Advertisement

Blog

The (Non) Relationship Between Volume & Price

For years, I have been telling people there is no relationship between volume and price. Occasionally, I meet an enlightened soul who agrees with me. More often, I am met with blank stares of disbelief.

Yes, I agree that, when you buy a few engineering samples, look at pricing on a distributor’s Website, and ask for quotes, the data is presented as if such a relationship existed. But once you begin negotiations, that relationship dissipates. The price you pay is a complex function of many variables. Coming up with a precise model for it exceeds the level of my mathematical skill. Pricing seems to be an art form, and it is influenced by factors like how badly a supplier wants your business. It depends on your reputation, how you pay your bills, your total spending on materials, the chosen channel, your negotiation attitude, geography, and more.

I can substantiate my proclamation regarding the volume/price relationship by using data from freebenchmarking.com. The Website has become the world’s largest independent database on electronic component pricing, and I can use it to explore pricing relationships. The figure below is typical of what I find when I make scatter plots of price vs. volume. My choice of which component to feature was somewhat arbitrary. It isn’t the largest component group or unique in any way. It is just very typical.

This plot, for a group of functionally equivalent capacitors, is made up of 642 price/volume data point pairs with volumes ranging from 1 unit to more than 1.5 million units per year. Pricing is gathered from our clients who represent a full spectrum of OEMs and EMS providers — from Tier 3 up to the largest Tier 1 users of components.

I see no price/volume relationship in this plot or any of the many other component plots I review. Some companies are getting better pricing for a handful of components than others buying hundreds of thousands of parts. I will concede that the price range appears to narrow with volume, but that might be because there aren’t that many companies buying such high volumes.

What does this mean for professionals in charge of sourcing and pricing? Here are some of my conclusions.

  • Your head needs to be in the right space for negotiations, so get rid of old constraining paradigms. Understand your competitive position and your leverage points before you begin negotiations. Know which of your components are properly priced and which ones aren’t. Your pricing is set by your negotiations, not by some old cost-plus-volume curve.
  • You must know why the supplier wants to do business with you and how you can increase your leverage and supply options. Know what factors you can push on to increase the supplier’s desire.
  • Don’t let decreasing volume become an excuse for accepting price increases or forgoing cost reduction. In fact, challenge all attempts at price increases until you are absolutely convinced there is no alternative. Remember that there is no dominant relationship between price and volume.

On a related note, don’t get yourself into contracts where your price is conditional on something you can’t verify. Some companies sign up for “most favored nation” clauses that promise best pricing but offer no means of verifying it is being received. Sometimes, these contracts work. Often, they don’t.

12 comments on “The (Non) Relationship Between Volume & Price

  1. _hm
    April 16, 2012

    It is difficult to understand your argument.

  2. saranyatil
    April 17, 2012

    I do agree with your points I recently burnt my fingers in using the old techniques of sourcing. Many LCD vendors refused to agree on the costing based on volumes.

  3. prabhakar_deosthali
    April 17, 2012

    If the price is an ART FORM where no formula fits then it is difficult to quantify the gain or loss for a buyer enetring into the negotiations with a supplier. Because each party will be applying its own criterion onto what price is the best.

    Ultimately as long as you recover that price from the products you make with a healthy profit margin , that price should be good.

    So in my opinion the buyer should decide the best purchasing price first and lead his/her negotiations with the supplier in that direction.

  4. FLYINGSCOT
    April 17, 2012

    I reckon price does drop in general as volume increases but I agree it is the price spread that really drops as volume increases.

  5. Barbara Jorgensen
    April 17, 2012

    It is difficult to let go of the perceptions we have on pricing–that it is a fixed price determined by cost to manufacture plus markup. Like Ken, I don't have the math background to go much deeper than that, but the factors he mentions, such the supplier's desire to do business with you, is very much a part of the equation. The data seems to illustrate the point more drastically than I would normally imagine, but for folks that require data to illustrate a point, the chart above is pretty compelling.

  6. Nemos
    April 17, 2012

    It is very clear from the above graph that volume is unconnected with the price. But if that is true the question is why that is happening ?

  7. Geoff Thomas
    April 17, 2012

    There are always prejudices, with volume pricing there can be the prejudice towards an agency, but these days, agencies get short shrift, – unless they provide other significant value adding items there is no respect as such, and really no reason for it, and with all companies doing business over the internet, almost nobody holding significant stock any more, why should a manufacturer do anything but sell according to their product manufacturing cost, the cost of packing, and the freight.

    Cheers,

    Geoff Thomas. 

  8. Himanshugupta
    April 18, 2012

    Rather than saying that there is no relation between volume and price, i would assert that the price spead decreases with the volume. The high price spread at low volume depends on many factors, as also stated in the article but with high volume purchase the buyers can put more chips on the table and negotiate harder.

  9. Himanshugupta
    April 18, 2012

    Until one look at the data closely, it is difficult to say with certainity what is happening. I do not think that it is crystal clear from the above graph about the assertion that there is no relationship.

  10. Daniel
    April 18, 2012

    Ken, but normally we experienced that pricing are inversely proportional to the quantity. I mean for lesser order, pricing may be little bit higher per piece and for bulk order; the individual pricings are kept in lower side. Again, the pricing is based on demand and availability.

  11. Johnny
    April 18, 2012

    Sorry to spoil the party, but… how is it clear from the graph that there is no relation between volume and price?

    To me it seems like the larger the volume, the lower the price…? I'm probably missing something?

  12. Ken Bradley
    April 19, 2012

    Thanks for your interest in this blog. Many of you have raised questions that I would like to address with this reply and in my next blog. Here are three of my thoughts:

    1.        The scatter gram shows components with low volume prices that are lower than high volume prices. The high volume prices appear to me to be in the middle range of pricing. The volume vs price myth doesn't hold.

    2.        There is a relationship between cost and volume. This disappears when translated into pricing because most pricing is not cost plus. In most cases, once negotiations start pricing goes down.

    3.        Suppliers operate with margin goals, tiered pricing structures, product subsidies and other distortions. All this kills or masks any volume – price relationship.

    Another thought, if there is a strong price-volume relationship, why would anyone negotiate? Also, why isn't there be greater price transparency, why is it so secretive? Maybe it's because some negotiate great pricing and others don't.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.