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Tel: +44 (0)1780 721664   Email: enquiries@qualitar.co.uk Understanding How Suppliers Set Prices December 2003 Buyers need to put themselves in their supplier’s shoes to understand how they set prices. I often assume the role of facilitating the process clients use to do this. There is also an exercise, which I’ve set several times on various training events. It illustrates exactly what I mean.Imagine you are a supplier; not a buyer. Your company has a good reputation for supplying high-end specialist IT services to a specific market sector. You have a history of supplying the two major customers in this market sector. At the moment you are not supplying either of them. They are both large and important and look good on your customer list. They provide you with a good springboard for more business with other customers in the same market.Almost at the same time they both ask you to quote for a new project with the same specification for each one. At present you do not have the capacity to supply them both. Your average quote-to-sale conversion rate is typically one in three. So you decide, on this occasion, to quote for both jobs and pull out of one if the other gives you the go-ahead. This is not an unreasonable strategy since, with a conversion rate of one in three you might not get either of the projects, and there is only a one in nine chance that both will say yes. Customer A Likeable people who are enjoyable to work with Prompt payers Give clear specifications Demanding Set very high standards They regularly visit to check what you are doing They understand your problems and often sit down with you to help sort them out They demand fast service, sometimes quicker than you can provide They are open to explanation if you have genuine reasons for failing to meet their deadlines In short, they are your preferred customer; a joy to work with. Customer B Some likeable individuals with whom you get on well They are poor payers - sometimes invoices are ‘lost’, and occasionally they have taken 90 days to pay up Different departments contact you separately, often with different messages No one function seems to be in overall control They keep changing the specifications On the last contract you thought you had provided exactly what was required, but they weren’t happy and forced you to make changes free of charge They are unhelpful, don’t like answering questions and rarely return calls. The Project Cost of £200,000 in time and materials You normally add 10% contingency to cover unforeseen charges, taking the cost to £220,000 Then you usually add a 10% profit margin, taking the cost to £242,000 Finally, on goes a bit more to allow for negotiation after the quote has gone in. The size of that ‘bit more’ is up to you. What you have to do as the supplier, is decide what you are actually going to quote to win the business. Think about it. The way you think, and the decisions you make, will be very instructive. Seeing things from the supplier’s point of view you are most likely to think along these lines. "We need the business, but we would prefer to work for Customer A. So we’ll quote £240,000 to them, and come down to £210,000 if pushed, in order to win the business. It means we’ve taken off the 10% contingency because we are unlikely to need it with them, and we’ve squeezed our profit margin because we really want the business. For Customer B we’ll quote £250,000 and come down to £230,000 if really pushed." The figures may vary between the people undertaking the exercise, but the principle is always the same. Customer A gets the lower quote and ends up with the lower price. Now stop pretending you are the supplier and revert to your role as a buyer. Don’t you want to be the company who always gets the lowest quotes from its suppliers? The way your organisation behaves has a tremendous effect on your suppliers. Even before the negotiations start, the right sort of behaviour from your company can deliver big savings to you. "Who would you choose to supply if both Customer A and B offered you the business?" Written by Will Parsons Qualitar Consulting Ltd © Qualitar Consulting Limited. All rights reserved. If you share these tips with others please always include our copyright and say they came from Qualitar. If you would like more information on the results we can deliver and the services we provide please e-mail us at enquiries@qualitar.co.uk   © Qualitar Consulting Limited. All rights reserved. Designed by apperleydesign.co.uk