The results of a recent EBN poll regarding the relationship between component price and volume are in — with strong support (75 percent) for the idea that a relationship exists.
As reported in my blog a few weeks ago, this is the complete opposite of what I observe using freebenchmarking.com data. Faced with this dichotomy, I decided to conduct a thought experiment, starting with the assumption that there is a strong price/volume relationship, to see where it would lead.
I begin with the assumption that there is a price vs. volume curve. Or is it curves? I know that distributors have strategic accounts to which they give better pricing, so there must be two curves. Manufacturers stratify customers into tier 1, tier 2, tier 3, and rest of world (ROW) accounts with different discounts off list price, so that gives us at least another four.
I also know that pricing changes with time. At a minimum, I am now on one of six time-sensitive curves. Additionally, if I negotiate with a supplier or manufacturer, my price will improve — otherwise negotiation would be a waste of time.
Conclusion: My price is derived from a family of time-sensitive curves that wiggle.
Now, what happens if I add competition by including pricing from alternate sets of curves from other suppliers? In my view, the number of possible wiggly price curves grows to create a near random map, and the question becomes which curve are you on and what have you done to influence its selection?
The fact that there is such a strong belief in the price/volume relationship is interesting as beliefs beget actions that beget results. We see this phenomenon, called the Pygmalion effect, in athletes where their belief in their ability leads to strong performance and championships. We also see it in situations where a belief that something isn’t possible leads to failure. Whether it exists or not, how constrained are you by your price/volume belief? Do you accept the salesman’s price/volume argument too readily?
In my thought experiment, I brought in alternate suppliers as a means of expanding the number of possible price/volume curves. Do you believe this affects pricing? Is there a premium that is paid on single-sourced items over multi-sourced devices?
I have been performing more analysis with freebenchmarking.com data and have derived a means of determining if there is a single-source premium. Do you think there is a price penalty for being single sourced, and, if so, how much is its impact on price?
By Ken Bradley – Lytica Inc. Founder/Chairman/CTO