Costing is a Science, Pricing is an Art: The Dangers of the Over-Engineered Quote
Amazon started as a bookseller in 1994. Everyone said it was crazy to think that people would buy books online. But in 1999, Amazon completely changed the game of customer convenience by creating and patenting the 1-click-buy.
Fast-forward to today and things have changed quite a bit for Amazon. So much so that they have significantly altered our expectations for speed and convenience; in 2021, roughly 65 percent of all U.S. Amazon shoppers were Prime members, willingly paying more to get their products faster.
Many companies across a variety of industry verticals are leveraging the same philosophies and frictionless experience Amazon provides to buyers. In manufacturing, these companies have invested tens of millions of dollars in providing buyers with a more streamlined quoting experience. These companies are starting to change buyer expectations.
In a custom part buyer report Paperless Parts conducted this year, nearly half of respondents said that the speed of shop response directly impacts their decision to work with them. This factor proved to be even more important to buyers who need quick-turn prototype work.
If you’re a contract manufacturer, how can you leverage that need for speed? It comes down to faster costing and more strategic pricing.
One of the biggest mistakes a shop can make is to look at costing and pricing the same way. Costing is a science, whereas pricing is an art:
- Costing involves looking at everything involved in making a product.
- Pricing requires you to ask, “am I getting the full value for the service I’m providing?”
Job Shop Costing
What’s typically accounted for in the costing process for job shops?
- Admin Time: Order processing and vendor management
- Raw Materials: Cost of materials to include scrap and cutting to size
- Yield: How many setup parts you need to achieve the required quantity
- Programming Time and Engineering: Time to build the CAM package
- Fixturing/Setup Time: Preparing your machine to run a job
- Tooling Costs: Special tooling and wear on existing tools
- Machine Runtime: Cycle time on the machine (attended or not?)
- QA: Ensuring critical tolerances meet required specifications
- Secondary Processes: Outside finishing services and heat treating
- Shipping Preparation and Shipment: Packaging costs and time, carrier services
- Overhead: Allocation of fixed costs to consider utilization of assets
Costing can be time-consuming if done properly, and risky if not. The most important considerations when costing are ensuring that the time and money you spend quoting can be covered by the total cost of the job. It’s also critical to know your floor – if you don’t, you risk losing money on a job.
Want to learn defensive and offensive pricing strategies? Check out our official Job Shop Pricing Playbook today.
Job Shop Pricing
For job shops, pricing is really the art of recognizing the true value in the service you are providing outside of the cost alone and being able to capture that value accordingly. This includes extremely fast turnaround times, high accuracy on increasingly complex parts, and unique or proprietary manufacturing processes. It should consider:
- Risk: How hard are these parts to make and what is the risk of rework?
- Urgency of the Buyer: Does the buyer need the parts as soon as possible?
- Type of Part: Prototype vs. replacement part
- Criticality of the Parts: Are they going in a critical application?
- Availability of Sources: Is it the slowest or busiest time of the year?
- What Others Charge: Have you benchmarked similar parts from other services?
- Type of Buyer: Engineer vs. procurement buyer
- Relationship With Buyer: Is this an existing customer or new work?
- Economy: Is the economy booming or in recession?
When pricing, it’s critical to understand your buyer (how much do they value lead time?), your competitors (how many ITAR/AS9100/5-axis/OEM Qualified options are there that can make this part in 3 days?), and the economic climate (can you ballpark a profitable quote and be in the acceptable range to win the job?).
There’s no one-size-fits-all job shop pricing formula. And ultimately, the right price is the price a customer is willing to pay.
A New Generation of Buyers in Manufacturing
Today, part buyers simply have different demands and expectations than they did 10, 5, or even 3 years ago. If nothing else, the need for speed justifies a need for automation and technology.
Paperless Parts enables estimators to focus on the three key steps they must execute:
Can/should we make these parts?
Manufacturability warnings (custom interrogations) help an estimator make the first decision in their quoting process: deciding whether or not their shop can and/or should make the part(s). If the parts are not the right fit for the shop, there is no point in quoting them. Warnings also help estimators quickly catch design mistakes and provide that feedback to customers early in the estimating process. This collaboration makes the shop look more professional and reliable.
What steps need to be taken to make these parts?
Process templates and custom processes help reduce the amount of decisions and clicks an estimator has to make by creating out-of-the-box router templates and automated router templates based on the geometry in the part file. This is decision support for the second step in the quoting process: determining which steps need to be taken to make a part.
What does each step involved in making this part require?
Flexible pricing rules help estimators create operation/workcenter-specific pricing rules that save time in the estimating process. Whether it is as simple as a default value for setup time or as complex as leveraging the geometric features of a part to derive time, these rules establish guardrails in the estimating process and allow estimators to run faster and click less without running off the road.
As a result?
- Faster quotes and higher win rates
- Reduced quoting costs and higher profit margins
- Higher quote volume (AKA more revenue)
- Consistent pricing for stability and efficiency
- Reduced human error (AKA predictability)
On top of winning more work and earning more money, you’ll spend more time being productive and investing time into more things you care about.
Download our latest Custom Part Buyer Report to find out how to meet and exceed customer expectations and win more work.