Marketing and Procurement Discuss Purchase Price vs TCO
Are you marketing or selling large capital equipment like refrigerators, freezers, fume hoods where the operational expense, in terms of energy consumption, can be significant over the long term? If your product has a lower total cost of ownership (TCO), even if the initial purchase price may be higher than the alternative, what is your best strategy?
Does sustainability matter?
Do procurement teams even care about operating expenses?
And if you are a procurement manager, what tools and data are available to help you make the best decisions for your institution?
For the first time, I have two guests on the podcast, experts from both marketing and procurement to answer these questions.
We discuss:
How sustainability plays a role in decisions about initial vs total cost of ownership.
The responsibility for educating the market
What procurement teams need to know to help clients (scientists) make the best choice
How procurement managers can know if they are paying the right price
Why you should build a credible value proposition based on independently generated information
An inside out view of marketing that starts with educating employees
Bill’s LinkedIn post that started this whole conversation.
OffWhite: Life Science Marketing
SciQuest: Procurement Software & Cloud Based Business Automation Solutions
About My Guests …
Bill White is the co-founder and CEO of Offenberger and White Incorporated. Off White is a marketing consulting firm based in Marietta Ohio, specializes in digital marketing, information mapping and content development for B2B companies, primarily in the life sciences and laboratory equipment space.
Eric Zoetmulder is the VP of Product Development at SciQuest . SciQuest offers cloud-based spend management and procurement solutions. Eric is my expert today on how companies think about and evaluate purchasing decisions.
The Transcript
This transcript was lightly edited for clarity.
Chris: I am really excited to have two guests on the podcast today. My first guest is Bill White. He is the co-founder and CEO of Offenberger and White Incorporated. Off White is a marketing consulting firm based in Marietta Ohio, and they specialize in digital marketing, information mapping and content development for B2B companies, primarily in the life sciences and laboratory equipment space. Bill, welcome to the podcast.
Bill: Hey, thank Chris. It’s great to be here today.
Chris: I also have on the line with me Eric Zoetmulder of SciQuest. He is the VP of Product Development. SciQuest offers cloud-based spend management, procurement in other words, solutions. Eric is going to be my expert today on how companies think about and evaluate purchasing decisions. Eric, thank you for joining.
Eric: Thank you too, Chris. It’s great to be here.
Chris: So what we’re going to talk about today is how to approach purchasing decisions. If you’re a marketer and you’re looking to influence a buying decision, I want to talk about how to influence people on the procurement part, and partly around large capital equipment purchases and so on, and a little bit related around sustainability.
This all came about because, several months ago, Bill wrote a brilliant post on LinkedIn about how short-sighted purchasing steals research dollars. I’m going to let him fill you in on what that was all about and then we’ll talk about what marketers might be able to do to sell their products more effectively, and how purchasing agents think about those purchases, with respect to initial cost and operating expense. Then, maybe, if there’s a way that we can spread best practices, if maybe Eric has some examples of companies who are really smart about thinking about these decisions. So Bill, would you please summarize your post for us, if you will?
Bill: Well yeah, thanks. It started out as a rant, then I was able to reel it back in and apply some dispassionate language to it. I was at a major research facility on another project and I happened to go into an area where someone was setting up, actually they were getting ready to shoot a movie, and they were setting up a lab and I was asking the folks on the set how they came to choose the fume hoods and what they were for. I was curious if they knew what they were talking about, and it turned out that they certainly did.
We were talking about the two different models that were there, and one was a product that was based on conventional air flow technology, and the other had some new and more high-tech air flow technology but cost a little bit more money. If you think about how much air, conditioned air, either heated or air conditioned, cooled air, gets sucked out of a facility that’s using fume hoods, it’s a substantial amount of money. He recounted for me the fact that they had just lost an order at a major university because this energy saving fume hood cost maybe a thousand dollars more per cabinet than the one that was chosen, but, over the course of its life cycle, and I think it was probably about 10 years that he was quoting, they probably were throwing a quarter of a million dollars away, just having gone with the lowest price.
Given that I had just come off a project, launching a new ultra-low freezer technology, which uses half the power of a conventional cascade refrigeration technology at the time, it was pretty raw because we found ourselves having a difficult time getting an audience with purchasing people who were not interested in paying for a product that cost maybe 12% to 20% more but would save a great deal of money over the life cycle. That’s when we started to think about how scarce research dollars… these folks were out there running in races for the Komen Foundation and raising money here and there, lemonade stands and whatever…. If that money is not properly invested, then it’s sad.
That is superimposed over what I learned as a capital equipment salesperson over the years, where I would go in and walk the hallways. You really can’t do that anymore at major research facilities, and talk to the users. It turned out that we learned, just in the last few years, that the broader view in terms of, I think you, Chris, mentioned sustainability. The broader view is that all levels of an institution, all levels, are impacted by a capital equipment acquisition.
A good example starts with the person on the bench, the principal investigator who may have a preference for a product, maybe it’s that fume hood that takes more air than another. Maybe it’s an incubator or a freezer or some sort of a centrifuge that isn’t as efficient, but they’re comfortable with it because they used it when they were doing post-doc work at NIH or someplace else. Then the other people stacked up in the equation include the lab manager, the facility manager, the maintenance folks, the financial officer in pharmaceutical companies. I’m sure, Eric, you’ll agree that the sustainability people have now taken on more responsibility and political clout. Then, at the top of the chain, you’ve got the owner, the architect and the lab planner.
If those people aren’t holding hands at the very beginning of this process, whether it’s a replacement or a new product or a new facility, then they’re not enlightening themselves enough to realize potential savings and that’s where the real sad situation manifests itself. So I had to write about it. I’m gratified with the response. We got a lot of feedback on it.
Chris: Nice. So, I’m just going to throw in a little bit here. We’re describing situations where, and maybe this isn’t always the case, but a facility is being built and, even if the funds don’t come from a grant, the choices that people make will eventually be soaked up by grant dollars because, over time, researchers bring in funding for their labs. Some of that goes to overhead and, if you’re increasing the overhead, which is essentially the operational cost of the fume hood or freezer, what have you, you’re taking grant dollars, right? There’s only a limited amount of those coming from NIH or the Komen Foundation or wherever, right?
Bill: Well yeah, and depends on internal billing and how the principal investigator is charged for using the space. So, there are many different formulas, but another thing is, if you don’t go through this exercise and this collaborative exploration, you’re also closing off an opportunity to get added bonus funds from energy companies, from the power companies, who are always looking for ways to create rebate situations for companies that want to invest a little more up front in long term energy savings.
Chris: Right. So Eric, in this scenario that Bill’s just described for us, can you explain how institutions make those decisions? And I’ve realize you don’t have your finger on the pulse maybe of every institution, but do different types of institutions think differently about it, and just explain that because, honestly, I don’t know. I think most of the people listening here probably don’t have a detailed view of how that is done.
Eric: Yeah, so we do a lot of business with research institutions, like you said. So a lot of large higher education institutions but also research facilities, like even NIH. When you come to those kinds of institutions, the funding actually has a lot to say about what you buy and what you’re able to do. There’s really two types of funding. There is general operational funding that is part of the start-up grant of why the institution is there or why the research is actually happening. Then, there is variable funding around how grants come in and who the grant owner is, and for what particular research is actually being done.
That’s one part of it, and what’s interesting about this is that, I sort of have an adage which essentially says it’s good to be rich, because if you’re rich, you don’t have to worry about amortization or interest payments, or paying a little bit extra for the good in the long run. A great example is one of our customers runs a fleet of cars, and all those cars are essentially needing to be replaced. But, for cash flow reasons, he can only replace cars as they come up due. He can’t go all out and replace it all. He just doesn’t have the actual money laying around to make the investments. So it is really important to understand where the cash comes from and whether it is one-time variable or whether it can be absorbed into the greater good of the organization, where you can, over a number of years, ensure and understand what you pay out.
The other piece that’s really interesting in these organizations is that these investments are not necessarily commodity investments, right? They’re made for very, very specific reasons to support the research that the leaders on the research side really, essentially, make a decision on. They have written their grant or they have written their research such that this is what we’re going after. So the quality of the research and the ability to create a stable environment to do the research consistently is really, really important.
So, for example, if I started my research in 2005 and I used certain tools and used certain environments to create very specific circumstances that allow me to do things and test it, I need to be able to consistently facilitate that. So, quite often, there’s a reason for the organization to stay with maybe outdated models or circumstances to facilitate what the original goal of the research is, and particularly, if you look at medical research or biotech, a lot of this is stuff that needs to be baked over years and years. So, besides the fact that we can do things better now because we’re more modern, there’s a real set of circumstances that dictates what kind of investments and buying choices have to be made.
So the other piece is interesting and that is that the person that actually buys the stuff or who’s responsible for buying, is a Nobel Prize winner, or is a really important researcher. It’s somebody with very specific knowledge. So, what Bill said earlier, which is “I’m familiar with the tool set, I know how to do it.” For those people, time is money. If they have to learn new stuff or if it takes five seconds more to do something that used to take five seconds less, it is an important part of the decision criteria. Some of these decisions cannot be driven by just understanding the true cost, right, the pure dollars in and out, but there’s a whole set of criteria that the people need to understand in order to make the right choices for the greater good of the organization.
Chris: Right, I understand that and I’ve been in a lab, and I understand, if you get used to using a particular product and there’s a way you want to do it and you want to do it consistently overtime, that makes sense. I’m thinking about things like hoods though and freezers. For example, I’ve never seen a freezer or a hood installed in a lab. I imagine most of them were installed with the buildings. So, that’s an earlier choice and, in the case of an important scientist picking his equipment, I understand that, but if he’s picking something like a fume hood, which, and maybe I don’t understand enough about the function of a fume hood from one to another, besides the amount of air it moves, I’m thinking that person is not going to be in that lab forever. Someone else will move in and they’re going to use that thing. So, the scientist’s decision has an impact on the institution long after he’s gone.
Bill: That’s true. This is Bill again. These principle investigators hate uncertainty. They don’t like change and rightfully so. The repeatability of what they’re doing is manifest in their ability to deliver the results that they’re going to deliver. Whether they’re what they want or not is anybody’s guess, but at least everything is going to have been the same all the way through. When you’re talking about some of these commodity items, as opposed to antibodies or reagents or getting cell lines from ATCC or something, absolutely. They know what they want and they don’t want to change. I don’t think that the institution wants to force anybody to change at that level.
On the other hand, when you’re talking about a freezer or a refrigerator and all it does, and I say that kind of tongue and cheek, it takes a lot to get that done but it gets cold. It gets cold and it stays cold. So, what they really want is they want reliability, and that reliability, over time, over the history, since World War II, for example, in the refrigeration part of the world, has come at huge costs, and the systems, quite frankly, have struggled. When something new comes along, crafting the value proposition has to be a little different, because you’re not only able to deliver the cold, but if you’re able to do it at half the cost and if the cost of running, for example, one of these ultra-low freezers is as much as operating your home for a year and you’re a large pharmaceutical company, and you have four, five, six or seven thousand of these freezers on your campus and, quite frankly, many of them do, you’re talking about powering up an entire subdivision.
If you can cut that in half, without compromising the deliverable, which in this case a cold place, then you’re really bound to examine it. Here’s a case where a purchasing department doesn’t have the contextual understanding of the whole equation, nor can they. They have too many other things to do. But to get and have a purchasing person incentivized solely on the basis of saving money on an initial acquisition is probably short sighted and that was my launching pad right there.
Chris: Right, and so that’s more of the example I want to talk about. I’d love to have Eric use this freezer scenario where you’re delivering cold, and I know there’s more than just staying cold. There are elements of the variability and how the cold cycles that are very important. I’ve talked to people recently who built enormous walk-in freezers that are going to hold millions of samples that have irreplaceable value, but I have to think and, certainly the scientists need to be able to specify that, but there must be someone in purchasing then, you would think… I guess what I’m asking is, “is there a person in purchasing who’s now thinking about the long term operating cost of that and how’s that weighed or what’s the best way you’ve seen it done?” Now I’ve asked three questions, Eric.
Eric: Well, so I think there is a very important role to play for good procurement process, right? So, what’s interesting about sustainability, and it’s not new, and this is something over the last 15 years, but I think forever, people have been looking for faster results at less cost, but the equation of doing it with less impact to the environment and/or where we live is really big. So, what I’ve seen with our customers is that the sustainability officer is elevated into management positions and is, in almost all of our customers, a mandatory part of procurement criteria.
And the other thing that’s happening is that procurement organizations are more effective in serving themselves as procurement experts that can help with best practices and, for example, almost all organizations that work with us have a rule that, above a certain amount of investment, there is a proper RFP or RFQ or at least a validation of requirements and the tool cost of ownership discussion required, right? I think if you talk about these kinds of investments, you’re talking total cost of ownership. You are talking about not just what does it cost now, how much does it cost over five years? What is the energy used? What is it to do preventative maintenance or what is it for break fix? What’s the warranties, right? The complexity of the tool set, all that information that, if you are just in the trenches doing your research, you may not think about because you need something on your desk in a couple of weeks, because you’ve got to refrigerate your stuff, right?
So, I think, as a procurement organization, but also the tools that you can use, you got to bring in the best practice. What I see, a lot of behavior happening is that, if the procurement department gets inserted without expertise, so that don’t understand the space that they support, or they don’t have expertise in specific areas, what happens then is that the people that want to buy the stuff, will purposefully try the initial purchase to be lower initial purchase because they are below the purchasing rules. Below $50,000, I don’t need to bring in purchasing. I can just do this and I can move on. I can make my choice.
So, there’s both an obligation on the procurement side to get involved at the right places to put in best practice but there is also an obligation on procurement side to be knowledgeable and to not be as intrusive, so that we don’t expend effort on the wrong stuff. I think those are areas where, not just the procurement department itself, but the tool set that we use and the collaboration with suppliers. I think suppliers have a tremendous role to play in educating the right group of people, and what they can bring.
Bill: That’s where I was going to go, Eric. You talked about a three-legged stool here. The third leg is the responsibility of the manufacturer, the innovator, the people that come up with the technology. The responsibility for educating the market, like it or not, rests solely with them. If they have a better idea, a better way of doing something, they can’t permit the market to try to assimilate it through some sort of a third party. They have to take direct responsibility for two things.
Number one is to organize the information in a way that we can spoon feed it and explain it to people, number one. Number two, they have to be honest. The days of throwing claims out into the market on pieces of literature, without any corroboration at all, I hope, are over. That must not continue. There has to be an industry self-respect, and, in the case of those freezers, the Department of Energy and the EPA have all now gotten to the point where they’re getting involved in how people can claim what they do. These tests have to be independently conducted, and it’s an apples to apples thing. We like to tell our clients that the best friend that you have as a manufacturer and innovator, the best friend you have is an educated customer. If that customer is not educated, that is your fault.
Eric: I think that what you said is interesting, right? Honest and balanced because I think if you look at the marketing side of this, marketing tends to highlight what is best about the product or what is best about the service. What is interesting is that I could walk in and I could say, “This product uses this much less energy.” Therefore, total cost is there, but if there’s only one person in the world that can maintain it, the moment it breaks, I’m out of service for months, right? So, there is a true need for balancing the total.
Bill: Absolutely. That’s those value propositions have to be stacked up and addressed, matched up to the organizational structure. Say it’s a large university or a pharmaceutical company, everybody in that enterprise is going to have some sort of an interest in the acuity of this decision. Did somebody just buy something down there in the microbiology lab that’s going land us a $10,000 power bill that we don’t know about? Happens every day.
Eric: So the thing that I think is interesting from a technology perspective is how can technology facilitate this and make it better, right? So what we’re looking at and what we’re doing is, you’ve got to make sure that everything that linked to the centrifuge or that is linked to the cap that you want to buy, you’ve got to understand what the total cost is and you’ve got to make that really easy to look at.
If I have a contract with a machine that uses disposables, I want to connect, not the disposables that I’m buying over time but also the maintenance cost that I had on it, plus the fuel and energy that I use with it. So I totally know what cost of ownership is. That is something you need to link together and put together, right? Then, I can understand that how much do I use today? Is it true it’s cheaper than what you say, yes or no?
Bill: Great. There’s a social responsibility too. What are we going to do with those disposables when we’re done with them? Are they recyclable? Can we turn them into something? That’s the sustainability part of the equation that’s started to really hold political clout at the board level for most pharmaceutical companies.
Eric: The other piece that’s intriguing is what have other companies done, right? Who else is in the market? Because there maybe one provider, manufacturer who does a lot education but then the question becomes, “Okay, who else does this kind of stuff?” Do we have comparables? Can I have conversations with them? So, part of this is the discovery thing as well. So, we actually have inner applications so we have the ability to look at public entities and what they buy. You can go out, even our own technology, you can see exactly who bought SciQuest and what they paid for it. You can call the person that has done procurement and ask them all the questions that you would like to have and create a very credible set of alternatives where you can really do proper sourcing. It’s very easy to find that, right?
So, we have a number of examples of schools that were looking for large machinery. They saw that other companies or other schools had bought it and they paid a completely different price than what they were presented. There’s a real opportunity there with good spend reporting tool sets, with good sourcing tools, to create that balance. It’s really a choice on how complex you want to make it. I think there is a boundary for 15K purchase. You don’t want to have it very complex, but the moment you start spending half a million dollars, it’s worth putting the extra effort into it.
Chris: I’m loving this conversation. I heard something Eric said, and it fits in with what Bill is saying. I’m thinking there’s an opportunity not only to educate procurement but to educate scientists, the end user on how procurement works, so that they don’t get in that situation where they need something in a hurry, and they’re not going to get what they want because they didn’t think about it soon enough.
Bill: This is Bill. I think that Eric would agree that there are as many scenarios as there are institutions out there. They all work differently but there are also a lot of common denominators. You’re right about the fact that we typically represent the people that are manufacturing, the innovators, the new technology folks, and we are taking on the responsibility of building curricula that work both internally to the company to do what we call empowering the last person hired. You can’t ask somebody to go out and sell something they don’t truly understand, especially when you’re in the distribution channel with many, many hundreds of salespeople.
But, on the other hand, you can only expect a bench, an investigator, that Nobel Prize winner, can only spend so much time trying to figure out what the best centrifuge or what the best product that he or she should look at. So the easier that we, I’m not saying we simplify it like a window sticker on a mileage estimate on an automobile, but there are certain common classes of products, I think that could be easily rounded up into apples to apples comparisons. I don’t know who would take the responsibility. I think Eric maybe that’s something that you guys probably may be working on. It’s almost like a consumer reports type of thing.
Eric: Yeah.
Bill: We all bear the responsibility. As a marketing firm, we bear the responsibility for leading our clients to that reality. Then, as procurement people, they have to have an open mind in how they are incented, I think, should be examined as well, but that’s an institutional prerogative.
Eric: Yeah, what we found, and the easiest comparison that I have is think about buying a car, right? Everybody needs a car. It’s essentially a commodity that we can–
Bill: And we can all identify with it too. Sure.
Eric: Right. So, if you really look at the cost of ownership for a car, right? There’s the mileage, there’s the insurance, there’s the repairs, there’s the warranties, all that kind of good stuff. There’s always data to homogenize it, to make it look the same. In the end, it comes down to what people can afford and how they feel about what they do. That kind of information is easier to get if you have more people buying it. So, there is a lot of that kind of information that is very important to detail out, to make available.
One of the big things about research institutions is that there’s a lot of commoditized, expensive pieces of equipment that need to start falling into the data collection and the Energy Star and all those kind of things that are needed, that are more car commoditized stuff. However, there’s a whole lot of cutting edge things that are happening. Cutting edge stuff, you buy at premium. You have no idea what the long term cost are because you have never used it longer than a couple of months, right? There’s a lot of education happening there.
So, I think if you can understand, when you go out to the market and you start scanning in out, are you doing that more commoditized piece, where it’s more incremental enhancements, or are you in that cutting edge, new stuff? That’s the other piece that you really need to understand very well before you start moving. Because you’re probably going to pay premium for cutting edge but you’re absolutely not willing to pay premium for your commoditized large expenses.
Bill: Right. And it’s up to the cutting edge company whose manufacturing the cutting edge to build a credible value proposition based on independently generated information. The days of writing copy and throwing it in a brochure and putting that out there as gospel, I hope, are over.
Chris: Yes. So I think this is a good place to wrap up. I don’t know if I have any other specific questions. I had some and I might edit this part out, but I was going to ask Bill kind of what’s his target audiences when he’s marketing to these people and then maybe have Eric comment on what he sees. I don’t doubt that you’re marketing to the right people but maybe what he sees again as best practices. Because I’m guessing, Bill, that for a lot of these large purchases, you’re not just writing content for end users.
Bill: Well, a lot of the content, a lot of the marketing programs we build are inside out programs that start with educating the employees and the sales and service people. By the time you’ve done a good job of that, and rounding up all of the what we call the raw materials, you’ve essentially stocked the cupboard with the information you need to build out a marketing tool kit that can go outside a front door.
That still doesn’t obviate the fact that the customers in the life sciences market are consumers and they’re influenced by the same emotional and other factors that we are when we buy a car or a perfume. As we say, selling perfume is selling hope. Well, in this particular case, I think we’re selling products that either minimize uncertainty, which is the last thing you want to deal with when you’re going home on Friday night and wondering if your specimens are going to be there on Monday morning. We’ve got tons of examples of catastrophic failures based on these instances.
The business of making it easy to understand. We haven’t ever found something we could not explain, but that Nobel laureate only has so much time to devote to learning what it is we’re trying to explain. So, you have to really cut to the chase. Does it get cold? Yes. Does it go fast and spin down? Yes. Does it warm up to 300 degrees in 58 minutes? Yes. Do we have proof? Yes, we do. I think that people want to know what’s the truth. We don’t want spin, not in this market. We don’t want that. It doesn’t work.
Chris: Yeah.
Bill: It’s short sighted and it’s unfair and that’s the point I was trying to make. It steals the resources that we need to plow into what real research is and curing real problems.
Chris: I like that. A little bit of a higher goal that people should be thinking about when they’re selling their equipment into laboratories.
Bill: Yes. They need to think about who is using this and why. We ask that question all the time. Why are we doing this work to help this company sell this product? We only have so much time during the day. Do we want to come in here and sell razor blades or do we want to really help people make informed decisions about how they’re going to create an environmental condition to grow cells at 5% oxygen, when that’s not what the ambient is. What are the benefits of that? Well, they’re huge. They’re huge, but not until we explain it.
Eric: Yeah, I think Bill, what you’re saying is dead on. It’s all about time, right? So, where do procurement people earn their money? They earn their money by taking all the insignificant purchases, the many, many, many that need to be done, off the table and get them done as fast as you can so that people can spend their time evaluating and procuring those things that really matter, and where you have to spend your investigative time, your learning time, but also your evaluation time.
So, the more you can automate, get the simple stuff and the mass stuff off the plate and completely take it out of the game, the more time you will get from your procurement people that know best practices, and understand how to do a total cost of ownership and do an evaluation, as well as from the people that actually use the things on a daily basis, to sit down and make an informed decision together with the suppliers. So I think that’s the key where procurement departments really need to get to. If they’re still doing (paper stuff?), they’re on the wrong track because, boy, they don’t have any time at all. The more they can automate, the more they can go and create informed decisions and change what they do and build something for an institution for the better.
Bill: We’re also seeing that offshore markets are starting to appreciate that same equation as well. They don’t have time for it. There are tons of companies out there that can bend sheet metal and do things, but, in terms of understanding how these products are used and the consequences of a bad spot weld, someplace down in a piece of equipment that you’ll never see, are real and they need to be communicated to the people on the factory floor. They have to be involved in understanding why they came to work this morning. We’ve seen that a lot in Asia, and they’re starting to come around and understand that the marketing equation is an inside out exercise.
Chris: I love that. I’m going to wrap it up here. I think this have been a fantastic conversation. I want to end on the note that we should all be thinking about what we’re really trying to do in these specific cases is keep in mind the goal of the research, which is to improve human health, improve the environment and so on and that all these decisions have an impact on that. And so, with that, I want to thank you, Bill and Eric, for what I think was a fantastic discussion.
Bill: Thank you. It’s a pleasure.
Eric: Thank you, and you’re welcome.
