Pricing or Purchasing - Which Is More Important?
A colleague recently pointed out that several people he knows in pricing have moved into purchasing. This simultaneously makes sense and is sadly confusing. It makes sense because knowing pricing well is a great toolset for purchasing people. I’d guess that 50% or more of a purchasing agent’s job is to negotiate a lower price. The better you understand the pricing strategies and tactics your vendor is using, the better you can do your job. Hence, purchasing people with pricing expertise have a leg up at their role. By the way, the opposite should be true as well. One powerful skill set pricing people could use is knowing how purchasing agents do their job. The entire time I was in corporate pricing, I never went to a class to learn how to be a better purchasing agent. What a missed opportunity. I did take negotiation classes from the sales side, but never from the purchasing side. However, the point of this blog is to lament the over-emphasis on purchasing relative to pricing. Big companies typically have more purchasing people than pricing people. They all have purchasing departments, yet only a subset have pricing departments. Companies spend much more to train purchasing agents than they do pricing professionals. Why? Probably because purchasing represents hard costs. When an executive looks at an income statement, they see costs and revenue. Aggressive purchasing can reduce costs. However, many things can increase revenue: sales, marketing, product definition, and maybe even pricing. Pricing isn’t immediately linked to large increases in revenue. Hence, if management puts equal emphasis on costs and revenue, pricing will get underfunded. However, companies have spent years reducing costs. They understand this process well. There aren’t that many left to reduce and they are getting more expensive to find. Economists call this decreasing marginal returns on their efforts. Pricing is overlooked, but has much more power to improve the bottom line. Companies tend to not revisit pricing as market conditions change. They don’t take advantage of pricing’s power when creating a product portfolio. Firms don’t focus on charging different prices to customers with different willingness to pay. They don’t even do a good job monitoring their day to day pricing activities to see what they can do to help sales achieve the prices they set. Suffice it to say, the marginal returns on pricing efforts are likely much higher than those on controlling costs. In my company, I’d be focused on both. Graphic by Pixabay
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