23/09/10

By Claire West

Understanding how suppliers decide what to charge for goods and services can help businesses achieve better value for money, say procurement consultants Positive Purchasing.

The most useful question for purchasers to ask is not "what are my supplier's costs" as is sometimes suggested, but "how did my supplier arrive at their price?"

In Positive Purchasing's latest Thought Leadership article, The Price of Good Value, director Jonathan O'Brien describes some of the most common pricing models. These include "greed pricing" -- when the supplier takes
advantage of its position in the marketplace to hike up the price -- "value pricing", when a customer is persuaded to pay more for perceived extra value, and "budget pricing" when suppliers are given a price and
asked what they could provide for it.

O'Brien, author of Category Management in Purchasing, published by Kogan Page, writes: "Pricing, for the supplier, is not an exact science. A common mistake is to think that suppliers work to a precise formula to determine what they charge. In some sectors this may well be so, but for the most part price is a very flexible quantity.

"The key to achieving the optimum relationship between value and price is to examine what kind of model the supplier - consciously or otherwise -- is working to. This, in turn, will provide clarity about the figure you are willing to pay."

The Positive Purchasing article concludes: "So the most useful question for purchasers to ask is not necessarily 'what are my supplier's costs?' as is sometime suggested, but 'how did my supplier arrive at their price?'

"Understanding this will shine a light on the pricing model adopted by the supplier and enable the purchaser to negotiate more effectively to achieve a price acceptable to both parties."