Q & A Table of Contents
Target Pricing In E-Commerce
From: Grant, Brisbane, Australia
Question: What can you tell me about negotiation strategies that are used in commodity based industries, such as coal, sugar etc. where there are fragmented suppliers. Given the nature of the product, sellers are deemed to be price takers. In some countries individual producers have joined forces to have a single negotiation voice when entering into supply/price talks with other country/company buyers.
Response: There are many groupings of purchasers that have developed websites to create reverse auctions -- in which suppliers have to compete against each other most often by lowering price. This is a variation on the old approach of 'target pricing'.
In target pricing, a purchaser puts out a request for proposals (or tenders) and then, as separate suppliers propose prices, the purchaser says: "Well your price of $x is interesting." Then the purchaser goes to the next supplier and says, "Supplier A (perhaps giving the name, perhaps not) is prepared to accept a price of $x. How much are you prepared to accept?"
This process can travel in a spiral, with the purchaser asking a series of suppliers to keep lowering their prices until an end point is reached. It is my impression that the mechanism of group purchasing websites is simply taking the target pricing approach and increasing the speed with which it can be applied as well as exposing suppliers to the 'joy' of making offers that might be viewed or compared by a number of different customers.
The mechanism is employed in the USA by the 'big three' automobile manufacturers as well as by utilities purchasing power -- and power generation companies purchasing fuel.
Beyond this general description, I am not deeply familiar with the process or how well it is working. My personal reaction is that this approach goes contrary to the idea of developing and maintaining relationships with business colleagues from different parts of the supply chain and I wonder whether this might detract from the long-term quality of business life.
Good luck with your negotiating,
Steve
| 
