Price Negotiation

Negotiating for Price

 

Historically, price has been the most difficult of all contract terms to be negotiated.  Because of its high relative importance and its complexity, negotiation for price will be used as an example to illustrate what is involved in negotiating many other terms of the contract.  If the reader understands what is involved in negotiating price, he or she can easily visualize what is involved in negotiating other issues. 

 

When negotiating price, the negotiator must currently consider the method of compensation to be used. The compensation method and the negotiation of price are directly related; hence, they must be considered together.

 

To assure buying favorable prices, negotiators strive to develop the greatest practical amount of competition or either into fact-finding discussions with representatives of preferred suppliers or “partners” about negotiation(s) based on competition is to get an adequate number of proposals from among the potential suppliers who are genuinely interested in competing for the contract.  When cost negotiations are likely, requests for proposals usually ask for not only the total price but also a complete breakdown of all supporting costs.

 

For every negotiated purchase, either price analysis or cost analysis, or both, is required.  Which analysis is best to use and the extent of the analysis required are determined by the facts bearing on each specific purchase being negotiated.  Generally, price analysis is used for lower-dollar-value contracts and analysis negotiation and cost analysis negotiation follows.

 

Price Analysis Negotiation

 

Price analysis negotiation, referred to as ‘price negotiation’, is the most commonly used approach when one is negotiating only for price.  Some proponents of cost negotiation disparage price negotiation, referring to it as ‘unsophisticated’ and ‘emotional’.  In the many cases in which price negotiations are undertaken in an unprofessional manner, that criticism is fully justified.  Banging on the table and shouting “I want lower prices” or “I can get it cheaper from another supplier” is certainly not professionally price negotiation.

 

However, in many specific causes in which pricing data are developed and utilized with professional skill, price negotiation can be just as advantageous as cost negotiation or more advantageous.  Compared with cost negotiation, price negotiation has three distinct advantages: 1) negotiation time is shorter, 2) support from technical specialists is seldom needed and 3) pricing data are relatively easy to acquire.

 

The traditional sources from which supply management professionals get pricing data are federal government publications, purchasing trade publications, newspapers, and business journals. Competing suppliers are excellent sources of pricing data.  They can provide the buyer with price lists, catalogs, numerous special pricing data, and formal price quotations.  They can provide the buyer with price lists, catalogs, numerous special pricing data, and formal price quotations.  From these competing supplier’s data, a supply management professional can readily determine two very important facts: the nature of the market (competitive or noncompetitive) and the extent of supplier interest in this particular purchase.  Historical pricing data and engineering estimates also provide a sound basis for price analysis.

 

Price Comparison:

The negotiator’s first step in price analysis is to determine the extent of market competitiveness and supplier interest.  The second step is to examine in detail the absolute and relative differences among the various prices quoted by the competing suppliers. 

 

Trend Comparisons:

Historical prices paid for purchases of similar quantities can be analyzed to disclose helpful price trend information.  For example, if prices have been increasing, it is reasonable to expect that the seller will attempt to maintain a similar pattern of increase.  Hence, by carefully analyzing the reasons for all price increases, a negotiation can structure a bargaining position on the basis of any invalidities uncovered.

 

Similarly, a negotiation can analyze prices to determine whether the price decrease is too little or too much.

 

Even a level price trend offers opportunities for price analysis.