Navigating Best Value – What You Need To Know About IT Pricing  

We are delighted to feature this advisory post from Al Nagar, Head of Benchmarking, KnowledgeBus,  Mercato Solutions.

Never has the phrase ‘no two days are the same’ rung truer than for IT buyers. The nature of the sector means that there are several changing elements to contend with when making a purchase: from new technologies, to fluctuating currencies to the lifecycle of the product.

Compare a product different from IT as an example. A fountain pen bought a year ago is very likely be as good as a fountain pen bought today, meaning the value will not change much. This differs somewhat for technology which sees new and improved products entering the market all the time, with each one looking to outperform and devalue its predecessors.

As such, the life span of IT products is somewhat limited, with the next shiny, new thing waiting in the wings to replace it after a few years. Vendors, of course, know this, and will have an expiry date in mind when they will grind production of one product to a halt as they start to transition users to newer models.

For procurement teams, getting the right price for a product at any given time requires an understanding that products have a life span, and that the value of the product will be in a constant state of decline. This fall in value occurs for a number of reasons..

Price fluctuations

For instance, the manufacturer may know months in advance that a new processor is going into their machines. As such, they don’t want old models filling up warehouses in the supply chain. Leftover stock will often undergo a number of price slashes in order to shift the old and make way for the new.

You may also find that a competitor will unexpectedly bring out a superior product which can affect the vendor’s ability to shift stock. The more successful the competition the more likely it is that the manufacturer will cut the price further.

The vendor may hope to achieve £1,000 for a laptop at the point of release, knowing that by the end of the lifecycle they will hope to reach a price of £700. If the competition is strong, however, that could drop down further to £500.

You sometimes see manufacturers build short-life products that are simply designed to fill a gap in the market – typically for a period of around three months. In this case, there’s not much wiggle room in terms of the amount the price can drop. With premium hardware products, however, the life span can be 12-18 months and that will lead to a considerable drop.

It is important that procurement professionals and IT departments are aware of how these prices fall as there is a tendency for buyers to seek a fixed price during the course of a product rollout in the organisation.

Fixed prices

Understanding the hows and whys behind this price drift is key for procurement professionals and IT departments - who will often look for a fixed price during the course of a product rollout, as they believe this is the most cost-effective option.

This is not strictly the case. Buyers may well be able to achieve a 10% or 20% discount on the starting price but at the end of the lifecycle a 50% reduction on the original price could be possible. By agreeing a fixed-price contract from the get-go, buyers are therefore losing out on potential savings down the line.

Furthermore, if they are asked for a fixed price at the start of an agreement, resellers will err on the side of caution. If a government agency went to tender with an order of laptops, the resellers would need to factor in potential risks that could be encountered during that period. They could, therefore, ask the buyer to pay more than they would at a later date.

Navigating the best price

IT buyers can avoid these potential pitfalls by starting a dialogue with resellers and vendors in order to gain an understanding of a product’s roadmap. This will help buyers to gain a better idea of the product lifecycle and when something is likely to be at its cheapest (and most expensive).

Benchmarking tools can also help buyers to pinpoint trends, to check current trade price levels and to understand market levels. This information can then be used to predict the best time to buy.

In such a volatile marketplace, the other option for buyers is to fix the margin not the price. A ‘cost plus’ procurement agreement will ensure that the mark-up above the trade price is the same regardless of product lifecycle.

Businesses can then use benchmarking tools to police resellers and ensure correct margin is applied to all purchases.

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