The soaring cost of material, energy, labour and transportation has led companies to rethink how they price, quote and even sell finished goods to remain competitive.
Two of the most common pricing strategies used within manufacturing are competition-based and cost-plus.
Competition-based pricing is a model that is predominantly outward-focused. Prices are based on what others charge in the same market as you. While helping companies remain competitive, this strategy doesn’t account for how much customers value a particular product or differences in production costs.
Cost-plus pricing takes the total cost of manufacturing and shipping a product and adds a fixed markup percentage on top. This model ensures a company covers all its production costs and helps ensure a profit is made.
However, it relies on predictable fixed costs such as labour, materials and transportation. It isn’t so effective during times of high volatility such as we’ve seen in recent years.
A disadvantage shared by both pricing strategies is they leave money on the table, and potentially lots of it.
Another behaviour prevalent in manufacturing is annual price-setting. Prices will be set in January, reviewed in December and tweaked the following January as necessary.
Again, this is a strategy best suited to times of relative certainty and stability. Many words could be used to describe recent trading conditions, reliable and stable wouldn’t be among them. Reviewing prices on such an infrequent basis has therefore become unsustainable.
With traditional pricing strategies firmly under the spotlight, often for the first time, decision-makers are looking to adopt a more agile, value-added approach. Volatile trading conditions are also driving them to understand their cost to manufacture at a much more granular level.
These were the key takeaways from a recent Discussion Group chaired by Jonny Williamson. Contributions were provided by Made Members representing a broad cross-section of industry.
Increased focus on stockholding and efficiencies
Raw material costs have increased dramatically over the past 36 months. While some appear to have stabilised, others continue to fluctuate and almost all remain elevated. Many companies have increased their stockholding of materials, components and finished goods to help minimise lead times and make quoting more accurate.
While this does have its advantages, tying working capital up in inventory does mean that money can’t go towards buying new machines, marketing activities or recruiting and training staff.
Nevertheless, some companies have had to pass price increases on to customers. One Member noted that despite customers sympathising with the situation and have often raised their own prices, it doesn’t make these conversations any easier.
One positive of the situation is the acute focus it has driven on process efficiency. With the cost of electricity or gas being so high, for example, companies are looking to minimise their use of it wherever and whenever possible. In many instances, inflation has served to reinvigorate continuous improvement efforts company-wide, both on the factory floor and in head offices.
Similarly, one Member commented how the pandemic provided a rare opportunity to step back and review what the company did and how it goes about doing it. So many efficiency opportunities are left untapped until there is a reason to go after them, he noted.
One such opportunity his company uncovered surrounded customers placing small but regular orders, oftentimes several each month. Previously, an invoice and delivery notes were created for every order placed.
Now, the company has introduced open orders so customers receive a single invoice at the end of each month detailing everything they’ve ordered. This has created significant time and cost savings for the admin team.
Delivering greater customer value
In order to avoid a race to the bottom, companies are increasingly having to compete on more than price alone. This has led manufacturers to look at strengthening their service offerings. Examples offered by Made Members include design consultancy, parts assembly, order consolidation, equipment installation, user training and after-sales support.
The group concluded by discussing whether recent events would lead to a renewed interest in servitized business models, i.e. outcome-based rather than product-based sales.
Image courtesy of Advanced Services Group - Aston Business School
The ‘servitization’ of manufacturing isn’t a new concept. Rolls-Royce has been offering power-by-the-hour, its pioneering approach to aviation engine maintenance, for over half a century. Yet, the model hasn’t become mainstream, particularly with the SME community, despite receiving a lot of attention immediately following the global financial crash.
In its simplest form, servitization looks to replace or augment one-off product sales with recurring subscription fees through offering products-as-a-service. It has been proven to help deliver greater value to customers, while opening up new revenue opportunities and differentiated business outcomes.
Could we see a resurgence of interest from manufacturers in servitization in 2023? There’s a strong possibility concluded the group.
Meet, confer and share best practice
Opportunities to openly discuss and consider challenges, opportunities and solutions are why the Made in Group’s Virtual Breakfast Mornings are so invaluable.
Seventy-five minutes out of your morning to hear inspiring and thought-provoking conversations, build relationships with like-minded fellow manufacturers, and gain a clearer picture of what’s happening beyond your factory gates.
We look forward to seeing you at the next one:
*Images courtesy of Pixabay