an issue arises or you have a question, you can reach out to someone with authority to solve your problems. You won’t have to wait for your question or concern to travel through three or four different email inboxes before finally arriving back to you. Any issues can be resolved quickly, which minimizes their impact and decreases potential losses.
Having a relationship with your 3PL also means that the motivation to provide you with excellent service isn’t just financial. Smaller family providers care about your success, not only their own bottom line. That means shipments are monitored and on time so your customers are pleased, and your inventory is treated with the care and attention it deserves.
To discover the value working with a family provider can offer your organization, contact Prism Logistics today to request a quote.