TOPIC 3 :
DETERMINATION OF PRICE AND RIGHT TIME TO BUY:
Definition 1: A value that will purchase a finite quantity, weight, or other measure of a good or service.
Definition 2 the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale
As the consideration given in exchange for transfer of ownership, price forms the essential basis of commercial transactions. It may be fixed by a contract, left to be determined by an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved.
In commerce, price is determined by what
(1) a buyer is willing to pay,
(2) a seller is willing to accept, and
(3) the competition is allowing to be charged. With product, promotion, and place of marketing mix, it is one of the business variables over which organizations can exercise some degree of control.
It is a criminal offense to manipulate prices (see price fixing) in collusion with other suppliers, and to give a misleading indication of price such as charging for items that are reasonably expected to be included in the advertised, list, or quoted price.
This is the breaking down of a quoted price into its constituent elements for the purpose of determining the reasonableness of the proposed charge. Price analysis can also be defined as the examination of a seller’s price proposal by comparison with reasonable price benchmarks, without examination and evaluation of separate elements of the costs and profit making up the price. The five tools that can be used to conduct price analysis include:
Ø Analysis of competitive price proposal
Ø Comparison with regulated , catalogue or market prices
Ø The use of web-based e-procurement
Ø Comparisons with historical prices
Ø Use of the independent costs estimates
Advantages of price analysis:
Ø It provides the buyer with a guide as to what he or she ought to pay
Ø It highlights possible mistakes in quoting in the part of the vendor ie where the price is exceptionally low or high.
Ø It provides a basis for subsequent negotiation that can be of benefit to both the vendor and buyer i.e. cost reduction leading to price reduction.
B. Factors that influence prices of materials
1. Market conditions :
Defin : Characteristic of a market into which a firm is entering or into which a new product will be introduced, such as number of the competitors, level or intensity of competitiveness, and the market’s growth rate. How changing market conditions can affect your business
In order to identify and deal with any potential problems, you should always be aware of any outside developments that could affect your business, and, if necessary, be ready to respond and change your plans quickly.
You should always be aware of:
- Interest and exchange rates – these can have an influence on the general trading climate and are not just a matter of direct costs. For example, interest rates may affect certain industries more than others and at different times, and foreign exchange rates could affect how easy or profitable it is to do business with another country.
- Your competitors – both existing ones and new ones, and what their strengths and weaknesses are.
- New technologies and innovations that could change the market and increase or reduce the demand for your existing product or service.
2. Quality of materials
3. Availability of materials
4. Prices of alternative materials.
Prices of alternative products
When producers decide what to produce, they always consider the prices of alternative outputs that they can produce with the same resources.
Farmers producing corn will, for instance, take the price of soya beans into account when they decide how much land to allocate for the production of corn.
An increase in the price of soya beans relative to that of corn will decrease the supply of corn. It is more profitable for farmers to produce soya beans; consequently, they will shift more of their resources in producing soya beans.
An increase in the price of an alternative product (soya beans ) will ceteris paribus lead to a decrease in the supply for the other good (corn), and the supply curve for corn shifts to the left. At the same price and at every other price a lower quantity is supplied than before the increase in the price of an alternative product.
C. METHODS OF PRICING
1. Fixed price
The term fixed price is a phrase used to mean the price of a good or a service is not subject to bargaining. The term commonly indicates that an external agent, such as a merchant or the government, has set a price level, which may not be changed for individual sales. In the case of governments, this may be due to price controls.
Bargaining is very common in many parts of the world, outside of retail stores in Europe or North America or Japan, this makes this an exception from the general norm of pricing in these areas.
Mitsui Takatoshi that it was begun by the world and a fixed price was used.
A fixed-price contract is a contract where the contract payment does not depend on the amount of resources or time expended by the contractor, as opposed to cost-plus contracts. These contracts are often used in military and government contractors to put the risk on the side of the vendor, and control costs.
Historically, when fixed-price contracts are used for new projects with untested or developmental technologies, the programs may fail if unforeseen costs exceed the ability of the contractor to absorb the overruns. In spite of this, such contracts continue to be popular. Fixed-price contracts tend to work when costs are well known in advance
2. Cost Price
This is your own calculation of how much it cost you to actually produce your products.
It includes your time x hourly rate, material and marketing costs, but also overheads such as studio rent, telephone and transport. Costing your product or service correctly is the foundation of how you will price your work.
You need to keep your cost price confidential, and do not share with others such as your retailers or competitors.
3.Variation pricing :
In economics, price dispersion is variation in prices across sellers of the same item, holding fixed the item’s characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price). It is often attributed to consumer search costs or unmeasured attributes (such as the reputation) of the retailing outlets involved. There is a difference between price dispersion and price discrimination. The latter concept involves a single provider charging different prices to different customers for an identical good. Price dispersion, on the other hand, is best thought of as the outcome of many firms potentially charging different prices, where customers of one firm find it difficult to patronize (or are perhaps unaware of) other firms due to the existence of search costs.
Price dispersion measures include the range of prices, the percentage difference of highest and lowest price, the standard deviation of the price distribution, the variance of the price distribution, and the coefficient of variation of the price distribution.
D. FACTORS IN DETERMINING RIGHT TIME TO BUY
1. Lead Time
The amount of time that elapses between when a process starts and when it is completed. Lead time is examined closely in manufacturing, supply chain management and project management, as companies want to reduce the amount of time it takes to deliver products to t he market. In business, lead time minimization is normally preferred.
INVESTOPEDIA EXPLAINS ‘Lead Time’
Lead time is broken into several components: preprocessing, processing and post processing. Preprocessing involves determining resource requirements and initiating the steps required to fill an order. Processing involves the actual manufacturing or creation of the order. Post processing involves delivery of products to the market. Companies look at each component and compare it against benchmarks to determine where slowdowns are occurring.
2. Reorder level