A clear definition of the “best” price is difficult to give because the term can be viewed from multiple angles. In the following, four different of these angles are explained:
1) Theoretically, the “best” price is one that no other purchaser can achieve for the same value under the specified conditions. However, this is practically never measurable or provable and can therefore lead to an illusion.
2) For an operational purchaser, the optimal price is the price of the currently best offering supplier. Anyhow, according to this definition, the price can be significantly higher or lower than the actual production costs. So, it may be that even the best offer is far away from a good price. Therefore, if suppliers offer a price below manufacturing cost over a longer period, they will sooner or later experience problems and raise prices, reduce quality and service, or shut down. Such a short-term approach may therefore be dangerous for both companies, the supplier as well as the purchaser.
3) Psychologically, the “best” price is nothing more than the “comfortable zone” for the purchaser. Large purchasing volumes are often seen as a justification for the best price offer: “We make so much money with this supplier, with us he does not pay attention to the margin but only on his base turnover.” Purchasers of smaller volumes, in turn, often say: “Our order volumes are not that big, suppliers barely notice us and take care of larger customers.” In both cases, a clarification by the sales department is advisable whether large purchases always bring better prices and how many of their own customers must make any contribution margin.
4) Using cost accounting, a long-term “best” price, or rather an optimal price, can be defined. This consists of the full costs and a moderate contribution to the profit margin. In addition, a corridor that spans between the manufacturing costs and a maximum of twice the average profit margin of the supply industry could be called a “healthy price” (see Figure 1). Prices above favor the supplier at the expense of the procurement unduly and should be avoided or reduced.
Such a detailed cost analysis requires some effort as well as special expertise and is therefore not possible in the day-to-day business of an operationally driven procurement department. Therefore, many purchasers strive for a benchmark with the competition, whereby in addition to antitrust difficulties also technically and methodically some challenges must be considered. In order to get a realistic indication of the “best” price, almost the entire market would have to be surveyed – but that causes a lot of effort. For a smaller sample in turn, the participants of the benchmark need to screen the supplier market in depth, at best regularly. In a next step, the obtained price level should be hedged against commodity markets and other influences. A target set by management would also have to be ongoing cost optimization. All in all, it is very difficult to actually find the “best” price.