Contract Renewal: Is this Price Increase Justified?

Categories : Procurement Goals | Improve Credibility | Evaluate Supply Market | Negotiate | Set Strategy
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Published on : Dec 06 2017

By: IBISWorld Staff Writer, Savannah George

Your product or service renewal is approaching and the supplier has just notified you that your annual rate will increase. How do you determine whether or not the price bump is justified? After all, you’re the one who has to communicate to management why the decision has been made to pay more or switch vendors. But sometimes it’s difficult to determine whether or not the price hike is a reasonable market increase.

In theory, it’s a good idea to find and compare some recent price changes within the marketplace. But trying to find this information can be tedious, especially if an internet search is your primary mode of research. Furthermore, if you have a new product or emerging technology, such figures could be scarce or nonexistent through a search engine query.

A Better Plan of Attack

The best way to understand whether or not a renewal increase is justified is to look at the three-year price history, three-year price forecast, and key price drivers. This information will give you an accurate look at the pricing environment for a particular product or service.

Price Trend


Price Trends

Recent price trend data will tell you how price has changed within the past three years and clue you in to the trends influencing the rates. From this, you can better understand the price volatility and how likely the market is to see significant shifts.

Recent Price Trend


Price Forecast

Additionally, price forecast information will give you a look into where the market is headed over the next three years and what average increases can be expected. This, coupled with price drivers analysis (the influences driving price change) will be helpful for anticipating contract costs for the next three years, so you can budget and plan appropriately.

Price Forecast


Price Drivers

When renewing a contract for the same services, vendors will often ask for a Consumer Price Index (CPI) increase or cite a specific reason. You might’ve heard some rationales such as “our overhead has increased,” “we’re giving our employees a pay bump,” or “the CFO wants to buy another yacht.” Some of these reasons are truly justified while others are obviously not! It’s the grey area that can get tricky and this is where price drivers can really come in handy.

Price Drivers


Price Drivers look at the input costs and external demands that are influencing price changes. You might be renewing a one-year laptop contract for the same laptops when the vendor tells you “the cost of components has been going up for us, so we’re requesting a 2% increase for the coming year.” That sounds pretty reasonable, right? Computer components are always getting more complicated, so it makes sense that the vendor might increase your price a bit. But, you always do your due diligence, so this is where you turn to price drivers information and you would see that the price of computer components has been decreasing every year since 2007! Wow. Now you can go back to the vendor with some solid reasoning why you won’t agree to that increase and if you’re really good, you may even negotiate a decrease!

Use Data to Your Advantage

With this information at your fingertips, you can turn to a reliable resource quickly without the hassle of sifting through pages of irrelevant and possibly outdated research on the web. Having a time series of price changes for each market will provide you with a better understanding of the current value of a product or service, and help you assess whether or not a rate increase falls in line with the average market change. This will provide you with the information necessary to negotiate more favorable annual renewal rates and make you a smarter decision-maker, especially in the eyes of management.

IBISWorld offers recent price trends and forecasts, plus detailed price driver analysis, on more than 1,000 indirect products and services.


For a custom demo of how IBISWorld can help you, visit https://www.ibisworld.com/about/freedemo/
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