Survey

In spite of high inflation some cost savings were obtained. How much net cost changes in the last 6-12 months did you obtain over or under the budget?

More than 10% under.
1 to 10% under.
No change.
1% to 5% over,
6% or more over.

Marketing people seem to be related to makers of
income tax forms. Why make ..." />

Question the Price Formula

Date: 04/01/2006

Marketing people seem to be related to makers of
income tax forms. Why make it simple, if it
can be made complex and difficult to understand? Marketers love to devise price formulas that are needlessly complicated.

Why do they do it? Our guess is that it challenges the buyer and her accounts payable people to dare question any invoices or to compare the pricing with someone else’s.

We know of one buyer who for twenty-three years purchased many millions of tons of a certain type of metal product that had a very unusual pricing formula. The buyer had no idea how the prices were calculated and neither did his accounts payable department. Bills were simply paid without questioning them.

When a new purchasing manager came on board, he began asking various salespeople for the product how the pricing was calculated. He was astonished to find out that even the salespeople didn’t know how it was done, except for one. That one gave the new manager all the information he needed to begin negotiating agreements that saved the company many millions of dollars.

The manager must be congratulated for his courage to continue to ask the right question. At first he was embarrassed by his own ignorance until he realized that those he was asking were even less informed than he was.

You might say it shows more intelligence and courage to ask the right questions than it does to pretend you know when you don’t.

This may be one of the most valuable tips you will get from this column. Make sure you and your accounting people know how to calculate prices of the products you buy. Learn how the supplier establishes prices. Try to get the supplier to make the formula as simple as possible.v