I hope that you have enjoyed the article “How Supplier Pricing Is Determined.”
In the article, I covered five of the ways that suppliers arrive at the pricing they charge your organization. Some buyers may question “Why should I care about how suppliers set their pricing?”
The answer is simple: because understanding the psychology behind the pricing will help you determine the best negotiation strategy.
For example, if a supplier uses “Input Cost & Markup/Margin Strategies,” you will only have so much room to negotiate because you are digging into the supplier’s margin and, at some point, it may be more advantageous for the supplier to walk away from the business than to concede to your lower pricing demands. In such a case, it may be a better strategy to augment your approach with collaborating with the supplier to identify input costs that can be reduced so that the supplier can maintain its same margin percentage, but still be able to offer a lower price to you.
In a contrasting example, if a supplier uses “Sales Goals/Quotas” to determine its pricing, the supplier may have a lot of flexibility with its pricing so you should ask probing questions and listen to the supplier’s response to get clues on how hard you can push for a better deal. This type of questioning-listening-acting approach is detailed in Chapter 7 of my book, The Procurement Game Plan.
So, back to that question: why should buyers care about how suppliers set pricing?
Because it helps them be better negotiators!