Price Benchmarking
Price is a numerical amount asked, offered or paid with currency in a transaction. Value is a relative concept weighed in relation to current knowledge and prudence. The following stories illustrate how Lichen will help online buyers and sellers link price to value.
Protecting Patient Access to Medicines:
Once it’s launched, Lichen could be used to calibrate micro affordability to relative macro market levels.
The sales manager for a global pharmaceuticals vendor has designed a pricing structure to mitigate the problem faced by doctors and pharmacists when trying to maintain patients on recommended regular dosage levels in markets with extremely different income levels.
The firm configures its e-commerce site with Lichen to post prices in any currency selected by a registered clinic, and to automatically benchmark its prices to an international standard monthly index of relative median household income (MHI) in each clinic’s region within a country.
To set this up, the sales manager selects the MHI index from a drop-down list in the e-commerce application, and sets it for monthly updates. On the first day of each month the software pulls in the latest benchmark value from the web service in order to compute and display prices calibrated to each clinic’s context, and to process transactions accordingly.
Each digital record of sale includes sufficient detail that the benchmark adjustment can be validated immediately or later for accuracy, by either the payer or the payee.
Stabilizing Contract Fees Relative to Purchasing Power:
Once it’s launched, Lichen could be used to link multi-year contract prices in cross-border contracts to a chosen ‘real’ value index.
A company in Amsterdam uses its e-procurement solution to issue a six-month contract to a software developer in Florianopolis.
Expecting large fluctuations in exchange rates between the Euro and the Brazilian Real, the procurement officer in the Netherlands suggests that instead of using expensive third-party currency hedging services, they use Lichen to benchmark the developer’s contract fee to their respective cost-of-living indices, as reported by Numbeo. In actuality, this would insulate both parties from volatility in the currency markets, by stabilizing the values paid and received in terms of tangible local purchasing power in Brazil and in the Netherlands.
To implement the agreement, the procurement officer selects the Numbeo price index from a list in their e-procurement form. Now, when processing each bi-weekly invoice to issue direct peer-to-peer payments, the software automatically queries the Numbeo service, applies that benchmark to the amounts, and reports the adjustments in the record of transaction sent to each party.
Maintaining Manufactured Goods Prices Relative to Input Costs:
Once it’s launched, Lichen could be used in algorithmic pricing to hedge input price volatility.
A manufacturer of tools in Shijiazhuang City, China, places a monthly order of hardwood, metal, rubber and other raw materials with an industrial-commodities wholesaler, paying for these in Renminbi.
The wholesaler buys the commodities from a separate import/export business, also paying in Renminbi. The import/export business buys commodities worldwide using a diversity of currencies, and sometimes even barter arrangements.
Even though the tools manufacturer conducts all of its procurement transactions in a single currency within their own country, they face indirect exchange-rate risk and global commodity-markets risk. Considering this, they put Lichen to use within their procurement system to manage risk from general raw materials price volatility, by benchmarking their own finished-product prices to an index constructed as a moving average amongst a set of global exchange-traded primary commodity prices.
Once a procurement manager selects the index from a list in their procurement application, every Saturday at midnight the software automatically pull in the current index value, and applies it to prices in their online catalogue of tools. These prices are used for sales throughout the following week. The index value is explicitly reported in all transaction receipts issued to customers, with a link to a company web page that summarizes its purpose.
