Too often a repeated mantra within our industry is that everyone sells components at too-low margins. The blame is always on the other guy, meaning the competitor, for selling at a lower margin than what should be market pricing. Well, what can your company do to raise margin pricing?
During the peak build season, the lead time for order delivery in many markets is at least four weeks out. This long lead time is caused by requests for new projects (demand) exceeding the capacity of manufacturing (supply) in the given market. Often this exceeding of capacity lasts all through the summer’s build season from the month of May to sometime in October. If this happens in your market, why are you not raising your pricing? When I speak to a client, the normal conversation goes something like this. TDC: “Why do you not raise your prices until your lead time drops to about two weeks, and be willing to give up lower margin orders to your competition?” The client: “But we would lose projects and, potentially, customers to our competition.” TDC: “Yes that is the point; you are giving up projects that are not able to fill your shop with higher margin dollars every day. If your production is never without any slowdown, meaning that your manufacturing is always at full capacity, then your company will be earning more margin dollars daily. Therefore, your net profit for the year would be substantially improved.” The client: “Well, Todd, I just do not want the risk of losing potential customers.” TDC: “So what you are telling me is that, with low margin projects, you are willing to purchase their presumed customer loyalty, but at the same time you’re willing to risk losing customers who would be willing to pay higher margins for better services?” The client: “I never thought it about that way, Todd.” TDC, “As long as your production is at full capacity all build season, it is foolish to be beyond a two or three week lead time and not charge a premium for the service that is better than your competition.”
If your salespeople are not complaining about your company’s high pricing and you are at full capacity, your company is not charging enough. What is the current complaint from your sales team? Is it the long lead times or high pricing? If you have long lead times and they are stating that you have to add manufacturing capacity, then raise your prices! If they are saying your company’s pricing is too high yet your production is always at max capacity, then your pricing is perfect! Only when you have the spare capacity do you lower your pricing. Sales people are working to earn a commission and cannot garner higher wages without selling more. It is in the company’s interest to maximize the company’s net profit, not to maximize the salesperson’s commission checks.
Is your company still pricing your projects based on a cost markup instead of the time allocation of your manufacturing resources? TDC has long been a proponent of helping companies understand that a cost markup formula for the pricing of your truss component projects is a bad idea that should belong in history’s long-dead practices. Think about the idea of renting or leasing your manufacturing building. Would you base the lease on how valuable the material being stored in the building is, or would you base the rent on time, which would be monthly? The same principle can be applied to the table time for each customer. Why are you renting out the table time based on material costs instead of the actual time it takes to assemble the project? The same can be stated about all of the resources of your company. When a project is being processed in your company, it is tying up the resources, and therefore, this allocation of resources should have a dollar amount associated with the amount that this allocation is tying up.
Getting more margin dollars for each project is really up to management more than most think it is. Market pricing is simply what a customer is willing to pay for the quality and service. If the customer is only willing to purchase from your company based on the lowest price, then service should not be your company’s priority for them. Service and, of course, quality are premiums that a customer is willing to purchase.
Speaking of services and value, TDC services are now being scheduled for the fall sessions. Thank you very much to everyone for your business, and I am doing my best to accommodate my services to those who request them. As such, maybe this article might help you understand who is given priority. It is with these best practices that TDC has helped over 100+ companies with actual paid consultations. Lean manufacturing practices, accurate time estimations, best practices for all departments, and better communications inevitably allow companies to make greater gains. On average, a three to six point gain in net profits is the most common result after applying TDC suggestions. This is well worth the time and expense of using TDC services!
Website: www.todd-drummond.com Phone: 603-748-1051
Email: todd@todd-drummond.com Copyrights © 2017