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Pricing Options While Purchasing Procurement Professional Services: Drawing the Parallels and Outlining the Basics

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"The price point defines the sales model. It has to be simple, and you have to know how to make money with it."

Don't all purchasers want to buy products and services which help them save cash while spending? The answer to this would definitely be an emphatic "yes". The main challenge comes into play in the form of a "how". The good news is that suppliers have themselves evolved several pricing models which buyers can choose from to their advantage. This series of blogs will be specifically mentioning a few of the models in favor with suppliers of professional procurement services like BPO services, staff augmentation and project based consulting work."

Product pricing has been well defined over the decades being perfected by sectors like manufacturing and FMCG. The pricing of products has stood strong on the tenets of concepts, akin to adding profit margin to production cost, setting price to achieve target return on investment or delivering effective value to customer relative to other products.

Service pricing has however never been much elaborated nor outlined in the world of marketing management. Business process outsourcing being a burgeoning sector with a diverse global client base had initially felt the need to align the service offering pricing closely to that of a product. The professional procurement outsourcing sector has pricing models with parallels to that of  product pricing models as outlined:

  • Cost Plus Pricing:  As the terminology signifies, this pricing model makes things rather simple for the service provider.  A simple profit margin added on top of the production cost summarizes the most widely used model in the product and the service sector. The cost in case of a product is computed straightforward as the sum total of all the raw material inputs cost to make the finished product, with a pre decided profit margin computed by the manufacturer.
    In the case of a procurement service offering the raw material is in the form of people, process and technology inputs. The service provider adds up all the resources required for client's service delivery and adds a profit margin. Quantifying the inputs of the people is done so by estimating the time and effort going into the service delivery (in terms of man hours).  In the current procurment process outsourcing sector, this model is referred to and understood by the client as the Time and material based pricing model.  
  • Target Return pricing:   In this frequently used product pricing model the price is set to achieve a target return on investment. The investment as again is in the form of all raw material inputs to produce the finished productl. The key crucial difference here being the target return factor. The target return on investment is computed from the client perspective, as opposite in case of a product pricing. Process efficiency and cost reduction being, the defining factors for procurement process outsourcing. Clients want the price they pay for service delivery to be linked to the returns on investment that they are going to obtain from the service provider.

This concludes the laying of the foundation for the upcoming blog in this series on the pricing models in the professional procurement services outsourcing sector. The key focus here was on drawing a parallel with how initially procurement service pricing was heavily inspired by product pricing. The upcoming blog in this series would emphasize on how the gain share and the fee at risk model were galvanized into being from the very rudimentary pricing models. Innovation and sector specific trends with respect to these pricing models will be the essence of the next blog in this series.

Invite all of you to comment and draw some interesting parallels of how the professional procurement service pricing models have evolved and matured over the years, empowering the client and driving the service provider towards a better service delivery.

Comments

Choosing right pricing model in buying services is central for buyers and suppliers.The top criteria should be of selecting an appropirate model should be value and ease of invoicing in my view.
Look forward to know more models through your series Arjun.

Well presented. Drawing parallels with the manufacturing or construction industry is not an easy task. A small doubt - Would a 'Cost Plus Pricing' with a 'guaranteed maximum price' be a better model?

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