WHAT IS THE RIGHT PRICE

In business operations it is of great importance to acquire resources of the right quality, delivered at the right quantity, to the right place, at the right time and even more important at the right price. This is often what is referred to as the five rights of procurement which aims at giving a general guide to procurement objectives. You must always be in a position to have an answer to the question ‘what is the right price?’ if you intend to make profit, given that procurement of inputs will make up for a bulk of your business expenses.

RELATED: Understanding the 5Rs of Procurement

What is the right price?

Price, according to Lysons and Farrington’s book purchasing and supply chain management, can be defined as the value of a commodity or service measured in terms of the standard monetary unit. This is what the seller charges for the goods and service they are offering. But it is important for you to realize that price is not the same as cost. Your duty as a procurement officer is to compare the prices suppliers have in relation to the value they are offering.

RELATED: Understanding Value from a procurement point of view

While trying to figure out what is the right price, you should be careful not to compromise the other key purchasing variables. You could assume that the right price is the lowest one after comparing what other suppliers are proposing as their prices, but what about the right quality? What about time of delivery? Then again you could factor in all these purchasing factors (5R of procurement) and realize you have to pay slightly higher, in which case, what about your organization’s ability to make profit?

In short the ‘right price’ will be the lowest price available, consistent with ensuring the right quality, quantity, timing and delivery.

From a suppliers point of view

As a seller you could be wondering what is the right price to charge and the answer will be along the lines of;

1. A price that a buyer and therefore the market is willing to pay. In short a price which the market will bear
2. Since attaining competitive advantage over other suppliers in your niche is important this price should be the kind that allows you a win over the said competitors.
3. A win for you is practically useless if the price you choose does not allow you to recover your costs and make profit. The price should be able to do that given that the main objective of a business is to make profits.

What is the right price according to the buyer?

The buyer doesn’t look at the price the same way the seller does. To a buyer price is an element in the total cost of ownership and this will be compared to the value the product or service has to offer. The right price will therefore be;

1. A price that the buyer can afford and allows them to recover the cost of production and make profit assuming the buyer is in business.
2. A price that seem fair from value point of view given the goods or services they are purchasing
3. From a competition point of view, the right price enables the buyer to compete more effectively in their own market.

How do buyers decide on price?

Not that we have mentioned what qualifies as a ‘right price’ to a buyer and that purchases will make a bigger part of your cost of goods sold in the income statement, it is important to understand some of the factors to consider when deciding on whether to say yes or no to a price as a buyer.

1. The type of items of services being procured. The buyer is not going to be in a hurry to pay more for non-critical items, which is not the case with strategic or critical products. With critical products the buyer doesn’t mind paying more and therefore as a seller you have to know what your products mean to a buyer, if possible.
2. How much the other suppliers are charging for the same becomes a determining factor assuming such information is actually available
3. The perceived value of the product from the buyer’s point of view. As a seller, remember to add value since this is what gives you the ultimate edge over the competitors and makes the buyers choose you.
4. The availability of substitute products or services and how much such are going for
5. The bargaining power of the buyer depending on the market forces, that is, a buyer is strong if there are many suppliers unlike in a case where the supplier enjoys a monopoly of the market.

RELATED: Understanding the market forces (video)

Let me know if you have any question and don’t forget to ACCESS VIDEO LESSONS HERE.