What is a "fair" price for manufactured components?
“Perception is reality...”
This classic line asserts the idea that however you perceive something, it is how it really is.
As an individual buying services or ordering goods, you might always find yourself wondering what makes the specific price for the item fair? And this is not an easy question to answer. And we see very often that companies overpay for their manufacturing services simply because they are not aware what the actual value of their components is.
In a way it is quite simple, all you need is enough reference points so that you can find the best deal for your requirements. But in practice, it can be a long and complicated process where you have to consider social and personal as well as technical criteria. Finding Suppliers who provide you with quality services for a reasonable price close to your home market is a challenge every manufacturing business has. The learn more about this you can read an article we made pointing out 6 tips for finding new Suppliers.
To understand the pricing of goods and services, we have to investigate a bit deeper about how individuals perceive a “fair” price.
"In general, people act in their self-interest and perceive the price as “fair” as long as it satisfies their reference points for its value"
Social and personal price and how we perceive it as "fair"
Prices are what people have to pay to get products or services. In manufacturing, they include time and energy, as well as money. And the price of the item that comprises these components is acceptable to the economic interest of the individual (personally fair) as well as to the social interests of the society (socially fair).
Let’s have a closer look at each of these perception components to gain a deeper understanding of how fair pricing of goods is understood.
Ok, let’s get a little technical here. The personal component of a fair price is the evaluation of the magnitude of the price. It is an exchange that an individual has experienced in the past and expects in the future. The “fair” price is the euro amount exchanged in that transaction. It is perceived to be unfair when a new euro amount differs from the reference price and puts the recipient at a financial disadvantage.
In general, people act in their self-interest and perceive the price as “fair” as long as it satisfies their reference points for its value.
Despite the emphasis on self‐interest, others point out that an economic concern for oneself does not explain everything: people are also motivated by a concern for others, for society at large. Over time, societies have developed social norms to facilitate social well‐being. The social component of price fairness is following these social norms. When a price or the person setting a price violates the social norms, it is judged unfair.
This component mostly applies to consumer goods. Where society would judge the fairness of the price as a unit, such a social system allows individuals to have a reference point for the price and judge if it is fair or not — for example, judging if a carton of milk in the supermarket is fairly priced compared to other supermarkets.
Hopefully, this article gives you a good indication of how a fair price for goods and services is perceived and allows you to evaluate your own methods of doing that critically. If you are curious to know more about the exact methods on how to set the price of manufactured components, we invite you to read this article:
Don’t forget to try out Sathive sourcing for free! We have built out tool with a soul purpose to help businesses find fair prices for their sourced goods and services.