Understanding Purchase Price Variance (PPV) and Why It Matters

Our world is changing. 

And there's no indication of that stopping anytime soon. 

For businesses? 

It means that you must be even more confident in your purchasing decisions. 

But how?

Well, metrics exist for a reason, to help you measure the level of success or, in some cases, failure regarding key operations of your business.

So, how is that PPV isn't part of our daily conversations?

Purchase price variance, after all, meets all the criteria to become the next popular procurement metric.

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What's Purchase Price Variance?

It's not complicated, really.

PPV is the metric with which businesses can understand the difference between the baseline price of a product and what they actually paid. 

For example, it could be that you were aiming to pay $X for a box of supplies, and at the end of the day, you had to pay $XX because the market suddenly changed.

Pretty straightforward, right?

Let's move on to the formula 

PPV = (Actual Price – Standard Price) × Quantity Purchased

Where:

• Actual price:  The real price you paid. 
• Standard price: The ideal. What were you planning to spend based on forecasts or trends?
• Quantity: The number of purchased items.

So, if you expected to pay $10 for a part but ended up paying $12 for 100 units, your PPV would be:

($12 - $10) × 100 = $200 unfavorable variance.

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Is PPV always bad news?

No

Sometimes, you might find that your baseline price was a bit higher than the actual price. That's called a favourable variance.

Understanding the real value of PPV for your business is an important opportunity to discover how well aligned procurement is with your efforts to save money.

Is PPV the sole metric to measure?

No

Knowing your Purchase Price Variance is a good step to have better spend management, but it shouldn't be the sole focus of your company's strategy.

Depending on your goals, there could be some additional metrics to look at.

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Why PPV Matters?

Keeps costs under control 

The power of PPV? 

Lies in the information it provides.

Beyond knowing if you paid more than what you wanted or if something good happened and you saved a few hundred, working with the PPV formula gives you precise data on what could be happening with your spending habits. Maybe it's time to update those pricing predictions you are still using as a reference.

Helps budget management 

Most of the time, we set budgets based on research and experiences, but if you are constantly seeing price variances in certain products or with a group of suppliers, you could use some budget revisions. 

Budgets only work when they've accurate information to help you make better decisions.

Contributes to supplier management 

Nobody likes to talk about payment changes.

Especially when it's a supplier on the other side of the table. 

So this is another benefit of learning your PPV numbers. You can spot trends in pricing changes and use that insight to negotiate better deals, ask smarter questions, or even re-evaluate your supplier relationships if that's necessary.

Impacts profitability 

If you are always paying more money than what you prepared for, you could end up facing financial issues. 

PPV gives you the chance to stop this vicious cycle before it starts reflecting on your profits.

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How to Calculate PPV? 

As we mentioned above, for all the fancy acronyms, Pricing Purchase Variance isn't that complicated to understand. 

But let's repeat the formula in case you didn't get it the first time.

The Formula 

PPV = (Actual Price – Standard Price) × Quantity Purchased

Favourable vs unfavorable 

• Favorable PPV: When the actual price is lower than the standard price, which, of course, means you saved money.
• Unfavorable PPV: When the actual price is higher than the standard price, this is probably the most common because it means you overspent.

You can also calculate this as a percentage to get a better sense of scale:

PPV % = [(Actual – Standard) / Standard] × 100

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What Causes PPV?

Well, depending on the results you get, it's possible to say that PPV happens for positive or negative reasons.

These are the most important ones:

Market fluctuations

Especially right now 

Even with all the best forecasting ability, predicting accurately what's going to happen tomorrow is becoming increasingly difficult. 

Maybe it's the natural disaster no one saw coming with such magnitude or the geopolitical crisis that gets worse by the minute, whatever the reason, there's a simple truth: The price of your materials can rise or fall in a matter of hours.

Supplier pricing changes 

Even when the world acts stable, you can still see some changes in the prices agreed with your suppliers.

Suppliers are independent companies, and just like your own business, they could face internal issues. So, be on the lookout for any price changes from their part and see if you guys can sit down and talk about it.

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Maverick spending 

And that means poor processes.

If your company doesn't have a strong procurement process distributed across all departments, then there's a high chance that everyone is left to their own devices when it comes to making a purchase.

In search of meeting their instant requirements, your staff might be rushing to purchase something regardless of the high price.

Volume pricing adjustments 

Many suppliers offer pricing based on volume. If you expected a bulk discount but didn’t hit the quantity threshold, or forgot to apply a discount code, you might end up paying more than planned.

That’s a quick way to see an unfavorable variance.

Negotiation 

Alright 

Enough of the bad news

In some cases, you can see PPV as the result of good effort.

Have you had a chat with your suppliers recently about how pricing could be slightly reduced?  

Maybe you are buying more and more, and it could be time to talk about bulk discounts.

Have you heard about early payment discounts?

There are certainly ways to pay a bit less than what you expected.

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PPV, Budgets, and Forecasting 

Because just like with any other metric, PPV is a great tool to see beyond the first glance and discover hidden patterns that could be hurting your business's finances.

When used correctly, PPV can give you the insights you need to build more accurate budgets and adjust forecasts to reality.

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Tracking PPV regularly sets you on the course to start noticing trends. Maybe one supplier is consistently charging more than expected. Maybe your team is setting overly optimistic standard prices…maybe nobody knows there's a procurement protocol to follow. 

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Knowing all of that can definitely help you to improve your budgeting and even your whole procurement strategy.

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Forecasting and PPV

Is the busy season coming soon? 

Does everything in the market seem to be close to changing? 

Then it's about time to consider all those possibilities in the POV calculation.

Here's how:

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Forecasted PPV = (Forecasted Price – Standard Price) × Estimated Quantity

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Remember…

No budget survives contact with reality 100% intact. That’s why PPV is also useful for rolling forecasts; you can compare projected costs with actuals in real time and adjust your financial models accordingly.

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Does PPV improve resilience?

In a certain way, yes 

Resilience is all about being prepared for those unexpected hits, so integrating PPV data into your forecasting and budgeting operations sets the first step towards developing the right foresight.

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Strategies to Improve PPV

Work in your relationships with the supplier

Building solid, transparent relationships with your suppliers is one of the best ways to reduce unexpected price changes. Open communication means you’ll be in the loop about upcoming pricing shifts, and it gives you more leverage when negotiating discounts or custom terms.

Tips:

• Schedule regular check-ins with top vendors
  
  
• Ask for visibility into future pricing.
  
  
• Consider long-term contracts to lock in rates.

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Review costs constantly

If your standard costs are outdated, your PPV will almost always look worse than it is.

Make sure you’re reviewing and updating them regularly, especially if you are purchasing materials whose price changes quickly.

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Optimize your times and volumes.

Sometimes, better pricing is all about timing. You could buy during low-demand periods or bundle purchases to hit quantity discounts, so you can reduce your actual purchase price, leading to more favorable PPV.

Try this:

• Plan bulk orders quarterly instead of monthly
  
  
• Use forecasting to schedule purchases ahead of price hikes.

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Automate

Because…yes, things get seriously better when you automate them. 

Procurement platforms help you monitor pricing trends, set price alerts, and generate real-time PPV reports. This lets you take action before small issues become big budget problems.

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