Why is it important for buyers to perform price analysis?
In the previous post, I discussed how cost analysis is conducted and its importance to a company’s survival. However, cost analysis provides buyers with detailed cost information about a purchased item, which represents only one piece of the puzzle. To assess the fairness and reasonableness of a price, buyers need to combine cost analysis with price analysis.
This raises two questions: What is price analysis? and How is price analysis implemented?
What is price analysis?
Price analysis is a comparison between the price of a purchased item and a price comparator (also known as a benchmark of reasonableness) to determine whether the proposed price is fair and reasonable.
How is price analysis implemented?
When examining the definition of price analysis, it is important to identify a price comparator that has been proven to be reasonable. According to the CIPS study guide, it is recommended to use historical prices, published prices, and pricing formulas as sources for benchmarking.
- Historical Price: Buyers can refer to their past purchases to determine the historical price of an item, which can help assess a proposed price for the same item from a supplier. However, when using historical prices, buyers must account for inflation. Inflation refers to the general increase in the prices of goods and services over time, which reduces the purchasing power of money. Buyers can determine the annual inflation rate using the Consumer Price Index (CPI) report. For example, if a component cost $200 in the year 2000 and a supplier quotes $320 for the same component in 2025, the price may seem high if inflation is not considered. However, if the average annual inflation rate is 2.5%, the quoted price of $320 in 2025 would simply reflect inflation-adjusted pricing.
- Published price: Buyers can compare prices of the same item using suppliers’ catalogues. Some suppliers publish the prices of their products on their websites or on e-commerce platforms, where buyers can gather pricing information and make comparisons. When conducting price analysis, buyers should compare items of the same quality level to ensure an accurate assessment.
- Pricing formula: It breaks down the cost structure of a product, providing you with a standardized way to evaluate and compare suppliers’ prices.
We provide CIPS practice questions with answers and detailed explanation, besides they are updated regularly to reflect the actual exam. If you want to consolidate your knowledge before the exam, you can check the links below. The discount code is CIPSEXAM25.
L4M1: https://www.udemy.com/course/cips-l4m1-practice-test-short-learning-guide/?couponCode=CIPSEXAM25
L4M2: https://www.udemy.com/course/cips-diploma-l4m2-practice-test/?couponCode=CIPSEXAM25
L4M5: https://www.udemy.com/course/cips-practice-test-commercial-negotiation/?couponCode=CIPSEXAM25
L4M7: https://www.udemy.com/course/level-4-diploma-whole-life-asset-management-l4m7/?couponCode=CIPSEXAM25
L4M8: https://www.udemy.com/course/cips-l4m8-practice-in-procurement-and-supply/?couponCode=CIPSEXAM25
L5M2: https://www.udemy.com/course/cips-l5m2-daniel-do/?couponCode=CIPSEXAM25
L5M3: https://www.udemy.com/course/l5m3-daniel/?couponCode=CIPSEXAM25
L5M4: https://www.udemy.com/course/l5m4-advanced-contract-and-finance/?couponCode=CIPSEXAM25
L5M5: https://www.udemy.com/course/l5m5-daniel/?couponCode=CIPSEXAM25