What price to pay for indirect products and services?

Roger OakdenGlobal Logistics, Procurement, Supply Chains & Supply NetworksLeave a Comment

There is not a ‘list’ price online.

The price you are prepared to pay for an item is when you consider most value will be gained. To many of us, this is based on the ‘list’ or advertised price that is available to all. However, this weekend, I experienced shopping on-line where prices are never set as a ‘list price’, but are calculated for each buyer.

It can happen with airline seats, but my experience was with hotel accommodation, booked through two on-line platforms. I was informed that for each property, “the price was the best available” and “only one room remained”. I purchased the offer, based on my perception of value. Two hours later, I was reading about places of interest on a non-booking site (using a tablet with a different login), that carried advertisements for accommodation. The two hotels were listed. When I enquired, the price for both was about 10 percent less than I had paid and surprisingly, both stated ‘only one room remained’.

This is the world of variable (also called dynamic) pricing. Prices that can change by the minute and personalised for the individual buyer. The price can be based on factors, such as: the buyer’s history of purchases for all products and services; current level of sales for the item; weather forecast; consumer confidence in the economy and any other measure that pricing analysts can think of to build into the pricing algorithm.

Since trading began, sellers have assessed how price sensitive are their customers and adjusted the offer accordingly. Today, the greater ease of gathering data about customers and buying factors means that while the same objective applies – maximising profit, the pricing process becomes more granular and sophisticated.

My experience coincided with reading the Atlantic magazine article ‘How on-line shopping makes suckers of us all’, which explains the growing on-line shopping experience that will affect all of us as consumers. And, as the article questions “Could the internet, whose transparency was supposed to empower consumers, be doing the opposite?”

And what about businesses? For direct items (those that are used in producing an item), there will most likely be some negotiation around specification, delivery and price. But for indirect and overhead (consumable) items and services (including 3PL and other Logistics services), it is more likely that standard items are purchased and an increasing proportion will be done on-line. So, your business can experience the same pricing approach as consumers and, if applicable, use the techniques when selling to your customers.

Data and information to set the price

To set prices specifically for your business, suppliers will need to gather data and information to feed into pricing algorithms. The data collection needs will differ, depending on whether the objective is:

  • The product or service is sold is a standalone item for which repeat business is required or
  • The main business is to sell capital items or long term contracts and the service parts and services are there to enhance customer perceptions of the seller’s capabilities.

Examples of the customer data to be collected as inputs to pricing algorithms are:

  • Length and depth of the customer relationship: Depending on the ‘quality’ of a new customer, a supplier can make an ‘investment’ in the relationship through pricing. As the relationship develops, the offer can be repackaged to reflect each party’s confidence (and maybe recover some of the investment)
  • The urgency of buying
    • Required but unplanned, with an immediate need. Opportunity for high prices in line with response time and capability
    • Required and planned, but the need is not immediate. Special offers and bundling deals to advance the purchase decision
    • Discretionary purchase: Requires more selling than just pricing to convert the buy from discretionary to planned
  • Frequency of purchase: the more often a buyer acquires a product or service, the more aware they become of price, ‘value’ and competitive availability
  • The gross and net income per sale: Whether individual sale and/or volume discounts will apply for a customer and the justification
  • Why does each customer buy this item (value proposition): Need to understand cost vs effectiveness.
    • If cost is the customer’s driver, then pricing must be below the cost of the customer providing the item using their own resources
    • If effectiveness is the driver, then overall performance matters more than price. Gather data to offer a bundled, fixed term contract.

Examples of internal company data collection are:

  • The basis of competition in the market: Know the availability and capacity of competitors in a market
    • The willingness of customers to ‘shop around’, but this takes time and requires specific capabilities within the buyer’s organisation
    • The more proprietary (through brand names or technical leadership) is a supplier’s offer, then higher prices can be charged
    • Where buyers expect skills and knowledge within suppliers, prices can reflect the level of skills and knowledge a supplier is able to provide
    • Where the volume of a standard service is important, initially price low to gain scale
  • The ‘cost to serve’ for individual customers (discussed in an earlier blog): This is critical to the success of an effective pricing policy
    • Cost drivers by major customer and the full cost of customer service elements
    • For a supplier offering ‘service level agreements’ (SLA), the cost to serve will increase when
      • service lead times increase at a particular time of the week or within a season and
      • increased distances between customers for service calls

These examples of elements in a pricing structure indicate the extent of data gathering and development of algorithms required to accommodate the attributes of each customer. But it can be done and will be coming to online suppliers near you. And, if you are a buyer that values simplifying the buying process and is not so concerned about the total cost, it will be right for you.

But what if you do not like the idea of personalised pricing? Then it requires a Procurement Strategy, where suppliers are segmented for different levels of attention and the possible cost of on-line buying is recognised. For me and accommodation booking, I will take a step back from online, but still use the Internet. Google Maps to find accommodation in the area. Web search for contact details and the telephone to discuss price and availability and to make a booking.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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