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Determine How The Price Was Established
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By American Purchasing Society

Before you negotiate, determine how the supplier established the price. Nine percent of chief executives admit that they use guesswork to price products. Others base their prices on costs or to match the competition. Fifty percent say they charge what the market will bear. These figures are the result of a survey conducted by INC. magazine and reported in the current issue.

We often hear the expression: "You get what you pay for." It is more often spoken by non-purchasing people or those who have been overly influenced by the preaching of engineers and quality assurance managers. In fact, price has less to do with quality than it does with perception. Naturally changing the specifications changes the cost and therefore changes the price. Is there any doubt that the same size sheet of gold costs more than a sheet of steel?

Many accuse purchasing of being too price conscious. They say that purchasing should be more concerned about the quality of the product. These people don't understand the function of the purchasing operation. Quality is a given. Providing the specifications are clear and complete, the supplier is obligated to deliver the right quality. Not so with price. The supplier can charge anything he wants and it is up to the buyer to either negotiate or choose to go elsewhere.

Now the question becomes why do suppliers charge different prices? There are various reasons. A supplier may simply want to meet or better the competition. Most of us think that suppliers usually want to cover their costs and make a profit. Some suppliers are primarily concerned about obtaining more business. But most suppliers want to do more; they want to maximize profits. Some want to get the most they can right away and have little concern for the future. Others are more concerned about long-term profits. They all would like to charge the most they can and still get the order and keep the customer happy. They often do this by changing the perception of the product. Through images created from advertising and sales presentations, the supplier conveys the message that the product is of better quality or value even though it may be no different or of even less value than another less expensive product.

For example, take a well-known popular brand of software that was on the market for $900. After several years, the price was lowered to $199. There was plenty of competition at the former price, but the company was still one of the best sellers even though the product was average at best.

It is up to the buyer to determine the value of the product in terms of utility. The buyer needs to separate the false perception generated by sales puffery and advertising from the cost of the product and its useful value. It is not an easy task to do so. It often requires research, analysis, and in depth interviewing skill. It often requires considerable time to obtain the lowest price possible.

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