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The Hedging Corner: Pricing Choices to Win Customers
Hedging tools such as resins futures (discussed in last week's Hedging Corner) provide means to protect manufacturers against higher resins and other raw materials costs, but may also be used to protect customers - existing and prospective - against higher costs. For manufacturers with spare capacity or bidding on contracts, explicitly protecting customers against higher costs means providing product pricing choices.
Tom Langan
July 6, 2011
3 Min Read
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. Pricing choices increase the likelihood of winning new customers through marketing efforts or contract bidding without sacrificing profit margins.
Manufacturing is highly competitive and, in order to compete, manufacturers must deliver products on time (reliability), meet or exceed product specifications (quality), and be customer-friendly (service). Most customers now expect those characteristics, so manufacturers aren't necessarily rewarded with new business for having them. So what's left for manufacturers, particularly contract manufacturers, to do to win new business? Many have decided they must offer the lowest possible price, even to the point of sacrificing profits just to stay in business. (Others just give up.) Yet, even offering the lowest price among regional competitors isn't enough to win new customers when competing with Chinese and other manufacturers who possess labor and other cost advantages. So is there anything U.S. manufacturers can do to win new customers, and retain existing ones? Yes. Offer customers product pricing choices.
Given the available hedging tools, there are several pricing choices manufacturers may offer customers. Most manufacturers only offer the Standard - a fixed price plus an "adder" to cover higher raw materials (resins, metals, etc.) costs as they occur over the life of the contract. This price "choice" protects the manufacturer against higher costs but does nothing for the customer. How's the Standard working out? How well did it work the last year as resins and other commodities' costs moved higher and manufacturers passed along these higher costs (or tried to) to their customers? By most accounts, not well.
If the Standard pricing choice isn't working well for you, here are three simple but winning alternatives:
Fixed price with no cost adder. The customer isn't exposed to higher commodities costs and you don't have to worry about passing them along.
Fixed price with no adder plus a floor, where the floor price limits or eliminates potential "buyer's remorse" for the customer at time of delivery.
Capped price. The customer pays the lower of the capped price or the market price at time of delivery.
These and other pricing choices are standard operating procedure (SOP) for buyers and sellers in other markets. They ought to be SOP for plastics manufacturers. However, they certainly aren't now and I doubt they will become so anytime soon. This presents even greater opportunities for those intrepid enough to learn how to -- and then offer -- pricing choices to their customers. In fact, pricing choices will even enable some manufacturers to compete effectively with processors in low labor-cost countries for medium- to long-term business. Customers may be willing to forego the short-term cost advantage provided by an offshore manufacturer for the price flexibility and protection provided by the intrepid manufacturer. That intrepid manufacturer can be you.
To learn more about pricing choices while maintaining profit margins - and even learn how to obtain pricing choices from your resins suppliers - email me at [email protected].
About the author: Tom Langan is a risk management consultant who operates WTL Trading. He specializes in commodity cost control, margin improvement, and revenue expansion for manufacturers and their customers.
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