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Keeping Your Pricing In Line With Your Costs

(November 2008) posted on Mon Nov 17, 2008

Don't get caught off guard by unexpected cost hikes. Learn how to carefully track your direct and indirect costs and then adjust your pricing so that your business remains profitable and healthy.


By Mike Ukena

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If you have a newsletter, email customer blast system, and/or a dedicated sales force, use these vehicles to keep your customers in the know about the pricing pressure that you are facing. Most of your own vendors are trying to do the same thing. No harm in copying their methods. I know of one major screen-print supply distributor that has a section on the home page of its website listing all the most recent price increases that they have had to enact. It makes it easy for their print customers to get a snapshot about how their own costs are likely to be affected in the coming weeks.

It is also a good time to avoid long-term, fixed-price contracts with customers. Unless you can secure your raw materials at a fixed price for the period of the contract, I would be very leery of a long commitment that does not allow you to adjust for your own cost increases. At the same time, customers would love to get a fixed price contract right now. For the same reason that airlines have been trying to hedge their fuel costs, a company that can fix some of their own costs can create quite a competitive advantage. Unfortunately, these advantages come at the expense of their suppliers. In this case, that supplier would be you, so be careful!

 

Keeping your business healthy

The ideas I have suggested here are not just good for the short term. They can be a good long-term addition to your bag of tricks for helping you keep tabs on your business. The value of the quick snapshot on costs is useful anytime. Even in an economy where prices and costs seem stable, why wait until the monthly or quarterly accounting reports to find out your profit margin took a dive because you did not react to a cost change on a major component of your business?

A good practice is to run the spreadsheet model any time you see a change in one item that you have included on the sheet. For instance, everything has been going along fine for months and, all of a sudden, your insurance costs spike. What does that do to your model? On our spreadsheet, a 15% increase on insurance would translate to a full 1% increase in indirect costs. If you were used to a 10% gross profit, that number just went to 9%—unless prices are adjusted.

I fully realize that we are talking about a perfect world here where everyone raises and lowers their prices based upon costs. In the real world, you also must face the competition that uses the cost pressure situation to gain market share by not raising prices. This situation is no different that any other day, it is just happening more frequently because of the cost pressure. Just remember, that the competition is experiencing the same cost increases that you are. Eventually, if they do not raise prices, it will hurt them.

You have to weigh the cost factors facing you and decide where your limits are independent of what the competition is doing. If you lose money on an order for competitive reasons, realize that you cannot do that forever, and neither can your competition. It is better to have a healthy smaller business than an unhealthy larger one that goes belly up. 

 

 

Mike Ukena is a 22-year screen-printing veteran who has owned a textile-printing company and worked in technical services for the SGIA as the director of education. A member of the Academy of Screen Printing Technology, Ukena is a frequent speaker on technical and management topics at industry events. He is currently a technical-sales representative for Union Ink Co., Inc.

 


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