Price is influenced by both internal and external factors
- What is the extent of the competition
- Is the market competitive
- What is the perception of value associated with the goods and services
- What is the budget
- Are there any environmental factors
Suppliers will also consider the following when deciding on how to set the price:
#cost of production #how much they need the contract #risk #fit with the organisation
Pricing strategies are likely to be based on a variety of factors
Full cost, cost plus, marginal pricing, target pricing . These might be driven by volume, being an established supplier or new entrant.
Buyers may influence the price based on the size of the order, power in the marketplace, benchmarking, TCO.
Delve deeper using Open Book Costing and Price transparency
Cost Drivers
Product based- raw materials, labour, overheads (profit is not a cost)
Check what cost is fixed regardless of the volume ordered. What cost is variable
Cost based pricing
Cost plus fixed fee (CPFF)= payment for cost plus additional fixed amount for doing the work, Cost plus incentive fee (CPIF)= cost and fixed fee plus an additional payment for exceeding KPI’s Cost plus award fee (CPAF)= cost and fixed fee plus bonus or gain share for additional performance
Fixed cost- when you want no surprises, the supplier may build in risks to their pricing.
Time & materials- where the timescales or quantity of work is unknown
Payments
Payment in advance- not recommended
Payment on delivery/ or milestones- recommended
If the supplier ask for a price increase check if there is provision for this in the contract. The supplier may argue that the price is increased because of fluctuations in raw materials, changes in the exchange rate, substitutions, late payments/ penalties.
Generally the cost increase should be absorbed by the supplier but if there are reasons supporting the request for a price increase these should be subject to negotiation.
Scoring price (an alternative way) Or you might prefer the traditional way of scoring price
What alternative way is there to scoring price other than the fomula lowest price/tender price X% weigting
Most procurement exercises score price using the above formula but some complex procurement exercises may require a different way to scoring price where other factors need to be considered.
Scoring price differently- cost of contract management, transition, exit cost or even savings when a bidder can bid for more than one lot and leverage savings using economies of scale.
Price scoring is more challenging, simply adding up the bidders final tender price and applying the formula is unhelpful as this does not give the true total cost of ownership price. An alternative way to score price is to disclose a threshold where all bidders who meet this score zero. Zero is the compliant figure, any bids above this number are non compliant.
Any bids under zero are scored comparatively using an inverted model. For example the threshold is £100 and a bid is placed for £50 the supplier would score 50 if the supplier places a bid of £70 there score is 30.