Suppliers will not tell the secrets of purchasing pricing

By justchinait
January 18, 2021

Ⅰ. There are two main targets for suppliers to set new product prices:

Gain profit target and market share target

(Ⅰ) Profit target

Profit is a comprehensive indicator for evaluating and analyzing the quality of sales, and it is the main source of funds for suppliers. There are three specific forms of taking profit as the pricing target: expected profit, maximum profit, and reasonable profit.

1. Obtain the expected return target

The expected revenue target refers to a pricing target in which the supplier uses the expected profit (including prepaid taxes) as the pricing base point, and sells the product at the price of the profit plus the complete cost of the product, so as to obtain the expected profit. Expected revenue targets can be divided into long-term and short-term. Most suppliers adopt long-term goals. The determination of the expected return should take into account factors such as the quality and function of the product, the bank interest rate in the same period, the consumer’s response to the price, and the supplier’s position among similar suppliers, and the strength in market competition.

2. Get the maximum profit target

The maximum profit target refers to a pricing target in which the supplier determines the price of a unit product to obtain the maximum profit after comprehensively considering various factors in a certain period of time, based on the maximum difference of total revenue minus total cost. The maximum profit is the maximum total profit that the supplier may and is prepared to achieve in a certain period of time, rather than the highest price per unit product. The highest price may not necessarily achieve the maximum profit. When the supplier’s product is in an absolutely advantageous position in the market, this pricing target is often adopted, which can enable the supplier to obtain high profits in the short term. But in a highly competitive market, it is almost impossible to maintain unreasonably high prices for a long time. Because unreasonably high prices are bound to encounter various confrontational actions, such as the reduction of demand, the prevalence of substitutes, and government intervention. Therefore, the maximum profit should generally be the goal of total long-term profit.

3. Obtain reasonable profit goals

A reasonable profit target refers to a pricing target in which the supplier appropriately adds a certain amount of profit as the product price on the basis of compensating the average social cost under normal circumstances to obtain a reasonable profit under normal circumstances. Suppliers often adopt this pricing target when their own strength is insufficient to implement the maximum profit target or expected profit target.

(Ⅱ) Occupy the market goal

The level of profit does not necessarily reflect the supplier’s market position, let alone its relationship with other competing suppliers, and the market share can accurately reflect the supplier’s position and competitive strength in the same industry. Therefore, many suppliers take market share as their price target.

1. Occupy the market at low prices

The goal of occupying the market at low prices is to improve product quality, reduce product costs, make the product’s price lower than that of the main competitor, and quickly squeeze the market at low prices, thereby increasing the market share of the product. After occupying the market, gradually increase product prices by adding and improving certain functions.

2. Occupy the market at competitive prices

The goal of occupying the market with competitive prices means that suppliers should carefully study competitors’ strategies before setting product prices and use tit-for-tat countermeasures against their opponents based on their strength to occupy or protect the existing market. This kind of price target is prone to lead to price wars and is relatively risky.

Ⅱ. Supplier pricing procedure

After the supplier has determined the marketing price target, it must also follow the general procedures for product price formulation, estimate the sales potential, predict the competitive response, and choose the pricing method. Only in this way can they formulate a price suitable for their own development. The procedure for setting product marketing prices generally includes the following steps:

1. Determine the price target

First, determine the corresponding pricing target according to the supplier’s business objectives.

2. Estimate the market sales potential

The estimation of market sales is related to the success or failure of new products on the market and the expansion of old products’ market. The method is as follows:

(1) Understand the expected market price. Forecast price is an important factor affecting product pricing. Product prices higher or lower than expected prices will affect product sales. Therefore, when estimating market sales potential, suppliers must first understand whether there is an expected market price.

(2) Estimate the sales volume under different prices. Calculate the equilibrium point of various sales prices and which price is most favorable.

3. Analyze the reaction of competitors

Actual and potential competitors greatly influence product prices, especially those that are easy to operate and profitable, and the potential competitive threat is the greatest.

4. Estimated market share

The market share reflects the supplier’s position in the market. Different market share means different marketing price strategies and methods. Therefore, the supplier should accurately determine the current market share before pricing.

5. Consider relevant plans for business activities

Suppliers must comprehensively and comprehensively review the entire marketing plan before pricing, such as product development plans and product promotion plans.

6. Choose a pricing method

After the analysis and research of the above procedures, the supplier finally chooses a specific pricing method to determine the product’s price.

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