Saving Costs: Have You Tried Price Benchmarking Yet?
With growing demand to improve procurement efficiency, reduce costs, improve savings and performance, it becomes vital for companies to establish best-in-class benchmarks to compare and make informed purchase decisions that are based on competitive pricing analysis. Benchmarking serves as a structured approach to uncovering best practices and acts as a catalyst for ongoing process innovation and transformation. Through rate cards and price benchmarking, organizations are able to develop a market price comparison, ensure they get the right level of discounts and achieve desired cost savings.
What are Price Benchmarks?
Price benchmarks consist of a compilation of pricing information pertaining to various items or services, which may indicate the most favorable and least favorable pricing available in the market. When evaluating various prices for the same product or service, you are effectively making a direct market price comparison, which will lead you to identify the most favorable and competitive market price through competitive pricing analysis . This helps buyers gain confidence about the prevalent market rates, keep a track of pricing trends and also to conduct informed negotiations with backing data.
What are the challenges with conducting Price Benchmarking?
For many procurement organizations, price benchmarking presents a significant challenge, as it necessitates access to information that is often difficult to obtain. Peer group companies typically are reluctant to disclose the prices they pay for various goods and services, owing to contractual obligations. Additionally, making sense of price benchmarks for categories that have fluctuating pricing trends or changing supplier landscapes can be time-consuming and effort intensive at the same time. Also, the vendors might not be very transparent and disclose their negotiated rates right at the beginning of the pricing discussions.
How to get the best Price Benchmarks?
Price benchmarking in procurement has the potential to significantly enhance your organization. It enables accurate market price comparison of product and service pricing against industry standards, identification of inefficiencies, and the facilitation of data-driven purchasing decisions. To implement price benchmarking effectively, organizations can follow a step-by-step approach. First, establish clear objectives for cost benchmarking. Select relevant metrics or key performance indicators (KPIs) to evaluate and enhance performance.
There are multiple sources for gathering price benchmarks. The most trusted ones are market research reports as they tend to have higher accuracy and data points validated through multiple iterations and multiple sources and conduct competitive pricing analysis in a professional manner. Other sources could include publications of industry associations or suppliers, however these could be time consuming and lack enough data points to validate accuracy. Once the data is collected, deploy appropriate analysis on the gathered data and look for opportunities for savings by identifying patterns or trends within the data. Collaborate with finance teams or department leaders to pinpoint the cost drivers within your organization. Formulate strategies and action plans to address identified gaps and enhance performance based on your analysis and collaborative efforts. This may involve renegotiating supplier contracts, exploring alternative sources, or implementing new procedures.
How to make the best use of Price Benchmarks?
Conduct Informed Negotiations
Identify New Suppliers
Expand Savings to All Categories
Conduct Informed Negotiations
If the price benchmarking analysis reveals that a vendor is charging you higher than market standards for a product or service, it does not automatically necessitate a change in supplier. You may have cultivated a valuable relationship with your current supplier over the years, or their product may possess qualities that surpass those available from competitors. In such instances, the appropriate course of action is to engage in re-negotiation. With the insights gained from price benchmarking, it is now time to return to the negotiation table and explore the possibility of a new contract. Equipped with up-to-date market information, you will be well-positioned to lower expenses and establish a contract that aligns more favorably with your needs.
Identify New Suppliers
This could be an alternative path in cases where the vendor is not necessarily a strategic partner. When incorporating price benchmarking into your strategic sourcing—which is highly advisable—and it reveals that you are overpaying, the most effective course of action may be to explore alternative options. This is an opportune moment to formulate a go-to-market strategy informed by the insights gained from the benchmarking process. For example, if you decide to conduct an eAuction, the updated information regarding the value of the product or service will assist you in defining the auction parameters. Similarly, if you issue a Request for Quotation (RFQ), you will be in a stronger position to assess the proposals you receive. This could be an expensive option considering the effort spent on finding alternative vendors, conducting negotiations and managing the vendor change. But of the savings are significant, this is always a good idea.
Expand Savings to All Categories, not Just the Critical Direct Categories
Often indirect categories tend to take a back seat when it comes to cost savings and achieving best-in-class status. Price benchmarking across all categories can help procurement teams identify hidden opportunities, often emerging from categories that are overlooked upon. Categories like office supplies, office furniture fall under this group. Identifying and optimizing spend on such categories could provide significant results when it comes to achieving savings targets.
In Conclusion, It is High Time You Start
Understanding price benchmarking and its various applications enables organizations to accurately evaluate their expenditures against industry norms and pinpoint opportunities for enhancement and to stay on top of pricing trends. Although cost benchmarking has its advantages and disadvantages, the benefits significantly outweigh the challenges. Effective cost benchmarking requires meticulous planning and evaluation of elements such as data collection, analytical methods, and stakeholder engagement.
