When dealing with businesses, ‘price’ is considered to be a sum of money that must be paid to acquire a product or service, while ‘cost’ is considered to be the expense that a business is faced with when bringing a product or service to market. The difference between the price of an item and the cost that is incurred to bring it to market is the profit that a business makes when the item is sold.

Deciding on and managing suppliers can be a huge challenge to businesses and to cost management, but can be made much simpler through the process of cost analysis. Supplier cost analysis allows businesses to fully consider the financial impact that choosing a specific supplier will have on their business, the price that they can sell their products or services at, and the profits that they will make.

Understanding a supplier’s cost structure is critical to determining whether or not they are a good fit for your company, as well as whether or not they are giving you a good deal. When undergoing cost analysis, buyers should ask themselves and their potential suppliers these essential questions regarding price before entering into a price agreement:

1. What are the business’s direct and indirect costs?

Direct costs include things like base salaries, labor, and materials—things that contribute directly to the production of the final product or service. Indirect costs are things that are not directly associated with the product’s production, such as communication and marketing costs, legal fees, and travel. Taking into account all of these costs will give buyers a better and fuller idea of what their finances and future profit will look like, and will make it easier for them to choose a supplier that best fits into their financial picture.

2. What is the price that competitors are paying?

Knowing what others in the industry are paying for the same services and products will allow the buyers to determine what is considered a fair price in their industry. This will help them to determine and negotiate a price that will allow them to remain competitive and will ensure that they are not overcharged. Comparing the prices of different suppliers in the industry will also allow buyers to have a better understanding of a range of supplier cost structures, making it easier for them to select a supplier that best fits their business and offers the most cost savings.

3. Does the supplier understand your industry and your business’s needs?

Buyers should ensure that the supplier has expertise in serving their particular industry. Suppliers should fully understand the industry’s dynamics, practices, and trends, as well as the habits of the industry’s customers. They should also understand what a particular business requires from them, just as businesses should have a solid understanding of how the supplier operates and what their business practices are.

4. What pricing structure best suits the business?

Buyers need to take into account the advantages and disadvantages proposed pricing structure that the supplier is offering them. They should consider whether or not there are discounts involved, if there is room for future negotiation, if bundled pricing is available, and how potential pricing or monetary conflicts between the buyer and supplier will be resolved. Buyers should also take into consideration whether or not the pricing structure will allow them to work effectively with the supplier to reduce waste. Another important factor that should be taken into consideration regarding pricing structure is its potential for flexibility and changing costs of products.