Up to this point, I have been stepping through the process of building a foundation and structure which will provide sustainability and growth for a business. We began with understanding and documenting the initial and current vision and desire on how the business is to be run. I then moved into developing a work flow as well as a process flow for how products or services get from initiation to final product. I have also referenced the importance of monitoring data for current and future tracking as well as reporting. The week I will talk about the important question you might be asking at this stage
what about the price? If the product is not priced correctly, you will lose money.
Everything leading up to this point is designed for you to fully understand your product and service and to dig deeply into what it takes to produce it. The purpose for this process was to adequately asses the costs associated with it. You have to understand the costs before you can understand the customer pricing. The main goal in any business is to turn a profit. Understanding all the aspects of what it takes to generate a product or service is only a piece. One of the most often underestimated pieces in establishing a price are the administrative costs and other side costs for things such as marketing or advertising, taxes, etc. I brought these up in previous discussions so none of them should be a surprise. Hopefully by this point if the subsequent process building brought out a key function or step that was not previously considered, it too will have a cost that was not thought about previously. Everything has a cost associated with it. This includes labor, materials, utilities, equipment, maintenance, administrative, etc. Each item must be assigned and cost and if that costs is direct or indirect. Equipment and labor will more often than not be direct costs and factored into every product or service provided. Maintenance and administrative costs are indirect or spread out over many products or services so subsequently have to be split over all of them. Each cost should be itemized and understood over a time continuum or quantity perspective. Bottom line, Its all about costs, and it will require more than a monthly visit with the accounting department to get a comfort level that all costs are understood and accounted for.
So now were at pricing and quoting. One of the most common pricing or quoting methods I see is the Experience model. That means the person doing the pricing or quoting has been pricing things for so long that they feel they are so good at it, the quote is always right. To that I usually ask, what if that person isnt setting the price, what happens then? Are the prices still carrying the same profit margins as before? What if the product is slightly different than before, is the price still accurately adjusted? What if material costs fluctuate, is the price still reflective of those changes? If you say yes, then you should be able to predict the exact profit margin at any given point. Establishing the price should be an exact science and reflect an established or desired profit margin every time. If the margin for a particular job is different than previous similar products or services, there should be an exact understanding as to why. Pricing or quoting can be as simple as inputting base values into a pricing model and a final quote be generated. It should allow changes to be made for custom situations while providing information back to changes in profit margins. I see a lot of times where this methodology is not followed, pricing is given to a customer, then the job ends up being a loss after the fact only to realize afterwards some detail within the job rod service was not accounted for or adjust according to changes. The pricing model should also take into account situational changes within the market. Utilizing or developing a robust pricing model will facilitate for quote to invoice reporting as well. These reports should be ran on every job to ensure you are compensating for changes in internal situations.
Between understanding costs, pricing or quoting, and robust model as a guide, the key is bringing them together from an accounting month end guess to a day to day exact science. If you dont establish the price correctly on the front end, by the time you realize things are not accurate; the losses could be high enough to apply serious stress against the future business. Considering the desire or aspirations to grow the business or even hand off a portion or all of the business to the next group of leaders, doing this with a confidence and an application of minimal stress to the organization, the costing and pricing or quoting models must be accurate. Learning on the job and on the fly should not be the norm for this process. This does not do the business any justice, does not stage the future growth or leader to be successful, and could ultimately send the business backwards in direction that is unrecoverable. IF the market segment competition is fierce, this segment is even more important as the margins must be kept low and closes to costs to get the customer. Dont learn the hard way. The cost associated with asking for help will pay for itself in very short order.