In a cost-based price model negotiation strategy, what are prices primarily based on?

In a cost-based price model negotiation strategy, prices are primarily established based on the supplier's costs. This method focuses on understanding all the expenses incurred by the supplier in the production and delivery of goods or services. This includes a comprehensive analysis of direct costs, such as labor and materials, as well as indirect costs, like overhead and administrative expenses.

Using this approach, the supplier will calculate a price that not only covers these costs but also includes a margin for profit. The emphasis on costs ensures that the pricing structure is sustainable for the supplier while allowing for effective negotiation with buyers who may seek to understand the rationale behind the pricing.

This strategy contrasts with models that prioritize market demand, consumer preferences, or raw material quality, which instead focus on external factors influencing pricing. These factors may lead to variable pricing strategies based on trends, competitive pricing, or perceived value to consumers, rather than a firm grounding in the supplier's actual cost structure.