I've visited a sizable number of component manufacturers over the years and one thing that I've always found remarkable is the wide range of pricing systems employed. To say, "There's no standard pricing model for the industry" is an understatement. Quite a few managers have expressed feelings ranging from ambivalence to outright embarrassment, many saying "It certainly could be better." The goal of this article is describe what "better" might look like.
Right and Wrong
Let's begin with the assumption that there is no right and wrong pricing system, and rather than debate the merits of competing systems, we'll instead describe what we use these systems for. We’ll also describe some desirable characteristics of any pricing system, and then compare those ideas to our own pricing system to see how they measure up.
Features
Here are the basic things I think a good pricing system would deliver:
· Tell me what price I should give to the customer (naturally!)
· Tell me the point below which I would start to lose money. I want to know, "How much 'room' do I have?"
Those are the two big ones, but since I'm aiming high, I'd also like it to do a little more for me:
· Tell me how long it will take me to build. This would help me know how it will affect other work in production and how quickly I can deliver it.
Other characteristics of a good pricing system
A good pricing system is logical, explainable, understandable, repeatable and consistent.
I don't want a system that "works" but no one knows why - it's just mysterious voodoo. Why? If I don't understand why it's working, I won't know what’s wrong or know how to fix it if it starts 'not working.' A consistent, repeatable system would be one that produces the same results with the same input, and is not dependent on a person or ‘impossible to define’ criteria.
Let’s describe a system that’s the opposite, that might work, but not have these characteristics. The statement “This job seems like it has about a 1.7 difficulty factor” might be used in such a system. But if I showed you that same job a week from now, would you still tell me “it’s a 1.7?” On what basis are you arriving at “1.7” as opposed to “1.6?”
Take the Test
So I'll invite you to apply these ideas to your pricing system and see how you make out.
“In considering my pricing system…”
· Does it tell me what price to give the customer? (Or does it tell me a number that I have to do more operations to in order to arrive at the price I give the customer?)
· Does it tell me where my ‘break even’ point is?
· Does it tell me how long it will take my shop to produce?
· Given enough time, could I explain it to another person?
· Is it logical; does it "make sense?"
· Is it consistent and it is used consistently?
If the answer to any of the above is "No," I submit that "it could be better." We’ll talk on ways to go about finding a better system in future articles.