Purchase cycle

Price analysis
 When is price analysis required?
Commodities Critical products
High
Strategies:
Strategies:
1. Cost analysis
1. Leverage preferred suppliers
V 2. Collaborative cost reduction
2. Price analysis using market forces
a efforts focused on total cost
l
u
Unique products Generics
e
Strategies:
Low Strategies:
1. Total delivered cost
1. Cost analysis – reverse pricing
2. Automate to reduce purchasing
2. Standardize requirements
involvement
Low High
No. of available suppliers
 Price analysis is used for commodities and generics
 To understand factors affecting the pricing levels in a given
market, we need to carry out market analysis
supply

Supplier’s Buyer’s market

Price
market

demand

Volume
Factors affecting price
1. Market structure
2. Economic conditions
3. Pricing strategy of the seller
1. Market structure
Economic conditions
 Industry growth stages
 Macroeconomic conditions – interest rates, labor market etc.
Pricing strategy of the seller
 Long term pricing strategy or short term?
 Price leader or follower?
 Is seller trying to establish entry barriers by adopting a low
price strategy initially?
 Cost based pricing approach or market based pricing
approach?
Market driven pricing models
1. Price volume model
 Study the price per unit and quantity of sales that maximizes
the profit
 Quantity discounts
2. Market share model
 Long run profitability depends on the market share
 Penetration pricing – lower profit margins
3. Market skimming model
 Prices are set to achieve a higher profit
4. Revenue pricing model
 Applied generally during the downturns in market demand
Market driven pricing models (cont…)
5. Promotional pricing model
 Pricing of individual products / services so as to enhance sale
of entire product line
 E.g. low price for printers but high for ink cartridges
6. Competition pricing model
 Price just lower than the highest price offered by the
competitor
7. Cash discounts
 Discounts for payment with in given no. of days
 E.g. 2% 10/net 30 – 2% discount if payment is made within
10 days; full payment to be made in 30 days
Cost driven pricing
 Uses the cost of production as a basis of pricing of goods
 Types:
 Cost plus pricing
 Full cost pricing / Absorption pricing
 Target profit pricing
 Marginal cost pricing