{"id":3590,"date":"2017-09-13T01:48:10","date_gmt":"2017-09-13T01:48:10","guid":{"rendered":"https:\/\/www.certitrek.com\/nlpa\/2017\/09\/13\/how-sales-pricing-drives-procurement-pressure\/"},"modified":"2021-07-15T04:22:35","modified_gmt":"2021-07-15T08:22:35","slug":"sales-pricing-drives-procurement-pressure","status":"publish","type":"post","link":"https:\/\/www.certitrek.com\/nlpa\/blog\/sales-pricing-drives-procurement-pressure\/","title":{"rendered":"How Sales Pricing Drives Procurement Pressure"},"content":{"rendered":"<p>In yesterday\u2019s edition of PurchTips, I gave you 19 questions you should know the answer to if you are truly thinking strategically.<\/p>\n<p>But they weren\u2019t the only questions.<\/p>\n<p>There\u2019s one I\u2019ll address all on its own in this post: \u00a0What is your organization\u2019s pricing strategy for the products and services it sells?<\/p>\n<p>You see, pricing on the sales side isn\u2019t just a sales function. \u00a0It is one of the most important components of the organization\u2019s overall strategy. \u00a0And it drives the \u201cmicro-strategies\u201d used by other departments, including the procurement department.<\/p>\n<p>There are a few different approaches your organization can take to deciding on its pricing. \u00a0The market will dictate which of them your organization can get away with. \u00a0They include:<\/p>\n<ul>\n<li><strong>Cost-Plus Pricing:<\/strong> \u00a0This approach simply means that your organization will charge its customers whatever its costs are, plus a markup. \u00a0This approach is often used in situations where (a) the scope of work is so unclear that the customer really has no way of knowing what the final price will be, and (b) there isn\u2019t a ton of competition that would drive better estimation and persuade the supply base to quote fixed prices. \u00a0Where an organization can use cost-plus pricing and get all of the business it can handle, there isn\u2019t much incentive to apply the most disciplined procurement practices. \u00a0If your organization pays too much for purchased products and services, that\u2019s OK. \u00a0It will simply add its markup on top of the cost and bill the customer accordingly, without much pushback. \u00a0And if the markup is a percentage of cost, heck, the more you pay for time and materials, the more profit your organization makes.<\/li>\n<li><strong>Value-Based Pricing: \u00a0<\/strong>This approach means that your organization bases its pricing on the quantifiable\u00a0<em>value<\/em> that its customers receive from an engagement, job, etc. \u00a0It is an approach often used for customers who are looking for a \u201cluxury\u201d type product or service and have the money to afford it. \u00a0For example, if a supplier\u2019s work will save a company $3 million in a year, they will have little problem justifying an appropriate expenditure that would \u201conly\u201d cost $1 million. \u00a0In organizations that use value-based pricing, there may be a little more pressure on the procurement department than there is in organizations that use cost-plus pricing. \u00a0But there\u2019s still not a lot. \u00a0In luxury markets, there\u2019s usually plenty of profit margin.<\/li>\n<li><strong>\u00a0Market-Based Pricing:<\/strong> \u00a0This approach means that your organization can only charge up to a certain amount for its products or services because there are enough competing products and services to have established an acceptable range of prices in the minds of consumers. \u00a0Let\u2019s talk about an example. \u00a0Think about a TV dinner. \u00a0Some cost more than others, depending on the amount of food included, the quality of the food included, and the reputation of the brand. \u00a0Yet, there is still a very finite range. \u00a0One may pay as little as $1 for a budget TV dinner. \u00a0Or pay as much as $5 for a huge TV dinner that only individuals with the heartiest appetites could finish in one sitting. \u00a0So, if someone tried to sell a TV dinner that cost $15 with similarly-sized proportions and comparable food choices and quality, consumers just wouldn\u2019t buy it. \u00a0When you manage procurement for an organization that uses a market-based pricing approach, there is usually a high degree of pressure to ensure that costs do not exceed a certain target. \u00a0And because of competition, that target can be challenging to hit. \u00a0For the TV dinner, you simply cannot overpay for any ingredient: \u00a0green beans, brownie mix, etc.<\/li>\n<\/ul>\n<p>Those aren\u2019t the only type of pricing approaches. \u00a0But they should be enough to convince you that understanding your organization\u2019s pricing strategy is one of the keys to truly strategic procurement thinking.<\/p>\n<p>So, add the above question to the list in yesterday\u2019s PurchTips!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In yesterday\u2019s edition of PurchTips, I gave you 19 questions [&hellip;]<\/p>\n","protected":false},"author":12,"featured_media":4048,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3590","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-procurement"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v19.4 (Yoast SEO v19.13) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How Sales Pricing Drives Procurement Pressure - Next Level Purchasing Association (NLPA)<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.certitrek.com\/nlpa\/blog\/sales-pricing-drives-procurement-pressure\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How Sales Pricing Drives Procurement Pressure\" \/>\n<meta property=\"og:description\" content=\"In yesterday\u2019s edition of PurchTips, I gave you 19 questions [&hellip;]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.certitrek.com\/nlpa\/blog\/sales-pricing-drives-procurement-pressure\/\" \/>\n<meta property=\"og:site_name\" content=\"Next Level Purchasing Association (NLPA)\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/NextLevelPurchasing\/\" \/>\n<meta property=\"article:published_time\" content=\"2017-09-13T01:48:10+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-07-15T08:22:35+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/11\/nlpa-images-058.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1067\" \/>\n\t<meta property=\"og:image:height\" content=\"1600\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta 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