Procurement Final Exam

Syllabus

1. Procurement guidelines for publicly funded organizations in Ontario upto page 17.

Under Week 7

2.

7 Supplier Negotiation Fails We’ve All Experienced

How to Negotiate with a Procurement Team

Under week 9

3. All documents that are posted under pricing

Plus following discussion questions regarding pricing

Discussion questions (Textbook): 11.1, 11.2, 11.4, 11.7, 11.8, 11.13

4. Last module

Read following articles:

Both articles (posted)

Exam

10 MCQs

10 Short answer questions

One article and related questions.

3-hour exam.

Students wanted to have a 100-mark final exam. It puts less pressure on each mark
during the exam.
Procurement Guideline
for Publicly Funded Organizations
in Ontario
Table of Contents

Introduction ........................................................................................................................ 1
Guiding Principles behind Procurement Best Practices ..................................................... 2
Responsible management .............................................................................................. 2
Value for money.............................................................................................................. 2
Vendor access, transparency and fairness ..................................................................... 2
Quality service delivery................................................................................................... 2
Upholding Ontario’s trade agreements.......................................................................... 2
Supply Chain Code of Ethics................................................................................................ 3
Personal integrity and professionalism .......................................................................... 3
Accountability and transparency .................................................................................... 3
Compliance and continuous improvement .................................................................... 3
Procurement Best Practices................................................................................................ 4
1. Establish internal controls ...................................................................................... 4
2. Plan before purchasing ........................................................................................... 6
3. Develop criteria....................................................................................................... 7
4. Canvass the market................................................................................................. 8
5. Purchase.................................................................................................................. 9
6. Document the transaction.................................................................................... 11
7. Keep records ......................................................................................................... 12
8. Manage contracts responsibly.............................................................................. 12
9. Review and improve ............................................................................................. 13
Non competitive procurement......................................................................................... 13
Definitions......................................................................................................................... 14
For additional information................................................................................................ 17
Contact information.......................................................................................................... 17

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Introduction
The Procurement Guideline for Publicly Funded Organizations in Ontario is a summary of
best practices in the procurement of goods and services for organizations funded by the
Ontario government and not designated under the Broader Public Sector Accountability
Act, 2010. It is a tool that may be used voluntarily as a reference on best practices in the
procurement of goods and services using public funds or a resource for organizations
seeking more cost effective and consistent purchasing practices.

The proclamation of the Broader Public Sector Accountability Act, 2010 established
new rules for procurement in the Broader Public Sector Procurement Directive.
Organizations designated under the act include hospitals, school boards, colleges,
universities, community care access centres, children’s aid societies and organizations
that receive more than $10 million in funding from the Ontario government.
Designated organizations are required to comply with the Broader Public Sector
Procurement Directive.

Those organizations that receive funding from the Ontario government and that
are not designated by the act are not required to comply with the Broader Public
Sector Procurement Directive. They are encouraged, however, to use the
Procurement Guideline to improve openness, fairness and transparency during
the procurement process.

It is meant for voluntary use by the thousands of publicly funded organizations in

Ontario. These are primarily charities and incorporated not for profit groups. All of the
organizations are integral to the local population’s well being and day to day activities.
They have representation in areas such as settlement, arts, sports, health, education,
accessibility and child care, and serve every region and demographic in the province.

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Guiding Principles behind Procurement Best Practices
It is up to the individual organizations to determine the best use of public funds when
deciding on a purchase. It is good practice, however, to observe certain procurement
best practices or guidelines to ensure the process is open, fair and transparent.

Responsible management
No matter how small the organization or the procurement, there should be an adequate
organizational structure, policies and procedures to be able to manage procurement
contracts fairly and effectively.

Value for money

Buyers should consider factors such as the requirements of the business, alternatives,
timing, supply strategy and total life cycle costs of the good or service when evaluating
vendors’ submissions.

Vendor access, transparency and fairness

Publicly funded organizations should provide all qualified vendors with fair access to the
purchase of goods and services. Buyers should avoid conflict of interest, both real and
perceived, and choose the successful vendor in a fair and non discriminatory process.

Quality service delivery

Procurement activities should result in the delivery of the required product or service
at the right time and place to organizations. This is especially critical for those
organizations involved in healthcare, education and social services.

Upholding Ontario’s trade agreements

Organizations should recognize and respect Ontario’s trade agreements with other
jurisdictions that open access to publicly funded procurement where they apply.

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Supply Chain Code of Ethics
A supply chain code of ethics should govern the conduct of buyers, vendors and all
others involved in supply chain activities.

It defines acceptable behaviour for ethical, professional and accountable supply chain
activities. If your organization already has a code of ethics, it may be augmented to
include specific supply chain clauses.

Personal integrity and professionalism

The public expects their taxpayers’ money to be used with honesty, due diligence
and care. Individuals involved with supply chain activities are expected to conduct
themselves with integrity and professionalism, show respect for each other and the
environment, and safeguard confidential information. Organizations should not
engage in any activity that creates, or appears to create, a conflict of interest.

Accountability and transparency

All activities involved in the purchase of goods and services using public funds should
be fair and transparent, and for the purpose of acquiring the best value for money.

Compliance and continuous improvement

Organizations should establish and regularly review their own policies and procedures
around supply chain management. They should make improvements as necessary,
acquire additional supply chain knowledge and skills, and share best practices.

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Procurement Best Practices
Every organization, regardless of size, should have procurement policies and procedures
in place. The following sections set out best practices that can be implemented as part
of an organization’s procurement policies and procedures. Staff should be made aware
of these policies and procedures and how they should be carried out to establish a point
of reference for effective decision making.

Below is a simple process flow that will help guide the organization when deciding
on a purchase.
Identify Validate
a need need and Check Written
Buy Receive Pay
for a good understand Budget Agreement
or service requirements
• Who can verify • Who can • Who does the • Who will • Who will make
we need it? verify we have actual buying? check that we the payment?
• Do we already the money to • What process received what
have it in buy? will they use we paid for?
another part • If we don’t to buy?
of the have the
organization? funds, can we
• Have we get them?
understood the
requirements?

1. Establish internal controls

Internal controls are mechanisms in the procurement process that help reduce exposure
to inappropriate, unauthorized or unlawful expenditures. Internal controls help ensure
that purchases have been authorized, that goods or services have actually been
received, and that funds exist to meet the expenditure.

Assigning responsibilities and establishing an approval authority schedule are essential

internal controls that promote the integrity of the procurement process. Internal
controls may be influenced by the size and complexity of the organization. In larger
publicly funded organizations, for example, procurement responsibilities may be
centralized and/or reside in different departments or with different individuals.

In smaller organizations where different departments or individuals may not be involved

in procurement, and where it may not be feasible to separate specific roles, adequate
controls approved by an external auditor should be put in place. If an organization
conducts a Review Engagement, the Review Engagement may be a good time to see
if adequate controls are in place.

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Organizations should establish an Approval Authority Schedule. An Approval Authority
Schedule defines who within the organization has responsibility for the procurement of
goods and services at different dollar thresholds.

The table below provides some examples of different dollar thresholds and purchasing
authority levels for small, medium and large organizations. Each organization should
determine their own dollar thresholds that balance the need for controls with the need
to operate effectively on a day to day basis.

Sample Dollar Thresholds

Example 1: Small Example 2: Medium Example 3: Large
Up to $100 Supervisor Up to $1,000 Supervisor Up to $5,000 Supervisor
Program Program Program
Up to $300 Up to $3,500 Up to $10,000
Director Director Director
Executive
Up to $5,000 Up to $10,000 ED/CEO Up to $50,000 ED/CEO
Director/CEO
Board of Board of Board of
Over $5,000 Over $10,000 Over $50,000
Directors Directors Directors

In addition to procurement, internal controls for expenses are useful for smaller,
publicly funded organizations. The controls should apply to everyone, staff and
volunteers alike, without exception, preferably with a written policy in place for
payment of expenses.

The Ministry of Government Services has developed the BPS Expenses Directive.
The purpose of this directive is to set out the requirement for designated BPS
organizations to establish expense rules where expenses are reimbursed from public
funds. The directive serves as a guideline to all other non designated, publicly funded
organizations. It is useful for reviewing or developing an organization’s expense policies
and practices.

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2. Plan before purchasing
Organizations should plan adequately for all purchases, whether they are recurring or
one time purchases.

Identify:
what product or service the organization requires, or if the requirement can
be filled using existing resources
market availability
an estimate of the total cost of the procurement, including any possibilities for
extension or costs that are beyond the initial purchase price. Examples of cost
beyond the initial purchase price include:
taxes or duties
shipping, handling, delivery
installation
insurance or warranty
maintenance and service
disposal
consulting or training
changes required to existing products or services based on the new product
or service.
the procurement method (informal, invitational, open competitive or
non competitive), that is commensurate to the total cost of the procurement
and market availability
internal approvals and timeline to complete the purchase
the duration of the contract, with consideration for total services to be provided,
optimum value for money and most favourable terms of the agreement
how the organization’s values, such as diversity, aligns with its internal
procurement policies and business and legal requirements.

There may also be contracts available that have been negotiated in advance by a lead
organization. When assessing a possible procurement, the organization can look up
regional buying groups and shared service organizations. These organizations have
group purchasing contracts that are already in place and may benefit the buyer through
better pricing and volume discounts.

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3. Develop criteria
Organizations should have a process in place to review bids before the competitive
process begins. This includes:
specifying what criteria prospective vendors have to meet in order to qualify
for a contract award for goods or services. A set list of expectations that is
clear to the organization as well as to the vendors will help in evaluating bids.
The organization should determine the importance of each criterion and assign
a weighting, i.e., “number of points” for each item. The organization should also
determine if there are any mandatory criteria that must be met for a bid to be
considered, for example, if the supplier has proper insurance to perform the
work. To maintain fairness and transparency, the criteria and weighting should
be set prior to the start of the procurement. For simple purchases, there may
be a single criterion, which could be price or delivery.
For more complex purchases, there may be multiple criteria that factor into the
award decision:
total cost of ownership, including price of product or service, taxes,
other expenses
quality
quantity
transition costs
delivery
servicing
environmental considerations
experience
expertise
financial capacity of supplier to meet procurement requirements.
an evaluation team that has signed non disclosure and confidentiality
agreements, and a conflict of interest form
a description of how the winning bid will be selected, for example, the winning
bid will be the one that receives the highest evaluation score and meets
mandatory criteria.

The criteria will help determine the type of procurement document to be used.
The three most common types of documents that support these processes are:
Request for Tender, Request for Quotation and Request for Proposal. A Request for
Tender and Request for Quotation are used when the evaluation criteria are based
primarily on price or price and delivery. A Request for Proposal is a document used to
outline evaluation criteria for a good or service that will be selected on factors other
than price or delivery alone.

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4. Canvass the market
Gather information about potential vendors prior to procuring goods or services
in order to ensure that the organization is as well informed as possible. Information
about vendors, pricing, local community and general trends can help organizations
make better choices.

Some examples of informal ways to gather information about vendors include:

networking with organizations with a similar business need
internet searches
checking references
checking with Better Business Bureau and electronic supplier websites.

Some formal ways of collecting information include using a Request for Information or
Request for Expressions of Interest. These methods may be used when the information
collected informally is not sufficient. The more formal methods of gathering information
may require more work by both the organization and vendors. For this reason, formal
methods are preferable for high dollar or high risk purchases when the organization is
not sure of what is available in the market. For example, an organization that wants to
introduce an automated system would need information about what is available in
the market and the vendors’ capabilities. A Request for Information may also include
a request to provide advice for an innovative technological solution.

A Request for Expressions of Interest gives the organization an opportunity to learn

about vendor interest and the community’s ability to provide the necessary services
or solutions.

To maintain fairness and transparency, a Request for Information and Request

for Expressions of Interest should not:
be used to evaluate or compare the collected information
result in the award of work
be used to pre qualify potential vendors
result in a legal contract with a vendor
require vendors to provide proprietary information without
a non disclosure agreement.

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5. Purchase
The organization should “right size” the procurement method to the procurement’s
value and risk. For example, it would be impractical for an organization to seek Board of
Directors’ approval for each low dollar, routine purchase. Conversely, procurements of
medium to high dollar value should be managed utilizing the appropriate procurement
strategy to ensure value for money.

An example of a high risk procurement could be one where a vendor dispute

already exists, or when an organization is procuring a good or service on which
it has little expertise.

Making high risk procurements more open gives the organization greater transparency
in their process and provides them with a wider selection of vendors and solutions.

Guide To Procurement Method

Informal Process *
Low $ Value Invitational
Competitive Process
Open

Informal Process
Medium $ Value Invitational *
Competitive Process
Open

Informal Process
High $ Value Invitational
Competitive Process
Open *

* Recommended Procurement Method in BOLD.

For low dollar and low risk or routine purchases, it may be appropriate to use
an informal procurement process. An example of informal procurement would
be to order from a supplier catalogue or to simply buy retail. For frequent,
low dollar value purchases, there is still opportunity to maximize value for money.
For example, if the organization routinely purchases groceries, it could look at how
much is spent over the entire year, rather than individual purchases, to ensure the
procurement strategy continues to be effective.

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When dealing with medium to high dollar procurements, it may be appropriate to use
a competitive procurement process. There are two types of competitive procurement
processes: invitational competitive and open competitive:

Competitive Procurement: Invitational

An invitational competitive process involves requesting a minimum of three qualified
suppliers to submit a written proposal based on the requirements outlined by an
individual or organization. The request may take the form of email, phone call or other
methods the organization uses to solicit bids.

Competitive Procurement: Open

An open competitive process enables all suppliers to compete in a fair and open
environment related to the contractual purchase or lease of any good or service
by an organization. Selecting bids from the widest possible range of vendors may
provide greater insight regarding market opportunities. There are electronic tendering
sites that are accessible to a wide range of vendors. These sites may be available free
for the buyer to post opportunities.

This will attract a higher level of vendor response and help maintain open,
fair and transparent procurement standards.

When soliciting bids, organizations should consider:

giving vendors a minimum response time of 15 calendar days for goods and
services. For more complex and higher priced goods or services, organizations
should consider a longer response time, such as 30 days or more.
including a “blackout” period. During the blackout period, vendors must conduct
all communications about the procurement only with the contact person named
in the procurement document. The blackout period begins when the
procurement documents are issued and ends when the agreement is signed by
the organization and the winning vendor.
ensuring any addendum to the procurement documents and question and
answer are available to all bidders.
ensuring the submission and closing dates for bids are stated clearly in the
procurement documents. Bids that are received after the closing date should
be returned to the vendor unopened.
ensuring vendors submit accurate bids as much as possible and including
technical information to tender documents, where applicable.

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For open competitive procurements, organizations should consider posting the name of
the successful vendor, the start and end dates of the agreement, and any extension
options. This information can be posted where the original procurement opportunity
was advertised. It is good practice to notify all other bidders that a contract has been
awarded and that the selection process is complete. To maintain cordial vendor
relationships, vendors should also be informed that they are entitled to a debriefing.
The Broader Public Sector Procurement Directive Implementation Guidebook contains
additional information of the types of information the can be shared with vendors in
a debriefing.

Vendor of Record Agreements

For frequent purchases of a particular good or service, a Vendor of Record agreement
can help improve procurement efficiency. An organization may create its own Vendor of
Record or, with a group of organizations, jointly establish Vendor of Record agreements
for common and frequently used goods or services.

A Vendor of Record Agreement consists of two steps:

an open competitive procurement to pre qualify suppliers
an invitation to vendors from the pre qualified list to bid on an identified
procurement for goods or services.

The Broader Public Sector Procurement Directive Implementation Guidebook contains

additional information on how to develop Vendor of Record agreements.

6. Document the transaction

At the end of the selection process, a contract between the organization and the
successful supplier should be drawn up. A contract is the formal agreement between
the two parties that includes the product details or the service to be provided, and the
payment schedule.

Organizations should consider including the following elements in a contract:

For products
price
product specifications
terms and conditions such as contract dates, warranty and performance.

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 For services
terms of reference such as objectives, background, scope, constraints, staff
responsibilities, tangible deliverables, timing, progress report, approvals
and knowledge transfer requirements
dispute resolution process
expense claims and reimbursements in accordance with the organization’s
expense claim policy.

In both cases, in order to mitigate risk of vendor non performance, terms of payment
and requirement for various types of vendor insurance should be clearly stated.

7. Keep records
Publicly funded organizations should keep records of procurement, as well as any other
pertinent information, for reporting and auditing purposes. The suggested retention
period is seven years. There should also be a written policy for handling, storing and
maintaining vendors’ confidential and commercially sensitive information.

Some examples of records that should be retained include:

the approvals obtained
copies of procurement documents used to qualify and select vendors
copies of award letters, notices and posted announcements
copies of agreements
changes to the terms and conditions of the agreement, especially changes
in the agreement price
supplier performance, such as performance monitoring and management,
and knowledge transfer
receipt of deliverables
any other documentation related to procurement.

8. Manage contracts responsibly

The agreement between the organization and the successful vendor should be formally
set out in a contract signed by the parties. The contract should include items specified in
the procurement documents, such as cancellation and termination clauses, any options
to extend the agreement and a bid dispute mechanism. The organization should
monitor the vendor’s performance and verify all invoices and payments against the
terms of the contract.

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9. Review and improve
Develop a time frame, for example, once a year, to review procurement policies
to make sure they still apply to the organization’s present business and
operational needs.
Monitor procurement expenditures, such as invoices, regularly, based on budget
allocation or business plan.
Monitor contracts, vendor performance and satisfaction with the procurement
process regularly, and introduce improvements as necessary.

Non-competitive procurement
Organizations should use competitive procurement processes to get maximum value for
money. There may be situations, however, when organizations are unable to conduct
competitive procurement or get maximum value under competitive procurement.
When using non competitive procurement, it is good practice to document the
reasoning for using this method and to obtain proper approvals.

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How to Negotiate with a Procurement Team

by

• Tom Kinnaird

and

• Hal Movius

February 06, 2020

White Packert/Getty Images

Summary. Service providers often feel frustrated when they are funneled into a procurement process
to win deals with clients. Their choice, as they see it, is either to walk away, or capitulate to
procurement’s rules, thus losing the opportunity for potentially significant value...more

Imagine the feeling: after months of courting a new client, who has given every indication that a
lucrative contract award is imminent, you receive an email from their procurement team. The letter
states that there will be a competitive bidding process; that all bidders must agree up-front to standard
(onerous) terms and conditions, and that any attempt to speak directly with the client will result in
expulsion from the process.

This unsettling scenario is increasingly familiar to many sellers – and most assume that negotiating is
more or less futile. Their choice, as they see it, is either to walk away, or capitulate to procurement’s
game rules, thus losing the opportunity for potentially significant value creation (and future profit). They
are about to enter a predicament we call “winning the pitch but losing the negotiation.”
Over the last several decades, we have coached and trained both buyers and sellers through many
similar situations. We have seen buyers waste time and money by structuring pitches in ways that
destroy value – and sellers lose time, money, and emotional balance by navigating those processes
naively.

But it doesn’t have to be this way. Rather than deciding how to respond to ultimata and threats, sellers
can instead use two key moves to improve their fortunes.

Analyze the set-up. Imagining how one’s counterpart views a negotiation leads to more valuable
outcomes for both parties. Unfortunately, sellers are usually in the dark about the assumptions and
habits of procurement professionals. They assume that a competitive pitch process has been carefully
thought through and that it reflects the client’s true priorities; in fact, this is often not the case.
Procurement teams often default to a tightly controlled and highly leveraged competitive pitch process
because it is easier to administer than trying to negotiate across complex internal stakeholders and
multiple suppliers simultaneously. Moreover, procurement leaders are often incentivized by short-term
metrics that encourage a simple zero-sum negotiation mentality and foster a control-oriented process
mindset.

Sellers also mistakenly assume that procurement departments have the authority to impose process
rules and requirements. Ask a Chief Procurement Officer how much actual decision-making power
procurement has in a typical organisation and the answer is: “surprisingly little.” Indeed, procurement is
rarely the final decision maker, no matter what they may tell sellers.

To assess the decision process, it’s helpful to think in terms of the deal’s “DNA,” a term we use to
differentiate:

• Decision owners (who actually approves or can block the final decision?)

• Negotiators – or negotiation process setters (like procurement)

• Advocates/Advisors (who have a stake in the outcome and/or might shape the decision criteria)
or process.

Sellers should ask process-setters how the ultimate decision will be made and who will be involved, but
should also treat the assertion of decision ownership by procurement as a hypothesis to be tested,
rather than the settled truth.

Sellers should also work to understand the buyer’s key business requirements and how they were
developed. If the Request for Proposal (RFP) already includes a set of business requirements, ask
questions to clarify where the requirements came from and whether they truly capture the scope of
value in the client’s mind. If no business requirements have been provided, ask for them. Sellers should
seek to understand from buyers how they have understood the interests (goals and concerns) of varied
internal stakeholders – each of whom may believe that their needs are most important. Asking
procurement about the thinking that went into business requirements can sometimes lead to invaluable
conversations and insights about what is truly most important to the internal client(s), and why.

Finally, sellers should think carefully about whether the stated business requirements accurately reflect
all key client interests. An RFP may omit key client interests when procurement fears that naming them
might give away leverage (sharing a desire make a decision quickly, for example). There are also
typically psychological and organizational interests in play: buyers typically want to be treated with
respect, be seen by their internal clients as having done a good job, and avoid feeling exposed for
lacking technical or market knowledge. Since meeting unstated interests can sometimes profoundly
influence both process and outcomes, sellers are wise to craft solutions and deploy communication
tactics that anticipate and meet both unstated interests and stated business requirements.

Shape the Process

Having worked to understand the set-up, sellers can almost always find opportunities to politely
challenge, disrupt, and change the rules of a competitive pitch. Power in negotiation comes from many
different sources—the strength of each side’s no-deal alternatives; the current or future dependence of
one party on another; the power of a uniquely responsive solution; the power of precedents, criteria
and benchmarks; the power to shape the other party’s future reputation or opportunities, and so on.
Facing many competitors doesn’t rob each seller of all power.

Moreover, power is almost always dynamic during a pitch process. A seller can often find leverage at the
precise moment when they are about to enter into a pitch, particularly in situations where their
inclusion is desirable to the client (e.g., an incumbent seller, or one with whom the decision maker has
worked before). Suppose, for example, that procurement’s RFP attaches a standard supply contract
containing onerous, one-sided legal terms and conditions (extended payment terms, unlimited liability
provisions, uncapped consequential losses, claims of ownership to all intellectual property, etc.). Faced
with losing a highly valued seller who is not prepared to accept the unreasonable contract clauses, a
buyer will often make process concessions to that seller, or to all sellers.

As a pitch progresses, the buyer may provide templates and spreadsheets that must be completed in a
very specific and restrictive way (sometimes defined by a narrow or incomplete description of the true
business problem). Sellers may be told that failure to comply within the response format will lead to
disqualification from the pitch. While designed to help procurement to compare responses more easily,
such restrictions can hinder the proposal of value-creating solutions, and sellers can consider three
politely disruptive moves, emphasizing why they might help the buyer to realize greater value:

• Re-imagining the business problem: a seller can fill out the template, while also challenging the
premise of the business problem that the buyer has described in the RFP, and providing a
supplemental, separate response to the problem they believe the client really cares about.

• Offering multiple packages: a seller can provide one response using the format required and
provide several other proposals that might vary scope, staffing, price points, and incentive or
compensation models. Providing MESOs – multiple equivalent simultaneous offers – is an
effective way for sellers to demonstrate creativity and effort in solving problems, to provide a
context for the relationship between price and value, and to uncover true buyer preferences.

• Bypassing communication restrictions: while this move must be considered carefully,

bypassing unreasonable communication restrictions – by speaking to the client directly or cc’ing
the client or decision owner in a summary of understanding, or a summary of what has been
proposed and why – can sometimes help to clarify what is actually most important in a solution,
or whether a requirement is truly critical.
 Toward the end of the pitch process buyers typically narrow the field to a short-list, seeking to maintain
leverage by using aggressive process tactics. They may run eAuctions where price is isolated from all
other issues; or set time deadlines by which final prices must be submitted. This is a moment in the
process when sellers are most at risk; because the sunk costs of pitching, internal leadership
expectations and pressure, and the possibility of winning can lead to significant and unilateral
concessions.

At these moments, sellers must remain disciplined. While remaining confident in their ability to create
value for the buyer, they can also keep their cool by remembering that, at this late stage, it is highly
likely that buyers have already identified a winner and are merely using the other sellers as leverage to
improve on price and terms. This is particularly the case when the purchase is complex and the scope of
value to the buyer of finding the optimal solution is high.

Rather than following passively, sellers can proactively shape the endgame through three moves. First,
sellers can propose a period of exclusive negotiation in which the interests on both sides can be fully
explored, and options enhanced and re-packaged. Second, they can employ deadlines – a time by which
a proposal must be accepted, or by which an award decision must be made – after which the seller
withdraws from the pitch. Finally, after the buyer announces that the work has been awarded, but
before legal contracts have been agreed, sellers can hold back delivery of products or services until key
contract terms have been agreed.

A Fresh Approach Sellers often bemoan the tactics and constraints imposed on them in competitive
pitches. But procurement isn’t going to disappear as a function any time soon, nor should it. While we
can hope that procurement professionals work to enhance pitch processes, sellers must learn in the
meantime to be more proactive participants in approaching, navigating and shaping competitive pitches
in ways that promote mutual gains – rather than pyrrhic victories – for themselves and their clients.
15 pricing strategies and how to set yours

By Cecilia Gillen · July 12, 2023

Hopefully, you enjoy what you do, and that's why you do it. But unfortunately, business
isn't just about doing what you love—it's also about making money. And of course,
making money means pricing your products or services correctly.

For your business to be sustainable, you'll need a pricing strategy that generates
adequate income while also being attractive to customers.

Here's a guide to creating a pricing strategy that will keep your profits moving up and to
the right.

What is a pricing strategy?

A pricing strategy is a plan for setting the best price for your products or services. The
goal is to set a price that will entice customers to buy, but that isn't so low that you're
not making a profit.

Sure, you could just trial-and-error a bunch of prices until you find the price that
maximizes profit without deterring potential customers—and there will probably still be
some of that even after you choose a pricing strategy for your business. But you'll spend
a lot less time and money starting with a pricing analysis than you will taking a complete
shot in the dark.

15 common pricing methods and examples

Your core pricing strategy has to do with what you're selling: a luxury, a bargain, or just a
good product for a good price. Once you have that figured out, you'll move on to
choosing a pricing method, which is the how of your pricing strategy.

Pricing methods are sort of like plays in a playbook. Your product probably isn't going to
switch from being a luxury to a bargain and back again, but you can (and, in some cases,
should) switch up the pricing method you're using to better meet your market demands.

Here, we'll look at 15 of the most common pricing methods, plus how and when to use
them.

1. Value-based pricing

The first pricing method is probably the one you're most familiar with: value-based
pricing. You might think of it as the "default" pricing method since it consists of finding
what the customer is willing to pay (the WTP price), making sure it's higher than the cost
of production, and setting your price somewhere in between.
If you need to make a price adjustment, you can do so as long as the new price falls
within the WTP range. If the new price surpasses this range, you'll need to explore
avenues to expand the WTP range. You can do this by incorporating additional value into
your product or service to increase the customer's willingness to pay the new price.

Takeaway: Charge what you can without turning o the customer to your product.

2. Cost-plus pricing

A very similar method to value-based pricing is cost-plus pricing. Instead of basing

prices on what the customer is willing to pay, businesses set prices by determining the
cost of production and their ideal profit margin. For example, if a product costs $100 to
make and a company's target margin is 15%, then the product will sell for $115.

Cost-plus prices still need to fall within the WTP range, but they're not chosen based
specifically on what the customer is willing to pay. If the cost-plus price falls outside the
WTP range, the company either needs to adjust its target margin or find a way to lower
production costs.

Takeaway: Ensure all costs are covered and don't keep you from reaching your desired
profit margin.

3. Competitive pricing

Another recognizable pricing method is the competitive pricing model, in which a

business sets prices based on what competitors charge for comparable products. If
your product o ers something your competitors don't, you don't always need to set
prices competitively. But if you're selling a bargain product, you need to be able to beat
the competition.

When Norm McLaughlin formulated the pricing model for his business, Norm's
Computer Services, he decided that he wanted to be considered competitive but not
cheap. That meant his pricing was on par with his peers, but he avoided the use of any
terminology like "budget," "cheap," or "cheapest" in his small business's marketing.
One of the things he tried early on was o ering the first 15 minutes of work free of
charge—if he solved the issue within that first quarter of an hour, the job would be
completely free. It worked. Clients told him they wanted to pay even if he solved the
issue in under 15 minutes because they didn't feel good about paying nothing for a
service that involved someone coming to their home. It was an attractive o er that
increased his competitive edge without negatively impacting his bottom line.

Takeaway: Maintain or gain market share from your competitors.

4. Economy pricing

Similar to competitive pricing, economy pricing involves setting the lowest prices
among your competitors to attract bargain buyers. But unlike competitive pricing,
economy pricing specifically targets people who will consciously sacrifice quality in
exchange for a cheaper price. Knowing this, you can source cheaper supplies, eliminate
extra features, and make other changes to lower your production costs so that you can
o er extremely low prices while continuing to make a profit.

The fast fashion industry is infamous for its reliance on economy pricing. Clothes are
created quickly using cheap (and often ethically questionable) labor, and they wear out
quickly. This allows stores to sell highly trend-conscious clothing, since customers
need to replace their clothes more frequently. Unfortunately, it also causes major
environmental damage—and usually doesn't even save customers money compared to
buying more expensive but longer-lasting clothing.

Takeaway: Attract price-sensitive customers while achieving high sales volume and cost
e iciencies.

5. Penetration pricing

As a new business, you may find that you need to set your prices toward the lower end
of the spectrum. Penetration pricing is when a business sets the price of a product or
service low at the beginning, then raises the price once the company is more
established.
Businesses that provide a service can draw customers in with low pricing, then win their
loyalty with great service. Introductory o ers can be a great way to entice new clients or
customers. For example, you could o er a fixed price or percentage o the first job, or a
portion of free labor. At least one of Norm's competitors o ered a 10% reduction on
labor for returning customers. In Norm's view, a better approach to customer retention
was to o er them that 10% o the first job—and then do such good work that they
wouldn't mind paying the full price for subsequent jobs.

Takeaway: Gain market share and attract customers quickly with low initial prices, then
raise prices once you've established a strong customer base.

6. Dynamic pricing

Have you ever pulled out your phone intending to grab a rideshare on a busy weekend
night or (I wince just thinking about it) a holiday? Those jaw-dropping price surges are
the result of what's called dynamic pricing, or pricing that changes fluidly according to
availability and demand.

Truly dynamic pricing requires an algorithm that can automatically adjust prices
according to purchasing activity. Uber's CEO isn't sitting behind a Wizard of Oz curtain
declaring price surges; the app automatically increases prices when demand is higher
than the number of drivers on the road. A less immediate version of dynamic pricing can
be seen at the gas pump, where prices change frequently in response to demand but
aren't automatic (in some states, like New Jersey, they can't change more than once per
day).

For small businesses, dynamic pricing works best with services or custom products
that require a price quote, since customers expect prices to be di erent depending on
the project and circumstances. If your prices are listed on your site and you change
them constantly, you'll drive away potential customers who perceive you as
unpredictable or unreliable.

Takeaway: Maximize revenue while adjusting for real-time factors like demand,
competition, and market conditions.

7. Price skimming
Price skimming is the opposite of penetration pricing, where you start by setting the
maximum price and gradually lower it over time. This strategy works best with products
that have major releases, like laptops or cars. By price skimming, you'll be able to
capture early buyers willing to pay top dollar for the latest and greatest; then, as you
gradually lower the price, you'll be able to sell the maximum number of products at
each price before dropping it again.

One of the most well-known price skimmers is Apple, which has made its product
launches into full events with tickets and fans to build as much hype as humanly
possible. Mega-fans buy the newly unveiled products the moment they're available,
even waiting in lines overnight outside Apple Stores to do so. As each new product is
released, the older models get shunted down the pricing ladder to capture buyers with
lower WTP points.

Takeaway: Capture early adopters and maximize revenue with high initial prices before
gradually reducing prices to attract more price-sensitive customers.

8. Hourly pricing

Often used in service-based industries, hourly pricing establishes prices based on the
time spent on a particular task or service. This aligns the price directly with the e ort or
resources dedicated to the project. It's a straightforward method for you and the client
to understand and agree upon the service's value.

Having said that, if your projects' complexity or required resources vary quite a bit, a flat
hourly rate may not be best for your business.

Takeaway: Ensure customers are billed fairly based on the actual hours worked.

9. Project-based pricing

Project-based pricing is also common in service-based industries. This method

determines prices based on the scope, complexity, and resources required for each
project. Rather than charging a fixed or hourly rate, companies assess the unique needs
of each project and provide a tailored quote. That way, businesses are accounting for
factors like resources, expertise, and time commitment required to complete the
project successfully.

This pricing model is common for architects. When a client approaches an architecture
firm with a request to design and construct a building, the firm will assess the project's
scale, complexity, materials, and other specific requirements to provide a project-
based quote. Obviously, the process and requirements for designing a public bathroom
vs. a skyscraper will be very di erent, beyond just time discrepancies.

Takeaway: Make sure profitability and e ort are accounted for in your pricing structure.

10. High-low pricing

I've taught all my loved ones that we don't walk into Michael's without a coupon or buy
anything at JOANN that hasn't been marked down to at least 40% o .

These stores use high-low pricing, where they o er products or services at a higher
price initially and periodically discount them. This approach attracts price-sensitive
customers who are motivated by discounts (me) while also maximizing revenue from
customers willing to pay higher prices to get their hands on the product before it starts
flying o the shelves once it's been discounted.

Companies can maintain a balance between profitability and reaching a larger range of
customers by driving tra ic to their stores or websites during promotional periods.

Takeaway: Create a perception of value to encourage customer purchases.

11. Bundle pricing

You've probably seen the Progressive commercials practically begging you to bundle
your car and home insurance for a better deal. Or maybe you bundled your cable and
phone services back in the day.
Bundle pricing is when a company combines multiple products or services and o ers
them at a lower overall price than what each item would individually cost. This creates a
perception of added value, convenience, and savings for customers. If you sell a lot of
small items or are trying to spread the love to an overlooked service, this pricing strategy
may help you increase your sales.

Takeaway: Sell items together in a package deal that's slightly cheaper than if you were
to sell the items individually to increase sales and customer satisfaction.

12. Geographic pricing

I follow a candy shop on TikTok with the most delicious-looking candy I've ever seen.
They're located in the U.K. and I'm in the U.S., which means I'd have to pay outrageous
prices to account for the shipping costs.

Geographic pricing involves setting prices based on di erent geographic regions or

markets, considering factors like local market conditions, competitive landscape, and
transportation costs like shipping. While this strategy makes it harder for a candy lover
like me to get their hands on some delectable sweets, if you want to expand outside of
your own geographic region, this strategy may be inevitable to keep your profits stable.

Takeaway: Maintain profitability across all your geographic markets by adjusting for
variable factors.

13. Psychological pricing

A book priced at $20? I'll pass. A book for $19.99? I'll take 10. This common
phenomenon that we all fall for time and time again is called psychological pricing. Also
known as charm pricing, this strategy leverages consumers' perceptions and emotions
to make them think they're getting a better deal than they actually are.

Making the price seem more appealing or a ordable to customers e ectively influences
customer behavior and increases sales, even if the price di erence is negligible (and
even if the customer knows in their heart of hearts that it's negligible). You can combine
this strategy with another method since it's a common standard in many industries.
Takeaway: Create the illusion of a lower price so customers perceive your price as fairer.

14. Freemium pricing

If you're like me, you started out with the free version of Spotify until the ads were so
grating on your soul that you gave in and shelled out the cash for the paid ad-free
version. This method of o ering a basic version of a product or service for free and
charging for additional premium features or advanced functionality is called freemium
pricing.

By o ering a free version, companies can give customers a taste of the value their
product or service o ers, build brand awareness, and create a larger user base. They
then monetize their user base with an enhanced experience for a subscription fee or
one-time purchase. If you're new to the market, this is a great way to get buy-in from
people who would otherwise be unwilling to convert.

Takeaway: Attract a large user base and convert some into paying customers.

15. Premium pricing

Some people enjoy the prestigious vibe and social appearance of luxury brands. For
example, luxury car companies, like BMW or Mercedes-Benz, position their vehicles as
high-end, o ering advanced technology, luxurious interiors, and superior performance.
(Although I'd love to see what they have that my Honda CR-V doesn't.)

With those high-end features comes a high-end price tag, otherwise known as premium
pricing. This strategy positions the company as exclusive and superior in value in
comparison to lower-priced competitors. It appeals to a target market willing to pay a
premium for the perceived benefits. If that's your target market, then this is your ticket.

Takeaway: Target a luent customers and generate higher profit margins.

You likely know o the bat that you'll need to consider your own business costs and
competitor prices so that you can find a price that earns a profit but isn't so high that it
drives potential customers to other businesses with better deals. But unfortunately, it's
not that simple: there are a lot of factors you'll need to consider in order to determine
the best pricing strategy for you.

Cost

I know I just said cost wasn't the only factor to consider, but it is the most important one
to start with. If your prices aren't higher than your costs, you'll be out of business before
you even get your company o the ground.

When calculating costs, make sure you include:

Product materials

Employee wages (that includes what you pay yourself!)

Overhead costs (rent, insurance, utilities, taxes, etc.)

Software and services for things like accounting, marketing, and legal

Shipping and transportation

Economic factors

When costs change, your prices will have to change in order to stay competitive and
keep making a profit. Businesses that rely directly on commodities as supplies—so
things like lumber, oil, and metals—will be most vulnerable to economic fluctuations,
but all industries are a ected in some way or another by global, political, and social
changes.

Conduct thorough research to identify what economic conditions your business thrives
in, and recession-proof your business. Be proactive about anticipating events that could
a ect your supply and demand. You especially need to incorporate a safety net into
your profit margins to ensure you have enough funds to stay in business during slow
periods if you're in a more temperamental industry.

Competitor pricing

Your prices don't always need to be lower than your competitors', but if they're higher,
you need to be able to justify it with added quality. Your products don't always need to
be quality, but if they're low-quality, you'll need to be able to justify it with lower prices.
Where you fall on either side of this trade-o determines your value position, which we'll
discuss in a bit. But no matter how you decide to position your product, you'll need to
stay up-to-date on what your competitors charge, pricing trends in your industry, and
what pricing models work best for your market.

It's usually not di icult to find out what your competitors charge—either by visiting their
websites or by calling them to ask. As you gather information for your competitor
analysis, keep a spreadsheet where you can record prices and note things like
introductory o ers, loyalty programs, and discounts.

Positioning

It's a common misconception that businesses have to sell good-quality products to be

successful. There are buyers at every price and quality level; what matters is how your
product quality and price are positioned with respect to each other.

One of the easiest industries for demonstrating this concept is the airline industry,
because there's no way to mistake the di erence between a high- and low-quality
purchase when there's a literal curtain dividing them. Normally, price and quality will
align with one another. First-class tickets o er high quality at a high price, economy
tickets o er low quality at a low price, and everyone else gets piled into coach.

Value prices occur when quality is higher than price—when you fly during o -peak
times or get upgraded to first class for free. When demand is high and seats are limited,
the airlines can a ord to charge higher prices for lower-quality seats, counting on the
fact that you'll pay full price for a terrible seat if it's your only option.
When you apply this to your own pricing, ask yourself what kind of value your product or
service o ers. Are you solving an urgent problem, or is your product more for comfort
and enjoyment? If you sell a first-class product, you'll lose money by selling it at
economy prices. If you sell an economy product, you'll need to sell it for a bargain price.

As you start o in business, it's important to remember that you can change your pricing
strategy as you go along. This is a marathon, not a sprint, so it's more about building a
client base of satisfied customers who will come back to you again and again than it is
to make as much money as possible as quickly as possible.

And the good news is that you don't have to get everything right from the very beginning.
You can try di erent approaches and make adjustments as you go until you're achieving
the outcomes you want. To continue optimizing for success, learn how you can
automate your small business.
Canadian Pricing Strategy for a New Point-of-Care Testing System

Medical device description: A point-of-care/ near patient testing (POCT/NPT) system

comprised of an analyzer, test cartridges, and consumables. Designed to enable better
patient care by providing faster, easier access to lab results within clinic and physician
o ice settings compared to traditional core lab based testing.

Medical device country of origin: USA

Business challenge/ Project objective: The medical device manufacturer commissioned

our services to recommend a pricing strategy that factored in Canadian market specific
drivers such as healthcare policies, customer practices, payor and reimbursement
mechanisms, and competitive forces. The objective was to recommend a pricing
strategy that would maximize and optimize sales and profits for the manufacturer in
Canada.

Our actions: We undertook a Canadian pricing study encompassing desktop research,

primary research, voice of the customer, procurement environment research,
reimbursement environment research, competitive analyses, clinical and economic
value analyses, and proprietary price models.

Project outcomes: The project outcome was a comprehensive pricing strategy

comprised of multi-tier pricing recommendations for both the overall POCT/NPT system
and its individual components. Our recommendations allowed the medical device
manufacturer to maximize its sales and profits in the diverse scenarios presented by
both Canada’s RFP and private procurement markets. As a testimony to the value of this
approach, our Canadian market targeted recommendations ended up being di erent
from what the manufacturer would have assumed based on its experiences in other
world markets. The manufacturer accepted our recommendations and implemented
them for their device launch in Canada to great market success.
Key takeaways:

Canada’s healthcare policy, procurement, reimbursement, payor, customer, and

competitive environments and processes can be quite distinct and unique compared
to other world markets

In order to maximize sales and profits from the Canadian market operations, it is
important for any medical device manufacturer to tailor their commercial strategies to
the Canadian market conditions

Important policy note: It is always our policy to protect our clients’ confidential
information . Given the highly competitive nature of the MD&D market, our clients need
us to keep their strategic project investments made with our firm as confidential . For
this reason, we do not publish client identification information in our case studies. If
required, we would be pleased to arrange for client references from this project for
prospective clients, provided the prospective clients do not have a conflict of interest
with this project’s client.
E ective Price: Understanding Competitive Pricing in Procurement

Introduction to Competitive Pricing

Welcome to our blog post on “E ective Price: Understanding Competitive Pricing in

Procurement”! In today’s fast-paced and ever-evolving business landscape, staying
ahead of the competition is crucial for success. And when it comes to procurement,
one of the key factors that can give you a competitive edge is pricing.

Competitive pricing in procurement refers to setting prices strategically to gain an

advantage over rivals while maximizing profitability. It involves analyzing market trends,
understanding your competitors’ pricing strategies, and leveraging that knowledge to
make informed decisions.

In this article, we will delve into the benefits of competitive pricing in procurement,
examine the factors that a ect it, explore successful case studies, and highlight some
challenges and risks involved. So grab a cup of co ee and let’s dive right in!

Benefits of Competitive Pricing in Procurement

Benefits of Competitive Pricing in Procurement

Competitive pricing in procurement o ers numerous advantages for businesses. It

helps to drive down costs by encouraging suppliers to o er the best possible prices. By
fostering competition among suppliers, businesses can negotiate better deals and
secure cost savings that directly impact their bottom line.

Competitive pricing ensures transparency and fairness in the procurement process.

When multiple suppliers are vying for a contract, the selection is based on objective
criteria such as price and quality rather than personal biases or favoritism. This
promotes healthy competition and prevents any potential corruption or unethical
practices.

Furthermore, competitive pricing allows businesses to access a wider pool of suppliers.

With more options available, companies have greater flexibility in choosing partners
who align with their specific requirements and objectives. This variety also stimulates
innovation within the supplier base as they strive to di erentiate themselves from
competitors.

In addition, implementing competitive pricing strategies enables businesses to stay

ahead of market trends and fluctuations. Constantly monitoring the market and
evaluating competing o ers provides valuable insights into industry standards and
benchmarks which can inform future purchasing decisions.

Adopting competitive pricing practices enhances overall e iciency in procurement

operations. It encourages continuous improvement as both buyers and suppliers
constantly seek ways to optimize processes, reduce waste, enhance quality control
measures, and streamline delivery schedules.

Embracing competitive pricing brings significant benefits including cost

reductions,resulting from increased competition among suppliers,fairnessand
transparencyin vendor selection,wider choiceof partners,informed decision-
makingbased on market trends,and enhancede iciencies throughoutthe procurement
process

Factors that A ect Competitive Pricing

Factors that A ect Competitive Pricing

When it comes to competitive pricing in procurement, there are several factors that can
influence the final price you o er. Understanding these factors is crucial for ensuring
e ective price strategies and maximizing your chances of winning contracts.

One key factor is the cost of production. This includes direct costs such as raw
materials and labor, as well as indirect costs like overhead expenses. By accurately
calculating your production costs, you can determine a competitive yet profitable price
point.

Market demand also plays a significant role in pricing decisions. If there is high demand
for a particular product or service, you may be able to set a higher price and still attract
buyers. On the other hand, if there is low demand or intense competition, you may need
to lower your prices to remain competitive.

The pricing strategies employed by your competitors can also impact your own pricing
decisions. If they have significantly lower prices or o er additional value-added
services, you may need to adjust your prices accordingly to stay ahead.

External factors such as economic conditions and industry trends should also be taken
into account when setting prices. For example, during periods of economic downturns
or recessions, customers may be more price-sensitive and require lower prices to
stimulate sales.

Understanding customer behavior and preferences is essential in determining the right

price point. Conducting market research and analyzing customer data will help identify
what customers are willing to pay for certain products or services.

By considering all these factors together with an emphasis on profitability and market
competitiveness, businesses can develop e ective pricing strategies that meet both
their goals and customer expectations.

Understanding the Market and Your Competition

Understanding the Market and Your Competition

In order to implement e ective competitive pricing strategies in procurement, it is

crucial to have a deep understanding of the market dynamics and your competitors.
This knowledge will give you the edge needed to set prices that are both attractive to
customers and profitable for your business.

Conducting thorough market research is essential. This involves analyzing factors such
as customer preferences, demand patterns, and industry trends. By gaining insights
into what drives purchasing decisions in the market, you can tailor your pricing
strategies accordingly.
Moreover, studying your competition is equally important. Take the time to identify who
your main competitors are and analyze their pricing models. Are they o ering lower
prices or unique value propositions? Understanding how they position themselves in
the market can help you determine where you stand in comparison.

Another key aspect is staying updated on any changes happening within your industry.
Keep an eye on new entrants, mergers or acquisitions, as these events can significantly
impact competitive pricing dynamics.

Additionally, monitoring customer feedback and reviews about both your

products/services and those of competitors can provide valuable insights into how
price influences buying decisions. It’s essential to understand what customers perceive
as value for money when making purchasing choices.

By continuously evaluating market conditions and keeping a close watch on competitor

activities, you will be better equipped to make informed pricing decisions that attract
customers while maintaining profitability.

Remember: understanding the market landscape helps position yourself strategically

against competition!

How to Implement Competitive Pricing Strategies

Implementing competitive pricing strategies in procurement is crucial for businesses

looking to gain an edge in the marketplace. Here are some e ective tactics to consider:

1. Understand your costs: Before setting prices, it’s important to have a clear
understanding of your costs and expenses related to the product or service. Calculate
direct costs, overheads, and any additional expenses that might impact pricing
decisions.

2. Analyze market dynamics: Conduct thorough research on market trends, including

competitor pricing and consumer demand. This will help you identify opportunities for
di erentiation and set competitive prices accordingly.
3. Set clear objectives: Define your pricing goals based on factors such as profitability
targets, market share growth, or customer acquisition. Aligning these objectives with
your overall business strategy will guide your pricing decisions.

4. Segment customers: Not all customers have the same purchasing power or
willingness to pay. By segmenting your target audience based on their needs and price
sensitivity, you can tailor pricing strategies that maximize revenue from each segment.

5. Utilize dynamic pricing: Consider implementing dynamic pricing techniques where

prices can be adjusted in real-time based on factors like demand fluctuations or
inventory levels.

6. Monitor performance continuously: Regularly evaluate the e ectiveness of your

chosen pricing strategies through key performance indicators (KPIs) such as sales
volume, profit margins, customer satisfaction levels, etc., making necessary
adjustments as needed.

By implementing these strategies e ectively, businesses can find the sweet spot
between attracting customers with competitive prices while ensuring profitability and
long-term success in procurement activities.

Case Studies of Successful Implementation of Competitive Pricing

Case Studies of Successful Implementation of Competitive Pricing

Let’s take a look at some real-life examples where competitive pricing strategies have
been successfully implemented in procurement. These case studies provide valuable
insights into the e ectiveness of such strategies and o er inspiration for businesses
looking to optimize their pricing practices.

One notable example is Company A, a leading manufacturer in the automotive industry.

In order to stay ahead of their competition, they conducted extensive market research
and analyzed customer preferences. Armed with this knowledge, they were able to
identify areas where they could lower prices without compromising quality or
profitability.

By strategically adjusting their pricing structure, Company A was able to attract more
customers and increase market share significantly. Their ability to o er competitively
priced products gave them an edge over competitors who failed to adapt their pricing
strategies e ectively.

Another case study worth mentioning is Company B, an e-commerce retailer

specializing in consumer electronics. Aware of the fierce competition in this sector, they
employed dynamic pricing algorithms that continuously tracked competitor prices and
adjusted theirs accordingly.

This dynamic approach allowed Company B to consistently o er lower prices than its
rivals while still maintaining healthy profit margins. As a result, they experienced
substantial growth and became a dominant player in the online electronics market.

These success stories highlight how competitive pricing can be leveraged as a powerful
tool for achieving business objectives. By understanding market dynamics and
evaluating your competition carefully, you can devise e ective price strategies that drive
revenue growth and enhance competitiveness.

In conclusion,

the implementation of competitive pricing has proven successful across various

industries by helping companies gain a competitive advantage and achieve business
goals e ectively.

Challenges and Risks of Competitive Pricing in Procurement

Challenges and Risks of Competitive Pricing in Procurement

When it comes to competitive pricing in procurement, there are certainly challenges

and risks that businesses need to be aware of. One major challenge is the constant
pressure to lower prices in order to win contracts. While this can attract customers
initially, it can also lead to diminished profit margins over time.

Another challenge is maintaining quality while keeping prices competitive. Cutting costs
too much can result in a decrease in product or service quality, which may ultimately
damage a company’s reputation.

Additionally, the risk of price wars should not be overlooked. In an attempt to outdo
their competitors, companies might engage in aggressive undercutting tactics that
could potentially drive down prices across the entire market.

Managing supplier relationships is yet another challenge when implementing

competitive pricing strategies. Negotiating favorable pricing terms with suppliers
requires careful balance and thorough understanding of market dynamics.

Staying updated on changing market conditions and competitor moves is essential for
e ective competitive pricing. Failure to monitor these factors could result in being
caught o guard by sudden shifts or industry disruptors.

Navigating these challenges and mitigating associated risks requires strategic planning,
accurate forecasting, ongoing monitoring of cost structures, and continuous analysis of
customer demands and preferences.

Conclusion: The Importance of E ective Price in Procurement Success

Conclusion: The Importance of E ective Price in Procurement Success

In today’s highly competitive business landscape, the importance of e ective pricing

strategies cannot be overstated. Companies that can e ectively navigate the
complexities of market dynamics and implement competitive pricing strategies are
more likely to achieve procurement success.

E ective price plays a crucial role in procurement as it directly impacts both the cost
savings and profitability of an organization. By setting the right price for goods or
services, businesses can attract customers, increase sales volumes, and gain a
competitive edge over their rivals.

Implementing a competitive pricing strategy requires careful consideration of various

factors such as understanding the market trends, analyzing your competitors’ pricing
strategies, and evaluating internal costs. By taking into account these key factors,
organizations can develop pricing models that strike a balance between a ordability for
customers and profitability for themselves.

Case studies have shown that companies who successfully implement competitive
pricing strategies reap significant benefits. For example, Company A was able to
increase its market share by o ering prices lower than its competitors without
compromising on quality. This resulted in higher sales volumes and increased customer
loyalty.

However, it is important to note that implementing competitive pricing does come with
challenges and risks. One major challenge is ensuring accurate data analysis to set
optimal prices while considering changing market conditions. Additionally, there may
be potential risks associated with undercutting competitors too much or engaging in
price wars which could lead to reduced profit margins.

To mitigate these challenges and risks, organizations should continuously monitor

market trends through comprehensive research and competitor analysis. Regularly
reviewing and adjusting prices based on changing dynamics will help maintain
competitiveness while maximizing profits.

In conclusion (tweak): In today’s dynamic business environment where competition is

fierce across industries; having an e ective price becomes paramount for successful
procurement outcomes! Organizations must strive towards developing sound pricing
strategies by thoroughly understanding market dynamics; analyzing competition
meticulously; & evaluating their internal costs judiciously! Implementing such strategic
approaches would not only attract customers but also boost sales volume; thereby
ensuring a competitive edge over rivals! The significance of e ective pricing strategies
Pricing Case Study: The Dark Side of Costco's Pricing Strategy

A combination of self-imposed low markup and an outsized reliance on membership

dues leads to heavy-handedness and detracts from the experience of customers,
employees, and suppliers.

UTPAL DHOLAKIA

SEP 08, 2023

Having been a Costco member and a regular shopper for many years, I can attest to the
fact that the overall buying experience at Costco is pretty good, from the high quality of
Kirkland Signature products to the flea market feel of discovering and trying seasonal
and limited-time items on sale, to the low prices and exceptional value of the
purchases. (Some aspects, like the teeming crowds, the long checkout lines, and the
struggle for parking, are put-o s, but they are understandable and perhaps even
validate the choice to shop at Costco).

As someone who’s interested in pricing strategy, I am also an “informed fan” of the

synergy and customer orientation behind Costco’s pricing strategy. I’ve written
previously about various aspects of Costco’s pricing strategy, such as its exemplary use
of a two-part pricing approach to create a highly appealing, di erentiated o ering, the
e ectiveness of its hot dog and soda’s iconic $1.50 price point, and its inadvertent but
e ective use of a price vocabulary to generate customer loyalty.

The Pricing Conundrum is a reader-supported publication. To receive new posts and

support my work, consider becoming a free or paid subscriber.

However, when you consider the Costco shopping experience closely as a customer,
some distinctly jarring pain points can emerge. On one shopping trip several years ago,
for example, I forgot my Costco membership card and had to leave a full cart of
groceries unattended and walk over to the membership desk to validate that I was a
Costco member. That’s because the cashier refused to check me out without proof of
membership. It took me an extra hour or so to complete my Costco trip that day.

Another time, we went shopping with family members at a Costco store in their town.
When the time came to check out, my relative wanted to pay, but Costo refused to take
their money (the only instance of a retailer doing this I’ve experienced). The cashier
made us feel uncomfortable and tried to sell a membership to my family member. In the
end, I ended up paying for the purchases after undergoing another membership
validation exercise. Other members have had similar experiences.

Under the soft, gooey kumbaya fandom that surrounds the Costco brand like a halo,
there are some hard, spiky edges in how Costco treats its customers members. Its
suppliers and employees also don’t always fare as well as they could.

As I want to explore in this post, these negative experiences directly have to do with
Costco’s pricing strategy, particularly the way it has chosen to execute its price
structure. (Here’s more on price structures; for more on price execution, see my post on
the Value Pricing Framework). The dark side of Costco’s pricing strategy provides useful
core lessons about the complex relationship between price structures and customer
experience.

Costco’s membership-markup pricing model

Costco is the poster child for the two-part pricing model that I call the “membership-
markup” pricing model. It has one of the more straightforward and simple-to-explain
price structures in retailing that is very e ective.

Membership fee. Costco’s customers have to sign up and pay an annual membership
fee on a subscription basis for the right to purchase products in its warehouses and
online. The membership fee is currently $60 for a regular membership, also called the
Gold Star membership, and $120 for an executive membership, which returns the user a
2% cash refund on purchases every year, further increasing their shopping commitment
to Costco. Costco incurs some costs to administer the customer’s membership (e.g.,
making a card when the customer joins), but that’s about it. The membership fee is the
high-margin component of Costco’s price structure.

Markup. Costco uses a dual-impact restricted markup pricing approach on product

sales to o er significantly lower prices than the competition. The dual impact is from
relatively smaller markups on relatively lower prices paid directly to manufacturers for
buying in bulk. As famously reported, the first prong is the restrictive and relatively low
markups that the company has held on to for decades:
Costco has to be lean because Brotman and Sinegal long ago established a rule that no
branded item could be marked up more than 14% and no Kirkland Signature item more
than 15% over cost. It is an inviolate line: the very value proposition of the company.

The second prong of the markup pricing is the low purchase prices from suppliers. This
price structure is well-di erentiated from its direct competitors, as discussed below,
but it is no secret. As Costco explains at the very beginning of its 2022 Annual Report:

“O ering our members low prices on a limited selection of nationally-branded and

private-label products in a wide range of categories will produce high sales volumes and
rapid inventory turnover. When combined with the operating e iciencies achieved by
volume purchasing, e icient distribution and reduced handling of merchandise in no-
frills, self service warehouse facilities, these volumes and turnover enable us to operate
profitably at significantly lower gross margins (net sales less merchandise costs) than
most other retailers.”

Bryne Hobart summarizes the membership-markup model this way:

Costco, for example, chooses to make money from memberships instead of on a per-
product basis—and doing so lowers the customer's marginal cost, conditional on their
sending Costco enough business to amortize the fixed cost of opening giant
warehouses and keeping them well-stocked. (This model has the added benefit of
leading to high inventory turnover, and producing the kind of scale that lets the buyer
negotiate aggressively with suppliers.)

The profit levers of Costco, Walmart and Target

We can compare Costco’s membership-markup pricing to the more standard markup

method used by Walmart and Target to get a sense of the importance of membership
fees to each retailer. Although I included Amazon in my initial set, Amazon has a more
complex price structure, it loses money (a lot!) from product sales, it has negative gross
margins, and it doesn’t reveal data about memberships (which deliver di erent values
like Thursday Night Football games). Combined with its technology positioning and the
weight of its AWS and digital advertising divisions, I concluded that Amazon is not
comparable to Costco, Walmart, and Target for the present discussion.
Costco’s numbers: I calculated the two profitability drivers (membership fees and
margin from sales) of Costco’s membership-markup pricing model from the information
in its latest 10-Q report. For the three months ending May 7, 2023, Costco reported
sales of $52.6 billion, revenue from membership fees of $1.04 billion, and operating
expenses of $52 billion. Essentially, Costco earned a gross margin of 10.3%, meaning
that 62% of its operating income was derived from membership fees, while the rest
came from product sales. This is no anomaly. Over all of 2022, Costco’s gross margin
was 10.5%, and membership fees contributed to 54% of its operating income.

Walmart’s numbers: This is in stark contrast to its most comparable competitor,

Walmart. Walmart reported sales of $160.3 billion in the latest quarter that ended on
July 31, 2023. Its cost of sales was $121.9 billion, resulting in a much healthier gross
margin of 24%. Its membership revenue was about $1.3 billion (from Sam’s Club and
Walmart+ memberships), contributing about 18.4% to operating income. Walmart is
making far more money by marking up its merchandise higher and relying far less on
membership revenues than Costco.

Target’s numbers. Unlike Walmart and Costco, Target doesn’t report membership
revenue separately because it doesn’t o er memberships in any meaningful way. In its
most recent quarter, which ended July 29, 203, Target reported sales of $24.4 billion and
cost of sales of $17.8 billion. Its gross margin of 27% was the highest of the three
retailers.

Reliance on membership revenue for Costco, Walmart, and Target, 2023.

The table shows the di erences between Costco and its main competitors. Costco is
able to sustain a significantly low gross margin because it supplements revenue from
memberships. The table also confirms that Walmart and Target practice a traditional (to
retail) form of markup pricing with substantially higher markups. Costco practices a
di erent membership-markup pricing strategy that relies heavily on memberships.

Both pillars of Costco’s strategy, a self-imposed low gross margin and a heavier reliance
on membership revenue to generate profit, have negative repercussions for Costco’s
constituents, including customers, frontline employees, and suppliers. This is the dark
side of Costco’s pricing strategy I want to explore further.
What price realization and plugging the price realization gap mean for Costco’s
constituents

The ultimate success of any pricing strategy, no matter how harmonious and
di erentiated it is, lies in price execution. The company must minimize the gap between
the asked-for price and the realized price. Membership and markup each bring distinct
challenges to realizing price for Costco.

Because Costco depends so heavily on membership revenue for profit, its price
realization has a lot to do with managing membership sales, ensuring that it keeps
signing on more paying members any way it can. It must build a wall to keep non-
members out while concurrently o ering them a gate to let them in and become active
dues-paying members. Instead of unit sales or sales revenue, Costco’s primary
profitability metrics are the size of its membership base and its churn rate. Costco is
more similar in its price execution objectives to Netflix than it is to Walmart.

This is where it gets interesting, and we get to the main point behind the dark side of
Costco’s pricing strategy: For Costco, managing memberships to realize price
necessarily requires making some hard and unpleasant customer experience
decisions. It means policing, denying, requiring hoop-jumping, being rude, and cracking
down ruthlessly and repeatedly, all for the purpose of keeping non-members out,
encouraging non-members to sign on and getting current members to renew. None of
these goals are possible without injecting a significant degree of unpleasantness into
the shopping experience of members and the working experience of frontline
employees.

Here are three specific methods that Costco uses actively to manage its memberships
and protect its profits that illustrate this point. To explore them vividly, I have provided
posts from Costco’s customers and employees from the r/Costco subreddit. (Note:
Each post is linked if you want to go down a rabbit hole and read the comments).

1. Cracking down on membership sharing

In its economic impact, membership sharing is as much of a problem for Costco as

password sharing is for Netflix, or even more. When people share their membership
with others, whether it is family members, neighbors, acquaintances, or just random
strangers that they met in the store, it is a profit leak for Costco, pure and simple.
Costco tries to plug this leak throughout the shopper’s journey, but especially at the
beginning and end, when the shopper enters the store and when they check out, in ways
that are unavoidably unpleasant to customers and not always fair. In the stories below,
customers report being disrespected, treated like shoplifters, accused, shouted at,
humiliated, and harassed by employees. You can see just how awful the policing
experience can be for everyone involved.

2. Policing self-checkout

Another profit leak that can occur is when non-members try to game the system and
purchase Costco products in the store or through another channel. The most recent
example is self-checkout. So it’s not surprising that Costco has now implemented strict
procedures to check not only membership cards but also photo identification of the
shopper to ensure that only members can use self-checkout. Costco’s spokesperson
told a Wall Street Journal reporter in June:

“Since expanding our self-service checkout, we’ve noticed that nonmember shoppers
have been using membership cards that do not belong to them. We don’t feel it’s right
that nonmembers receive the same benefits and pricing as our members.”

Costco’s executives “don’t feel it’s right” because this shopping behavior is a significant
profit leak for their membership-markup pricing model. The truth is that most members
don’t care about this issue, and if anything, the policing activities by employees slow
down the checkout lines and degrade the self-checkout experience of Costco’s
members. It’s noteworthy that neither Costco’s shoppers nor its employees like the
policing, as the following stories illustrate:
3. Upselling Executive memberships

A third approach to managing memberships that will appear familiar to pricing

practitioners is upselling current customers from the cheaper Gold Star membership to
the more expensive Executive membership. It’s classic trading up in a Good-better-best
price structure.

Furthermore, the economics of Costco’s profitability discussed earlier means that a

customer buying the Executive membership will be far more profitable to Costco than a
regular member, regardless of how much they purchase over the course of the year.
Each Executive member contributes $60 more to the bottom line at the outset and then
approximately 8% gross margin for their purchases, which are presumably more than
those of a regular member. But even if they are the same or less, Costco still comes out
with a higher aggregate profit.

In services marketing, upselling activities by employees rarely provide a pleasant

experience for customers. It is no di erent for Costco customers and employees, as the
following stories illustrate. The first one describes a pushy Costco membership services
employee, leading to “the worst taste of Costco to date.” The second post mocks the
e orts of a gas station attendant trying to sell an Executive membership.

What “operating e iciencies achieved by volume purchasing” mean for Costco’s

constituents

As we saw earlier, Costco attributed the operating e iciencies it achieved by purchasing

in volume as a significant component of its business strategy that contributes to
successful outcomes. This is the “markup” piece of its membership-markup pricing
model.

While Costco deliberately chooses to accept a low gross margin as a pillar of its
harmonious pricing strategy, its suppliers are forced to tag along and accept
correspondingly lower margins if they want to do business with Costco. What’s more,
the company is quite open about its heavy-handedness with suppliers. For instance, as
reported in a Bloomberg article, in an analyst call after reporting quarterly earnings in
2018, Costco’s CFO Richard Galanti said:
“You’re seeing significant savings -- in some cases, a small amount from us -- but more
from our suppliers because it drives more sales….The brands need to come down in
price, too, because they’re losing market share.”

Given its size and scale, Costco has many degrees of freedom to accomplish supplier
margin reduction. For instance, one approach it has used in the past is to have vendors
take on a larger proportion of the costs when running limited-time promotions on their
items at Costco. Another is to prod vendors to lower prices over time so that Costco, in
turn, can o er lower prices to its customers.

Larger brands, such as CPG behemoths that sell a few SKUs of their vast product lines
through Costco, have considerable flexibility in this respect. As I’ve discussed in other
places, their incremental costs of manufacturing the products to sell in Costco are
often low (e.g., by using spare capacity or other low marginal cost resources).
Consequently, they can still make money at significantly lower prices.

However, as the following somewhat lengthy post explains, smaller vendors may not
enjoy the same flexibility or success. Moreover, the asymmetric power in the retailer-
manufacturer relationship means that they are at a disadvantage in negotiating terms
and may have to accept lower, perhaps even unsustainable, margins to supply to
Costco.

It is worth noting here that the sort of negative experience described here is not unique
to Costco. Its direct competitors, Walmart, Target, and others, have been accused of a
similar modus operandi by their respective suppliers.

Lessons from this case study

Costco is held up by many, including myself, as a practitioner of exemplary pricing

strategy. However, every pricing strategy, no matter how harmonious, di erentiated, or
clever, must grapple with the problem of price execution and ultimately delivering a
profit.
Everyone must compromise. There are tradeo s for everyone involved when
membership-markup pricing is used instead of traditional markup pricing. What
customers gain in lower prices and exceptional value in their purchases, they lose in the
negative experience during checkout and, to a lesser extent, in other parts of their
shopping journey. What employees gain in higher pay and better benefits, they lose in
having to administer the negative aspects of the membership policing actions. What
suppliers gain in large-scale, reliable orders and predictable cash flows, they lose in
having to settle for wafer-thin margins and a powerful partner that always has them on a
tight leash. Whether these tradeo s are worth it will depend on the individuals.

Price execution is essential. No matter what type of pricing strategy you practice, there
are one or more components that deliver profit to the organization. Without decisions
and actions to execute them, these components remain theoretical. Within the
company, decision makers must establish the policies, line managers must enforce
them, and frontline employees must enact them, all in the service of realizing price and
delivering the profit. This typically involves taking actions or imposing restrictions on
customers that generate profit or stop the profit from leaking.

In Costco’s case, the profit is derived through membership and markup, with a heavier
reliance on the higher-margin membership revenue. Consequently, despite its good
intentions, customer-oriented and employee-focused mindset, and best-in-class
business strategy, the company has no choice but to adopt aversive policies to manage
memberships that are bound to be unpleasant for those involved. There is no way
around it.

Zero-sum games abound. All three instances of membership management and the
retailer-supplier relationship dynamics that we saw are zero-sum games. Costco only
wins (in the sense of earning a profit or preventing a profit leak) when the customer
loses (by paying for the membership and using it in a restrictive way). Conversely, the
customer only wins (for example, by buying products without a membership) when
Costco loses (by profit leakage).

This is the main lesson that we can learn from this case study on the dark side of
Costco’s pricing strategy. In the end, every pricing strategy, no matter how thoughtfully,
ethically, and cleverly constructed, must culminate in a zero-sum game being played
out between the company’s agents and its constituents, in this case, its customers,
employees, and suppliers.

The truth is that in pricing, zero-sum games abound, and they are essential for the
sustainability of pricing models.
1. identify five common pricing strategy.

2. What do you understand by pricing?

3. Costco pricing strategy.

4. Walmart pricing strategy

5. Apple pricing strategy.

11 Essential Procurement KPIs You Can’t Ignore

Businesses today want procurement teams to drive value beyond cost savings. As a
result, procurement leaders are constantly looking for ways to improve their
procurement process and make it more sustainable. However, they don’t want to make
any decisions without the right data. And so, they track an array of purchasing metrics
as KPIs.

While procurement key performance indicators (KPIs) is a widely used buzzword in

procurement circles, they are not set on stone. Procurement KPIs means di erent
things to di erent businesses, almost to the point that most procurement leaders aren’t
sure what counts as a KPI and what doesn’t.

But when it comes to decision-making and performance tracking, how can you be sure
that the purchasing KPIs that are being tracked matter the most? Only by gaining a
better understanding of the purchasing metrics and taking a look at the procurement
KPIs that are used by industry leaders.

What are procurement KPIs?

Procurement KPIs are a type of performance measurement tool that are used to
evaluate and monitor the e iciency of an organization’s procurement management.
These KPIs help an organization optimize and regulate spending, quality, time, and cost.

Additionally, procurement KPIs help businesses keep pace with their overall process
goals, procurement strategies, and business objectives.

Why measure the e iciency of your procurement process?

The saying “If you cannot measure it, you cannot improve it” holds as true as ever.
Measuring the e iciency of a procurement process is important, as it plays a critical
role in the supply chain in the case of an economic downturn. A great way to improve
procurement e iciency is to automate.

While cost savings are an obvious objective of procurement performance, it is not just
restricted to that. By measuring the performance of a procurement process,
organizations can find answers to other important questions like:
What needs to be improved?

How do we compare with other organizations?

Are we improving or declining?

11 KPIs every procurement team should measure without fail

The right procurement KPI is relevant to your business goals and simple to track. While
you’re drafting your first procurement KPIs, it can be a bit overwhelming. By gaining a
better understanding of their purpose, you would be able to identify KPIs that better
serves your needs.

Listed below are eleven procurement KPIs that every organization should keep track of:

Compliance rate

Supplier defect rate

PO and invoice accuracy

Rate of emergency purchases

Supplier lead time

PO cycle time

Vendor availability

Cost per invoice and PO

Spend under management (SUM)

Procurement ROI and benefits

Price Competitiveness

Depending on their purpose, these procurement KPIs can be split into three major
categories: ensure quality, improve delivery, and deliver savings. All three categories are
interdependent, so focusing on just one category might harm the other two and
decrease the process sustainability.

1. Quality KPIs: Ensure quality

Compliance rate

Contractual and policy compliance are pivotal to ensure legal security. If these
compliance rates dip down, they can spike up indirect and maverick spend. A foolproof
purchasing contract with clearly defined penalties can improve the compliance rate

Metrics to note:

The ratio of disputed invoices to total invoices

The total di erence between the price paid and the price quoted

Supplier defect rate

Supplier defect rate is used to evaluate a supplier’s individual quality. Measuring

supplier defect rates and breaking it down based on the defect type will o er actionable
insights into a supplier’s trustworthiness. Supplier defect rates are usually measured in
defects per million.

Supplier defect rate= Number of substandard products/Total number of units tested

PO accuracy

Low PO accuracy hikes up operating costs. Procurement KPIs are measured across
supply categories, buyer segments, and more. This metric will help businesses ensure
whether suppliers are delivering what was ordered and if it was delivered at the right
time.

Indicators to track:

The ratio of product/service delivered outside the pre-defined service target

% of erroneous delivery over the total number of purchase orders in a period of time

2. Delivery KPIs: Improve delivery

Rate of emergency purchases

Emergency purchases are those unplanned orders which are acquired to prevent the
shortage of products/services. This metric is measured with the ratio of emergency
purchases to the total number of purchases over a fixed period of time.

By lowering the rate of emergency orders, organizations can:

Save costs

Improve procurement plan

Reduce supply risks

Ensure continuity

A complete guide to crisis management

Learn how to mitigate risks like never before

Supplier lead time

Supplier lead time is the amount of time that elapses between the time a supplier
receives an order and the time when the order is shipped. This KPI is often measured in
days. Vendor lead time starts with availability confirmation and ordering and ends with
the delivery of goods.

Supplier lead time = Delivery time (Goods and receipts delivery) – Order time (PO
acceptance)

Purchase order cycle time

Purchase order cycle time is measured in hours or days from the time a purchase
requisition is submitted to the time when it is transmitted to a vendor or contractor. This
KPI covers the end-to-end ordering process which makes up the whole purchase order
cycle.

Vendor availability
Vendor availability is used to measure a vendor’s capacity to respond to emergency
demands. This procurement KPI helps organizations determine the degree of reliability
they can place on a vendor.

Vendor availability (%) is measured by the ratio of the number of time items available on
a vendor’s side to the number of orders placed with the supplier.

3. Cost-Saving KPIs: Receive savings

Cost per invoice and purchase order side

The cost spent per invoice and purchase order can vary from one organization to
another depending on the factors that are included in this calculation. An organization
that follows a manual approach will have higher processing costs when compared to
other organizations that use an automated process.

A recent APQC survey shows that organizations with little to no automation in place end
up spending at least $10 or more per invoice.

Spend under management

Spend under management is the percentage of procurement spend that is regulated or

controlled by the management. As an organization’s spend under management rises up,
its ability to optimize cost and forecast expense increases with it.

SUM = Total approved spend (i.e., direct, indirect, and service-related cost ) – Maverick
spend

Take full control of your spend

Here’s how you can bring your spend under management

Procurement ROI
Procurement ROI is used to determine the profitability and cost-e ectiveness of the
procurement investment. This metric is best suited for internal analysis.

Procurement ROI = Annual cost savings / Annual procurement cost

Price competitiveness

Little to no competition among vendors can lead to a place where a few suppliers enjoy
a monopoly. This can lower quality over the long run. Here the emphasis is placed on
shortlisting vendors that o er the buyer a distinct competitive advantage.

Price competitiveness can be measured by comparing the price paid with the published
market prices listed on procurement market intelligent sites like Beroe Inc.

It also gives procurement leaders the ability to create custom reports that show key
metrics like PO cycle time, the rate of emergency purchases, and the annual
procurement savings to annual procurement costs.

Using an eProcurement tool is the key to improve procurement performance

To step up procurement performance, organizations need to take KPI measurements

and tracking digital. Using a cloud-based tool will help organizations with data
collection, segregation, routing, retrieval, and much more. This lets procurement sta
spend more time analyzing the collected data.

Using an E-procurement software o ers a number of great benefits like:

Drastic reduction in process time

A steep rise in productivity

Increase in speed and e iciency

Radical gains in terms of compliance

Substantial cost savings

Significant reduction of risk

Enhanced visibility of the whole process

Streamline Your Procurement Process With Kissflow

Visualizing and tracking procurement KPIs using Kissflow Procurement Cloud

Summary

The process of developing procurement KPIs at an organization isn’t always a clear-cut

task. But, when procurement leaders take the time to identify their business needs and
understand the nature of procurement key performance indicators, it is easy to pick
those which are in tune with an organization’s goals.

A cloud-based digital procurement solution can help businesses measure KPIs, gain
actionable insights, mitigate risks, and increase profitability.
Five Ways to Measure Procurement Performance | Procurement Metrics

Historically, cost savings was considered the only reliable measure of procurement
performance. But spend savings can only go so far — at some point, it’s simply not
possible to reduce costs further, so procurement professionals need to rea irm their
value to the organization in other ways. Here we look at five proven ways to measure
procurement performance, along with a few tips for improving the metrics.

1. Procurement Cycle Time

We define the procurement cycle time as the time elapsed from placing creating a
requisition to receiving the goods. Decreasing the cycle times associated with procuring
materials and services is an e ective way to cut procurement costs. Research from the
American Productivity & Quality Center’s (APQC) found that top performers in
procurement take fewer hours to place a purchase order and wait fewer days to receive
materials from suppliers.

Automating the procurement process with suppliers can significantly reduce the time it
takes to receive the ordered product. According to APQC’s research, e-commerce/e-
procurement software can cut an organization’s cycle time from seven days to two. Not
only does this mean you receive products needed for key projects sooner, but it can also
help increase procure-to-pay e iciency.

Some ways to reduce procurement cycle time include:

Minimize the time it takes to produce and approve a requisition

Get approved purchase orders (PO) into the hands of vendors more quickly

Proactively monitor open orders

Provide vendor self-service portals empower vendors to enter their own invoices

2. Vendor performance

Vendor performance management refers to the monitoring and analyzing of the

reliability, quality, and performance of your company’s vendors. Monitoring vendors can
help your company boost e iciency and profits, reduce stock levels and inventory
costs, and improve (both internal and external) customer satisfaction.

Some vendor performance metrics to monitor are:

Delivery lead times

Communication time lags

Quality of the products supplied

Pricing competitiveness
The frequency of price changes

Compliance with negotiated terms

Substitutions made

Number of back orders

3. Spend under management

Spend under management refers to the percentage of your organization’s total spend
that the procurement department manages. It is a common metric of performance and
can easily and uniformly be applied to organizations across all industries and sizes. For
every dollar that placed under management, the average enterprise sees a benefit of
between 6% and 12%.

Targeting areas of unmanaged spending is a key way procurement professionals can

deliver value and maximize savings for their organizations. We highlighted five ways to
reduce unmanaged spend here.

4. Cost savings

Cost savings remains a fundamental, pivotal metric to measure the success of the
procurement function. In a recent analysis, The Hackett Group found that world-class
procurement organizations spend 21% less (up to $6 million in cost savings for the
typical large company) and have 29% fewer full-time-equivalents while generating more
than double the purchased cost savings of typical procurement organizations.

Cost savings sounds simple enough, but how are companies successfully reducing
costs? One direct way is to reduce the cost per purchase order, using techniques
including:

Investing in digital technology and process automation

Incorporating vendor self-service

Adding mobile requisition and approval capabilities

Using guided buying catalogs and PunchOut tools

5. Percentage of POs that are catalog-based

This metric doesn’t make everyone’s list, but when used as a proxy to measure
compliance with negotiated contracts and pricing it provides valuable insight. When a
majority of routine purchases are made through approved vendors through which you
have pricing agreements, prices are typically lower, service is generally higher, and
errors are less frequent. In addition, by using guided buying catalogs or PunchOut
catalogs, organizations decentralize the requisition process, empowering individual
users to initiate the process, freeing the procurement department to negotiate even
better deals.

It’s only when you begin to measure the performance of your procurement activities that
you can begin demonstrating the value the procurement department and its personnel
bring to an organization. An easy way to start is by using our Procure-To-Pay Calculator,
that will help you determine what procurement is costing you currently, and how you
begin to save.