One of the most important concerns of any buyer is the cost of products sourced from China. The sourcing agent will make negotiations easier across various suppliers. So, if you are looking to get the best possible price on your procurement process, it is better that you understand the thinking behind the manufacturer’s pricing decisions. This will make it easier to negotiate a fair price without being overly forceful and rude. Here is a detailed guide about how supplier pricing is done and what methods are used for it.
The Pricing Goals of Manufacturers
When determining the price of a product run, the manufacturer will consider the basic law of economics in terms of supply and demand. But remember that this is only an external force over a long-term period. The two main internal forces that work with supplier pricing when buying building materials supply wholesale are the internal cost structure and the pricing goals. So, the pricing goals of the manufacturer can be summarized as follows:
- Obtaining sufficient expected returns, which is divided into long-term and short-term returns
- For a longer period, by creating the largest total profit with control over revenue and total cost.
- The pricing goals are reasonable profits based on the current market if there are insufficient capabilities for respect or maximum profit.
- Setting lower prices for market occupancy, a gradual increase of product prices, and greater market share.
- A comprehensive study into the competitive strategies and formulating more competitive pricing to occupy the market or protect an existing one.
The sourcing agent you hire will pay particular attention to the manufacturer’s pricing system and goals. A full understanding of these goals can offer the logic and reasoning behind the supplier’s pricing logic. Though no supplier will share this information on their website, it can be learned gradually, but it will take time.
Methods of Manufacturer Pricing
- Cost Plus Method: The formula is Cost + Profit = Price. This is a common method where there is a monopoly on the product, especially with a new product launch. Manufacturers have a greater say in the pricing, which means this is the best method. However, remember that it does not consider an external market. So, the final product price is calculated by figuring out the average cost, adding a profit percentage, and adding the two together.
- ‘Price – Cost = Profit’ method: This is a common method in highly competitive markets. Though suppliers try to lower the costs, they still need to ensure that the pricing will be within the target profit margins. This pricing method follows the profit margins of businesses and market competition.
- ‘Price – Profit = Cost’ method: This is a common method used in industries that are being phased out due to advancements beyond their capabilities. Excessive competition means there is little room for growth, and this pricing method gives manufacturers few profit margins.
- Jump pricing method: This method does not allow price comparison using traditional means or with products new to a market. It is commonly used if the production costs are the same.
Takeaway
Sourcing agents can help you negotiate the best deals with manufacturers and suppliers based on the above criteria. However, there may be instances when the price doesn’t allow much room for negotiation. This is when you need to shift your negotiation tactics into other possible areas, such as low MOQ, high quality, and faster delivery time.
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