Puls Solutions

Price models – how do suppliers set prices?

Blogginlägg   •   Sep 10, 2014 08:32 CEST

Most buyers are very interested in getting a fair price deal with their suppliers. The product and service should not be over priced, neither under priced. In this article we discuss different price models the suppliers and you could use.

First, what is in the price? The suppliers could price their products and services in many different ways:

  • Cost plus price
    • Calculated the sum of all variable and fixed cost drivers plus a percentage to cover profit and overhead
    • The cost plus price probably ignores the market forces
    • The cost price model could drive inefficient manufacturing and high overhead
  • Historical price
    • Historical prices often has en index linked percentage added each year
    • Probably ignores the market forces
    • Probably doesn’t reflect the supplier’s costs
  • Market price
    • Risk for cartels leading to high prices
    • Does probably not reflect the cost
    • Will probably vary as the market changes
    • The price is set in line with what the market is prepared to pay
  • Special price
    • Probably a one time deal for a special offer
    • Can be artificially low or high due to the supplier’s or buyer’s needs
  • Penetration price
    • Usually has price reductions to increase the volumes followed by steady price increased
    • Often used by the suppliers to increase market share or penetrate a new market
  • Premium price
    • A very high price not related to the cost
    • Often used in scarce supply situations and the product is highly differentiated from competition
    • brand marketing is driving this price model
  • Regulated price
    • Set by the government and beyond the supplier’s control
  • List price
    • Published in price list
    • Discount often apply
    • Could manipulate the buyers to think they got a good deal when they get a discount on an already high price

The price model is motivated by the following parameters: Value, cost, budget, competition and opportunity.

  • Value: the worth for the customer of the goods or services compared to the paid price
  • Cost: the actual investment in material, labour and overhead needed to produce the goods and services
  • Budget: the amount of money available for the purchase
  • Competition: rivals between different suppliers wanting to sell in the same market place
  • Opportunity: a combination of circumstances leading to an improved result when buying the product or service

So what is the price? Price is a policy, cost is a fact. A buyer can use the knowledge of different price models buy accepting the propose price model and negotiate with help of competition or make counterproposals in other price models.