Competition in any business environment can be beneficial for buyers/consumers, offering a range of alternatives and encouraging undercutting and thus lower prices. But in some instances this can have more disadvantages to buyers… Let's look at the instance of a competitor entering the outsourced services industry. In any environment an existing business's clients are vulnerable to competitors, and surprisingly a Harvard Business School study has revealed that many business's most valuable clients, those with the longest tenure, are often the ones most vulnerable to being poached by a competitor. (For more information, download the PDF of the HBS working paper.) http://www.hbs.edu/research/pdf/11-084.pdf
The reason for this often comes down to undercutting. A new or existing competitor may approach an existing client with a lower price, and while every client will evaluate service quality in conjunction with price, often price proves to be the winner. The willingness to trade price off against service quality is often too tantalising for many business owners, and this leaves many service providers with a dilemma… Delivering higher levels of service raises a service provider's costs, thus raising the price of the service to the client, and making the provider susceptible to a cheaper competitor. Alternatively a provider can reduce their service quality and thus their price, but this leaves them similarly vulnerable to competitors if their clients are sensitive to service levels.
The reason for this often comes down to undercutting. A new or existing competitor may approach an existing client with a lower price, and while every client will evaluate service quality in conjunction with price, often price proves to be the winner. The willingness to trade price off against service quality is often too tantalising for many business owners, and this leaves many service providers with a dilemma… Delivering higher levels of service raises a service provider's costs, thus raising the price of the service to the client, and making the provider susceptible to a cheaper competitor. Alternatively a provider can reduce their service quality and thus their price, but this leaves them similarly vulnerable to competitors if their clients are sensitive to service levels.
Service providers face financial loss if they attempt to retain clients in a price-war, but the reality is that the long-term implications of reduced service levels can hurt clients even more. Buyers essentially shoot themselves in the foot when they over-focus on price or quality, as an inherent necessity of outsourcing is maintaining a long-term relationship in order to capture optimal value.
The best way to resolve this dilemma is for both service providers and clients to realise that there is no trade-off between price and service quality, and that all outsourcing agreements need to be structured in a way that provides optimal value. The answer is to build a relationship where both parties look out for each other's best interest and work towards a shared goal, benefiting from a symbiotic relationship.
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