Friday, May 19, 2006

Category Benchmarking: How do you know the true price of diapers?

A tried and true tenet of Spend Management and one that Ariba Inc. focuses on developing is category expertise. True understanding of the goods and services that you buy, the market drivers that influence buyer and supplier behavior, your organization's business objectives and commercial requirements, and it's spend are essential to effectively managing those requirements. So as we enter the weekend, I'm going to provide some category expertise on one of the most strategic categories that young families manage for 3-5 years, diapers.

Diapers are an intensely competitive category dominated by 2 brand name suppliers - Pampers (Proctor & Gamble), and Huggies (Kimberly Clark Corp), with Luv's and numerous private label options on the market. Those with young children know that diaper's are a significant line item from the moment of birth, through to the moment the last one hits the diaper pail. Significantly, manufacturer's have "normalized" their pricing so that the smaller and more often your child "fills" a diaper, the less you will pay for that diaper. As your child grows, you get fewer, larger diapers for the same investment.

As with most consumer goods, you will find a seemingly excessive array of diaper specifications. Beyond size, you will find boys and girls, absorbency, and styles more or less similar to underwear. Following the general size rule above, expect that the more like underwear they are the more they cost.

But how much should you, the home spend manager pay for diapers? And how do you know what you're really paying?

First, you don't have to pay list price. The mailers full of diaper coupons will start arriving at your home before junior is born. I suspect they will continue to arrive until your young one begins to shave.

Discounts don't end with coupons though. You will be compensated for storing inventory with lower per/diaper prices. The more you buy, the less you pay.

If you buy Huggies at certain supermarkets using that supermarkets loyalty card, you'll receive a contibution to your child's college education. (Geek calculation: NPV of the transaction)

If you use a certain credit card, a portion of your purchase will be refunded to you in frequent flyer miles, cash or the reward of your choice. My poison is the Fidelity 529 rewards credit card which returns a fat 2% cash into a 529 college savings account. This is my preferred payment mechanism for everything.

If you take advantage of Amazon's rolling offers, you will experience competitive pricing on a per unit basis, you will get free shipping, saving you the "experience of the grocery store, and if you're willing to take on additional inventory ($99 worth to be exact), they'll rebate you an additional $30, reducing your overall cost by about 1/3.

If you are a diaper buyer, you'll buy a lot of them. But you may not have realized how complex this, and many consumer goods transactions, really are.

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