When taking a complete look at the cost of products sourced from China, the purchase price is often the most important part and concern of the buyer. Any buyer will do price comparision across manufacturers – common practice for any product buying – along with inquiries and negotiation as the basis for all product sourcing and procurement.
Sourcing Nova will make inquiries and product negotiations during the sourcing process for our customers across various suppliers. However, it is important to note that we will rarely inquire via mass email. Typically, the mass email is used for quote mining, and then the quote is used to pressure the manufacturer into discounts.
If you are looking for the best possible price on your Chinese products, it is far better to understand the thinking of the manufacturer’s pricing decisions. This way it is easier to negotiate a fair price without being overly forceful and rude.
Manufacturer’s pricing goals
We all understand the basic law of economics in terms of supply and demand. The manufacturer will take this into consideration when determining a price on a product run. It is important to remember that the supply and demand dynamic is only an external force over a long term period. There are two more important internal forces that are at work for the manufacturer – the internal cost structure and pricing goals.
Manufacturer’s pricing goals can be summarized into the following 5 points
- Obtain sufficient expected returns – This is divided into long-term and short-term returns.
- For a longer period – Create the largest total profit with control over revenue and total cost
- If there are insufficient capabilities for expected or maximum profits, the pricing goals are reasonable profits based around the current market
- Set lower prices for market occupancy, greater market share and gradual increase of product prices
- A comprehensive study into the competition’s strategies and formulate more competitive pricing to occupy the market or protect the existing one
Since we are a professional sourcing company, it is important to give particular attention to the manufacturer’s pricing system and goals. Only with a full understanding of these goals can we understand the logic and reasoning behind the supplier’s pricing logic. Many in our industry ignore those goals and fall into gross misunderstandings. This does not give us insight into what the manufacturer’s pricing goals actually are, however.
Can we know what their pricing goals are?
No manufacturer will share this information on their website. The Chinese people are very hesitant to share this information with any strangers (it is a part of the Chinese character). However, this information can be learned, but it takes time for the two parties to build a solid relationship – on all levels – will this information be made extant. Typically, this will happen over wine and rice. It is very much a Chinese custom to talk business over a meal.
4 methods for manufacturer pricing
“Cost + Profit = Price” Method (also known as “Cost Plus Method”)
In certain markets where there is a monopoly on the product, particularly with a new product launch, this is commonplace.
Here is the line of thinking of the manufacturer: The single product cost is $5.00. I want a profit of at least $3.00 (A cost/profit ratio of 60 percent). This means I price a single product at $8.00. (Prices are in U.S. dollars).
Shifting to the seller’s market, manufacturers have a greater say in the pricing. This means the “cost + profit” method is the most common. It is important to note this method does not take an external market into account. An average cost is figured, a profit percentage is added and the two are added together. This is the final product price.
Average costs of products do not change significantly as a general rule, and the profit margins of the industries are stable. The cost plus profit model remains stable so long as the other factors are stable. When there is an increase in raw materials or wages, many manufacturers raise prices across the board.
Doing this pricing method is not without risks. All it takes is competition or a product alternative into the market niche. Should the original manufacturer remain firm on their pricing and not attuned to market changes, they will miss their own market share or the opportunity for better business development.
This system does not leave much room for bargaining. Instead, our purchasing agents will work on other elements of the sale – reduced MOQ, adjusted payment terms, faster delivery times or product quality improvement.
The “price-cost=profit” method
In hotly competitive markets, this is the common method.
The manufacturer’s line of thinking: The market product is fierce, and I cannot change the supply or demand relationship. There is a fixed product price. Therefore, if I am going to make a decent profit, I have to look internally at operations and reduce costs there.
This is true in fiercely competitive markets. Companies do everything they can to lower costs but still ensure product pricing will reach the target profit margins. As an example, introducing lean and flexible production and implementation of total quality management as a way to reduce costs will have some manufacturers reducing processing procedures or adopting inferior raw materials.
This pricing method follows the market competition and profit margins of businesses. The method then seeks a balance between each.
Manufacturers choosing this model rarely need us to bargain. The price of the supplier is the price within the market competition. It is necessary for us at Sourcing Nova to control the quality of the products ordered, thus preventing manufacturers from infringing onto the rights and interests of buyers.
The “price-profit=cost” method
This method is common in sunset industries. Industries that are being phased out because of advancements beyond their capabilities.
The manufacturer’s line of thinking: The competition is exceptionally fierce. I cannot change the market supply and demand relationship. We have worked tirelessly for many years within R&D but cannot reduce production costs any further than what we have done. This means in the future there is no more potential or room for cost reduction. The only choice I have is a constant profit reduction.
Excessive competition within an industry means there is little room for growth. The products within the industry have many copy-cats, manufacturers cannot drive pricing, are in where they can go onto the market and space for reducing costs is depleted. This means their only chance of survival is product transformation or upgrading existing facilities for new development opportunities.
Manufacturers with this pricing method mean the profit margins are incredibly slim. Your business will need to look for new and different niche markets or make differentiated products to stay away from business difficulties and issues.
Jump pricing method
This is a method in markets where price comparision cannot be done in traditional means or with products new to a market.
The manufacturer’s line of thinking: I am not 100 percent certain what is the best price. Let’s see what happens when I give you a price on products and find one that the buyer is comfortable paying.
This method is common even if the production costs are the same. Each individual manufacturer will establish prices. Jump pricing has a small relationship to the production cost of the product. The cost lies in the historical costs based on the supply and demand law. Short supplies will mean higher prices, but a small order with a tight time schedule could also mean a higher price.
The push of a higher price makes sense from the manufacturer’s point of view. They have, on the other hand, a rare opportunity to increase prices with arbitrary reasoning. Keep in mind, the popularity of these products is only for a short time and will disappear from the market. It is the goal to make good money quickly before it is too late. Good examples of this phenomenon are pet rocks, Cabbage Patch Kids, Beanie Babies and fidget spinners.
Those manufacturers who go with this pricing method have realized there is no true partnership between the buyer and supplier. This is a short term or even a one time transactional relationship. If the buyer cannot let the manufacturer see long term value, the manufacturer will look into the short term benefits for themselves. For the product prices to be reasonable, there needs to be a vision of long term value and a true partnership – not just a place to purchase products. This is the explicit goal of Sourcing Nova – establishing a long term partnership for the best possible pricing and cooperation.
It is important to realize that the credibility of the buyer needs to be firm and fair. Many times a buyer will promise a significant future order as part of the price negotiation. Manufacturers see through this charade easily. The outcomes are never in the favor of the buyer.
Sourcing Nova negotiates the best possible deal with manufacturers based on these four criteria. However, there are times when the price does not leave much room for a better price – this is the easiest point of negotiation. This is when we shift our negotiation tactics into other possible areas of your order – such as high quality, lower MOQ and a faster delivery time.
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2 thoughts on “4 Methods of Supplier Pricing – A Comprehensive Overview”
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