Commodity Pricing

clip_image002Working in the world of technology (I know, this is supposed to be my non-technical blog) I hear a lot about the fact that computers and servers and related services have become commodities. I think this began when IBM decided to stop making ThinkPads, you know the laptop everybody wanted to own, but the commodity mentality has gained momentum in recent years as the economy has added pressure to budget decisions. I have to make these decisions for two very important groups of people, the company I work for and my family. With respect to the company I work for, I have a fiduciary responsibility to make the best choice when spending their money. When it comes to my money, I have a personal but entirely similar responsibility. In both cases, I am not driven by price when buying so-called commodity items. If you tend to consider price first, ask yourself these three questions:

Are you buying a commodity or a product? – Keep in mind that from some vantage point, everything is a commodity; are you buying a gallon of paint or 40,000 tons of pigment? If you are buying a product, your first consideration should be “what do I want?” Of course that question is followed closely by “what can I afford?”, but it still should be the first thing you consider. If there is a misalignment between the answers to those two questions, your next choice is to change what you want or save your money until you can afford what you want. I know, “save my money until…” has fallen out of favor, but it remains a valid approach. Before you start considering substituting something equivalent to what you want, consider whether you are talking about equivalent or similar. I can find cheaper hand planes that look like the Stanley Low-angle block plane pictured here, but planes that are equivalent cost just about the same. Before you start considering “finding what I want at a lower cost”, read the next two questions.

Is there a difference in what you are buying due to the vendor you have selected buying commodities vs. products? – This might be a hard question to answer, since you usually can’t tell what is inside the box and technically, it may just be a much more fine-tuned version of the equivalent vs. similar question. I don’t mean to pick on Home Depot, but the discussion thread linked here illustrates the thinking on this question. I have two personal examples that speak to that distinction: 1) I purchased a faucet from a big-box store and found that the mixing valve was nylon, not brass as in the “same” model faucet at a local hardware store. As the discussion shows, it was a slightly different model number. 2) Well, it’s hard to pick a specific example, but suffice it to say, I buy building material from a local lumber yard. They beat the big boxes on quality and, unless I’m buying one 2×4, on price. I do have an example from a purchase for my company that is on point with the question. Many years ago, when memory prices were extremely high, I bought a large quantity of modules from a low-price vendor. This guy was simply shuffling chips from a container to a small bag, and when I discovered several bad modules, I also discovered the answer to my question. This vendor was not buying for quality, he wasn’t standing behind his product, no, he was simply extending a wholesale purchase opportunity to me at a slight markup.

Is there a difference in the service you receive after buying a product from a vendor who is selling a commodity? – If you expect the answer to this question to be “no”, you live in a dream world. Before you start commenting about great service from a big-box store, re-read the question. I have heard many stories about the high quality of Home Depot service, and I believe those stories because Home Depot buys commodities but sells products. The guy I bought my memory from was buying and selling commodities. I know that I can get a less expensive Internet provider for our company, but it would be through a company that is selling bandwidth, not Internet service. I know that I can find a less expensive source for servers, switches and other network infrastructure, but again, I would be getting a bunch of equipment and not much more. I can register a domainclip_image004 name for as little as $2 or as much as $7.49 (with the mix of vendors I’m familiar with) and even on that simple product, there can be a difference in the service you receive. Every board in the lumber order we bought to complete an addition on our house was straight and all but two were defect-free. The two that were cracked were replaced in the next order, without my ever having to return them.

The perfect mix is finding a good vendor who is selling the exact product you want, at a fair price. Changing any one of those terms without affecting one or both of the other terms is asking the impossible.

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