Change Your Pricing Formula for 2018 and Make More Net Profit

Issue #10222 - January 2018 | Page #30

By Todd Drummond

Let us assume that you are having problems with a truck’s transmission and it must be repaired or replaced. The local mechanic explains the hourly rate for service and that the cost of any parts needed to fix the transmission is extra. The hourly charge he is billing is to cover his operating expenses and create a net profit. Note that the cost of the parts he is replacing has no bearing on the hourly rate. The cost of the parts is an add-on expense one is charged on top of the established hourly rate. Now, what does this have to do with roof truss or wall component sales? The answer is a lot more than most may have considered in the past.

If your company was not selling manufactured components, how would you maximize the gross profit for your manufacturing facility? It is quite simple. You would rent or lease your facility at the maximum dollar rate per time period. It would be a natural idea to lease at the maximum dollar rate the market would allow, whether on a monthly, weekly, daily, or even per-hour basis. What a tenant is using the facility for and the cost of materials he or she is using to manufacture his or her products are irrelevant to you. You want the most you can get based on market conditions for the agreed time the lessee uses the facility. Now, when you sell a component project to your customers, how is this so different from leasing your manufacturing facility? When you manufacture a customer’s project, it is using your facility’s hourly and daily time periods.

Most component manufacturers establish the selling price based on the cost of the material plus the labor cost and then use some multiplier for establishing the total sales price. The material costs of lumber and truss plates are like new auto parts for a truck. What does that mean? As stated before, mechanics first establish how long it will take to make the repairs, and then they add the cost of the new parts to the bill. They do not use the cost of the parts, plus the cost of labor, and then mark it up. The cost of the parts has nothing to do with how much of the hourly garage time the repair will consume. The cost of parts is always a separate line item from the hourly charge.

Now we can see how this applies to selling components. Using the material cost to establish the margin rate skews the hourly rate up and down depending on the cost of material. By using the cost of material in a pricing formula as a cost markup, a company is charging less per hour for a facility’s hourly rate when the material market cost drops. By using a cost markup, any time the lumber cost drops, you are giving yourself an hourly pay cut for your company. Now, what can you do to provide a consistent baseline to establish your gross margin markup for each project?

Drummond’s pricing method for proper margin rate based on time.
Material + Labor Cost + (Dollar Rate * Expected Hours) = Sales Price

The results of using this pricing formula will yield higher margin dollars per-hour projects than prior sales. The reason for this is that you will be able to view the gross-margin dollar rate per estimated hour and recognize the high and low margin dollar-per-hour projects at a glance. You will have a much better understanding of which orders are worth the effort and which ones you will pass on to your competition. You will know at a glance how much you will truly be earning on an hourly basis, so, in essence, you are giving your company an hourly raise to do business. All of this will lead to greater net profit at the end of the new year.

So, if you doubt the accuracy of this approach, consider the following from one of our clients. Keith Kylmala, owner of Kylmala Truss in Saginaw, MN, has this to say about TDC’s advice. “We are an Alpine customer, and all I can say is Todd’s time standards are scary accurate! Once we set up the labor configuration file based on our equipment and practices, our truss software estimates the labor time and cost in a spectacularly accurate way. We love how many options there are to choose from with Todd’s time standards labor document. No more educated guessing for our costing and pricing.”

When your company is ready to start using proven truss labor estimations based on industrial engineering practices so that you can use this proven better pricing method, give TDC a call. No one is better at helping companies improve all departments within the wood component industry. When it comes to operational improvements, TDC is the one to call. TDC has the most paid consultations in over 15 years of fulltime refined consulting services. TDC does not receive any referral fees or commissions for any equipment or truss plate vendor recommendations. With TDC, you will get unbiased advisement and proven best lean manufacturing techniques for every department for the wood component industry.

TDC wishes you a happy New Year and a very successful and prosperous 2018!