CEO Journal Time to Rethink Pricing Dan Marcus, TDC Consulting Inc., Amherst, Wisconsin


from customers back to metalcasters, which happens with clockwork-like regularity as the relationship between supply and demand changes. Specifi- cally, as demand within a particular market segment falls relative to sup- ply, owing perhaps to an economic downturn or the addition of signifi- cant casting capacity, pricing power shifts to customers. Conversely, as segment demand rises relative to sup- ply, as is happening now in the wake of the recession and casting capacity shakeout, pricing power shifts back to metalcasters. Pricing changes can have a dramatic


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and immediate impact on both the top and bottom lines of companies that can sure use the profit-making help these days. Plus, knowing as we do that pric- ing power is returning to metalcasters, CEOs should be thinking seriously about a more contemporary and com- prehensive approach to pricing. Here are some of the basics to get started: 1. Abandon cost-plus pricing and replace it with market pricing. Given that the market has beaten down many prices over the past 18 months, it is counter- productive to continue to peg casting prices to costs, as doing so will work against getting that lost margin back. Moreover, cost-plus pricing is a virtual guarantee that metalcasters will attract business that does not belong in their facility, and it will leave pricing dol- lars on the table for work that does belong there. Market pricing is the only way to maximize price realiza- tion over time.


2. Don’t give anything away for free. Metalcasters need to charge cus- tomers for everything they provide, including services like mechanical


MODERN CASTING / August 2010


ricing should be at the top of every CEO’s agenda these days because, as I write, pric- ing power in many segments of our industry is shifting


and chemical certifications, pallets and containers, non-standard inspec- tions and layouts, management of outsourced service providers, the costs of carrying castings in kanban inventory, and so on.


Market pricing is the only way to maximize price realization over time.


3. Never add cost without first attending to the price. In other words, no engi- neering change or quality enhance- ment should be made for any reason without first rethinking the price. This is not to say that getting a higher price will be easy or that you should always ask for one. But the rule is never to take on additional costs without at least carefully thinking through the price implications before doing so. If that is done, the result will often be a higher price without having to push through a price increase per se. In other cases, customers will be discouraged from implementing questionable quality “enhancements” or otherwise adding unnecessarily to a part’s cost, which in turn will help protect your margins.


4. Don’t give away cost savings. Some believe that it’s the business’s ethical obligation to pass on to customers the cost savings gained from capital improvements, engineering changes and/or manufacturing process im- provements. Nonsense. No such obligation exists, and it never has. That said, it is sometimes advisable to share a portion of its cost savings with customers.


5. Employ an all-inclusive surcharge, and begin to think of it as an integral part of the market pricing strategy. This at a minimum means including


all raw materials and energy in the surcharge. Moreover, I suggest a surcharge management fee be built in to cover the costs of maintaining what has become a large, complex, report laden, margin-less, and vitally important element of every metal- caster’s revenue stream.


6. Fix problem jobs now. Compile a “misery index” of jobs that soak up lots of resources (because of chronic quality and/or productivity prob- lems) and provide little or no margin relief.


Start with the most miserable


jobs and immediately begin discus- sions with customers about lowering costs and/or raising prices.


7. Understand how customers will react. Buyers and purchasing managers alike will typically howl and threaten to pull the work at the mere men- tion of increased prices. Despite this knee-jerk reaction, customers will always go through at least an informal cost-benefit analysis before moving a part, and they do understand that switching costs can amount to 20% or more. Keep in mind that custom- ers absolutely do not want to move work from a trouble-free supplier, that their initial reactions are often for show, and that a well documented and reasonable price increase can usually be implemented without damaging the relationship. It’s a fact that pricing is by far the most


difficult marketing management task and, while the items mentioned here in cursory fashion are just the basics, they have been proven effective and are far superior to the old-fashioned across the board price increase. These concepts should be the CEO’s first steps in his or her modernization of the pricing side of the profitability equation.


MC


Keep the conversation going. Reach the author at tdcmetal@wi-net.com to com- ment on this or any CEO Journal column or to suggest topics for future columns.


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