Outsourcing at the lowest price could harm your business

Totally agree with you. We should outsource at the reasonable price and always make sure about their quality and reliability before using any of them.

thanks for sharing this. It will be great information for some nubies around here and for other warriors too, I'm sure. once again, thanks.

For many people- they just think margins and short-term , not building a viable business that they can eventually sell on at great profit

G

Any time you see ANY product or service in ANY market that is the CHEAPEST in the whole category, there are 3 and ONLY 3 reasons why can be priced that way.

1. They are the biggest provider in their category and have the scale to undercut by purchasing in bulk for discounts. This is as rare as it is obvious when you come across it. Wal-Mart is cheap for this reason. It's important to note that this pretty much ONLY applies to sale of products. Services never work like this, because you can't actually buy service in bulk to resell. This is because the only way those providers can cut costs will be one of the two following reasons.

2. They can charge less because the products and services are of a lesser quality than the more expensive competition. Ever hear "You get what you pay for"? That lesson exists because of this reason. If you can't cut your overhead or supply costs by having the clout and cash to buy in bigtime bulk, how else can you bring that cost down? By cutting CORNERS. Whether it's in time or materials or whatever, if you're looking at a small provider who undercuts the competition, this is MOST LIKELY to be how he's doing it.

Now, that's not to say you can't do this AND be honest and up front about it. IKEA is famously, vastly wealthy for doing just this - making good looking furniture that's made of cheap materials and they further reduce costs by leaving the assembly and manufacture up to you. That alone brings down their shipping costs, because now they aren't taking up all kinds of empty space when moving the product. (In case you've never shipped big things, you get charged not just by weight, but by volume).

3. The last possibility is the saddest one, because the provider actually means well. They are ATTEMPTING to try and be like number 1, but are not smart enough in business to understand that bidding low on services to get business is a FATAL error. What will happen is that in order to make up the money, they take on more work than they can handle. Any quality they may have started with quickly goes out the window. If they don't compromise quality, they start blowing deadlines. Either way, it's an upside-down business model that can do nothing but fail. RARE is the person who has the skill and business acumen to do this on purpose and make it work.

Essentially, you have to immediately flip all initial profits into scaling up and staffing. Basically you are riding a dangerous and fast-moving wave, because you basically need to take in new work to pay the people you've already hired to do the work you've already gotten paid for. To pull this off, you usually need investors and a solid plan for systematically raising your prices to the point of equilibrium and eventually profit. You basically have to run the entire business as a loss leader until you can cultivate the most valuable members of your client base out of all the low end customers you pulled in with the low pricing.

But like I said, the only people who can pull it off the way I describe above are people who are super-savvy at business and leave a successful career to start all over. A newbie won't have the resources or experience to pull it off.

They basically end up losing all their customers and ruining their reputation before even starting to get a good one. If you're looking at a small provider who is cheaper AND newer than everyone else, that should be a warning sign that if their quality is actually GOOD now, it won't be for long, so get it cheap while you can and then wait for the dip and cut them off fast.

Those are the only three possibilities I've ever been able to come up with when trying to figure out HOW someone can dominate by charging less than everyone else. And only one of the 3 is even possible to succeed at long-term. I'd love to know of any others if anyone has any, though.

As it stands, when you have those three facts in mind, how can it EVER make sense to outsource a vital operation to the cheapest bidder JUST because they're the cheapest?

Either it's cheap because they're the biggest, in which case you probably weren't even taking bids. Or it's cheap because it's crappy (which is fine if you don't actually need quality). Or it's cheap because they've not yet hit the point of failure (which is fine if you're prepared for prices to rise to catch up to the quality, or alternately prepared for the quality to drop or the provider to disappear and go under).

Hope that helps - great post. Food for thought.