PRICE DETERMINATION

            The effective buyer must become an expert for the item purchase. Some purchasing managers believe in buying at the lowest possible price without consideration for delivery time, acceptable quality levels, or the appropriate quantities. The effective buyer in a competitive environment will more than likely obtain purchase goods and services at a market price given that quality, delivery, and proper quantities are appropriate. If you buy items for one-half the market price without obtaining appropriate quality, delivery, or quantity standards, your firm would be rendered noncompetitive.

            The objective of the purchasing department is to buy the right materials from the right supplier at the right time and at the right price. Perhaps the most important factor associated with the purchasing decision is the business environment and the power imbalance between the buying and supplying firms.

      Demand is the key determinant for market oriented company. Demand is the starting point for all activities. Simply, the average customer will be demanding different product quantities, depending on price. Law of the market says that demand and price are counter proportional (price increase leads to demand decrease and vice versa ).

      Competition has a significant influence to price determination of market oriented companies. Prices need to be adjusted in order to address the competition. Every company should research market and competition, prior to launch of the new product. Based on market survey and the strength of the company the prices can be the same, lower or higher.

      Costs is while demand and competition are external factor, the costs are internal. The costs must be embedded in every stage of price determination process. There are several methods of cost embedding into price:

1.) Costs Plus – company calculates the costs and increase price for the specific profit.

2.) Markup – price based on cost increased for amount of specific markup percentage.

3.) Target Return Method – calculated required markup, in order to achieve return on investment.

4.) Profit Maximizing is the price where the marginal profit equals marginal cost.

5.) Breakeven Analysis – is the number of units sold that generates profit that can cover cost. This point does not have profit nor lost.

      Life Cycle pricing approach analysis the current phase of product life in market. Entering phase usually requires higher sales prices in order to payback initial development costs. Also customers are willing to pay more for a new product. Growth phase is bringing the market stabilization. Prices are more or less stable. Declining phase is the last part of product life cycle. Prices are still going down.

      Sales Channels have the different shopping occasion. Consequently the pricing is adjusted to sales channel. For example, the same product is cheaper in hypermarket than on petrol station.

      Government is usually do not interfere into price determination. Exceptionally it may limit maximal prices for a certain products. Still, government is influencing pricing, since the taxes & custom duties are the part of the price.