Beware of cutting prices.

Beware of Cutting Prices

To many sales and marketing people in our industry, cutting prices is a good alternative to the considerable effort involved in developing an effective marketing plan. Similarly, a lot of top managers consider "creative" pricing a viable alternative to incurring the expense of building a strong marketing program.

The rationale goes something like this: "When business is good, profits are up and we can afford to reduce prices in order to build a lot of volume so we will be in a better position when the bottom drops out. When business is bad, we can get more volume by reducing our prices, thus, getting us up to or above the breakeven point."

Both of these arguments are nonsense. Most foundries don't charge enough for their castings in good times. Often, foundrymen are surprised when significant and repetitive price increases go through with hardly a ripple. Then they wonder how much profit they have missed over the past few years by bringing their prices into line too late.

When business is good, foundries need cash to fuel growth and liquidate debt, money that could be generated by high margins. When business is bad, cutting prices usually only makes things worse. Sales must be increased substantially to recover the dollars lost by the reduced pricing levels.

Most foundry managers are overly fearful about raising prices. Their sales people tell them that higher prices won't stick and that customers will place their business somewhere else. In some cases, that may be so. If you meet too much resistance from customers, however, you can always go back to the table and reach a compromise. The fact is that you can only evaluate the accuracy of your pricing by attempting increases.

You also should judge the success of your price improvement program by what your customers do, not by what they or your sales people say. After all, it is the nature of buyers to grumble about prices--particularly the less experienced ones who don't feel they are doing their job unless they complain bitterly.

Determining Prices

Many foundries set prices by marking up costs, which virtually guarantees trouble. If your costs are higher than your competitor's, you price yourself out of the work. If your costs are lower, you leave money on the table.

Pricing with a standard markup is not only irrational, but it strongly undermines the marketing program by employing a mechanical technique for coming up with a number that may or may not have any relationship to providing your sales people with a useful market price.

Because price should be based on the reaction of customers, the right price cannot be computed by using a mathematical formula. Setting a selling price by a cost-plus-profit formula is not conducive to maximizing profit in today's highly competitive marketing arena.

Since individuals have their own buying characteristics, it is a serious mistake to assume that pricing policies that apply to one customer will apply to others. Similarly, all jobs will not have the same profit contribution. In the real world, contribution will vary greatly from one job to another.

From the customer's standpoint, he naturally expects price to decline as volume increases. Thus, foundries encounter two basic types of buying practices with higher volume accounts.

First is the price-buyer, who purchases castings in large volume. Typically, he is a shopper with little loyalty to his foundry sources. Essentially, he is a trader. This is the type of work that is extremely vulnerable to foreign sourcing.

The second type of volume buyer is primarily interested in one or more special services, elevated quality requirements, flexibility, delivery, capacity, etc. As long as he is satisfied with his current source, he usually is reluctant to change, providing the price does not get too far out of line.

A lot of care should be given to ongoing price adjustments for these accounts, where demand will be constant over a reasonable price range. Your market intelligence program should be good enough to alert you to the point at which price increases become excessive and place the work in jeopardy.

A good technique for accomplishing this is a quarterly price review of all major jobs in the foundry, with an eye toward increasing or reducing selling prices as market conditions change in order to maximize profit. If volume is declining, then some labor, material and overhead costs are avoided. However, standby and programmed costs cannot be avoided. Additional profitable work must be obtained or these overhead costs will have to be reduced.

Other Pricing Tips

Here are two other thoughts on pricing. First, don't discuss prices with your competition--and particularly not when a third party is present. This is a blatant violation of the antitrust statutes and punishable by a personal fine of $100,000 and six months in jail. Your customers can compare casting prices all day long, but if you do it, it's against the law.

Second, when you institute price increases, make them gradual. Don't hold the line too long or you will be faced with a really tough selling job by trying to get a large catchup increase at one time. You could end up losing the job. Casting buyers find it much easier to sell their management on price increases that are frequent but small, rather than those that are infrequent and large.

When sales slow down, it takes a good marketing plan and lots of hard work and creativity to turn the situation around without sacrificing margins. If nothing seems to work, then the only way to increase sales and generate contribution may be to cut prices. However, this should be done only as a last resort and not as a knee-jerk response to help out the bottom line.

T. Jerry Warden Foundry Marketing Services Estero, FL