How Supplier Pricing Is Determined
PurchTips edition #263
By Charles Dominick, SPSM, SPSM2, SPSM3
How Have Your Suppliers Determined Their Pricing?
There are many determinants of supplier pricing. Five of them are as follows:
- Input Cost & Markup/Margin Strategies. In many sales, a supplier has to pay for materials and/or labor that comprise the goods or services provided to your organization. Most suppliers want to recoup those expenses (called "direct costs") plus an additional percentage (called a "markup") to cover indirect costs and profit. For some services where the direct costs of serving a single customer isn't easily evident, the supplier's overall profit margin goals will guide pricing decisions.
- Pricing of the Competition. In many situations, if a supplier's markup percentage was too high, customers would buy the goods or services elsewhere. So, the pricing of competing suppliers will compel some suppliers to limit their markup in order to match or beat competitors' pricing.
- Buyers' Ability/Willingness to Pay. For certain categories, suppliers will determine their pricing by how much they predict that a certain buyer is willing to pay. If the buyer appears to not be too concerned with pricing (e.g., a big company buying a low cost service), the supplier will often inflate its markup. Whereas if the buyer appears to be struggling to find the budget to make a purchase, the supplier may try to find a price point that the buyer considers "affordable" while the supplier still makes a profit.
- Sales Goals/Quotas. In some situations, revenue is more important than profit to a supplier. This importance can be magnified if there is an imminent deadline for a sales quota and sales are lagging. In these cases, suppliers can be flexible with pricing and may even agree to an unprofitable sale if it can be subsidized by other higher-margin sales.
- Perceived Value. Some suppliers embrace the philosophy that the higher something is priced, the more likely that it will be perceived as a higher quality product or service. Matching competitors' pricing may lead to the perception that the product or service is "cheap" or of poor quality, so a supplier may price it higher. This, in effect, can allow them to invest in offering a truly higher-quality product or service.
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