Sometimes we are faced with a buying activity that has a completely different set of parameters surrounding it compared to those we face every day.
One such activity is when we are faced with buying a Velben good. This is a product or service where the preference to buy that particular item increases as the price increases – it acts the other way round to the usual law of supply and demand.
So, what are these fabulous items ( and can I start making and selling them..)?
The most usual examples are types of luxury goods, such as high-end watches and the most expensive wines, where the price itself is an indicator of the worth of the product. Some argue that the most expensive cars act like Velben goods, where the more ‘bling’ ( high levels of ornamentation) is added, the higher the price and perceived worth by some.
So, is there any danger of this happening in our more day to day existence in corporate procurement? If we think of those areas of purchase where the price has become completely decoupled from the cost or the requirements of the business, then we can see that there is opportunity for Velben behaviour. Examples we have seen include some aspects of spare parts in MEICA, high end professional services and some aspects of capital equipment purchase. And luxury cars, of course.
High cost spares is an interesting case. In this case, our perception of the rarity and lack of availability of the goods is reinforced by the pricing mechanism put in place – clearly, if they were available, they would be cheap and therefore paying more to secure a such an item would be a poor decision. However, we suffer from a Velben type effect because we value the items highly because we are told they are rare.
There is an eventual result of this, reflected in all Velben goods – the decision is made not to buy a good or service because the price means that substitutes become acceptable: Velben does break down as infinite price does not mean infinite demand. In these cases, the buyer behaviour changes at some level of pricing which the supplier will be sensitive to.
In the spare parts example, at some price point the degree of difficulty of aquisition, or the risk of availability will overwhelm the price of the product and an alternative will be sought. Being on just the right side of that line is the challenge for the supplier.
On the purchasing side, we need to think about our response to apparent Velben pricing. Where it looks like our category of spend has elements which act in this way, we need to explore the cost of change and the opportunities which stepping away from those goods or services might bring. This act, of itself, may allow us to challenge the price model used by the supplier sufficiently to cause a change in price point, moving back towards more comfortable territory.
Keeping up with different ways of pricing is a great discipline in purchasing – it helps influence our understanding of the suppliers behavior.
Mark Hubbard is founder and Co-CEO of Positive purchasing Ltd. He has never knowlingly bought a Rolls Royce.