2025 Procurement Guide: Target Pricing

With 45 years of experience in procurement, I’ve come to understand that a target price in procurement is like a navigator on a voyage—it may not be a magic tool, but without it, you’re sailing without a true sense of direction.

What exactly is a target price?
It’s far more than just the unit cost of a product. As I often explain to clients, setting a target price is like renovating a house—you need to account for materials, labor, transportation, and even the cost of dealing with property management. A comprehensive target price should include:

• Factory price of the product

• International shipping and insurance

• Tariffs and import VAT

• Domestic warehousing and distribution

• A reasonable contingency reserve for risks

Why is this number necessary?
It’s simple: with it, you have a clear benchmark. In the cases we’ve handled, procurement projects with a well-defined target price achieved final prices that were, on average, 12% lower than expected. This isn’t magic—it’s the confidence that comes from knowing your numbers.

Who should know this number?
Your internal team must be clear about it—it’s the standard for evaluating suppliers. But when it comes to suppliers, I recommend treating it like playing cards—don’t reveal your hand too soon. Data shows that negotiations where the target price isn’t disclosed in advance tend to secure an additional 5% to 15% price reduction.

How to set it reasonably?
I summarize it as the “Four Reference Points”:

1. Market ceiling: Work backward from the retail price, leaving ample room for profit.

2. Competitive benchmark: Study the pricing range of similar products.

3. Cost breakdown: Analyze every step, from raw materials to the end customer.

4. Profit equilibrium: Ensure it meets the company’s basic profitability requirements.

A practical tip: If you already have existing suppliers, try setting the new target price at 85%–90% of the current price. This range is challenging yet reasonable, making it easier to foster a competitive mindset.

How to verify if the price is reasonable?
Just like traditional Chinese medicine emphasizes observation, listening, questioning, and pulse-taking, evaluating prices requires a holistic approach:

• Order volume: Doubling the quantity typically reduces costs by 8%–12%.

• Quality standards: Each level up in quality may increase costs by 15%–30%.

• Process complexity: Specialized processes can sometimes double costs.

• Supply chain maturity: Established supply chains are generally 10%–20% cheaper than newly developed ones.

At the end of the day, a target price isn’t a constraint—it’s the navigational chart for professional procurement. It won’t steer the ship for you, but it ensures you stay on course. A good target price should be like a flexible rubber band—firm enough to hold your bottom line yet elastic enough to accommodate reasonable adjustments.

I’m the old sailor in your procurement voyage, hoping to use this experience to help you navigate every journey with confidence and composure.