Pricing Strategies: A Guide For Job Shops
Understanding pricing so you don’t lose money.
Too many job shops are misinformed about the objective of quoting. They believe the objective is solely to win the job. But the goal should be to spend the least possible amount of time and effort to deliver a quote to the buyer at a price they’re willing to pay and that is profitable for your shop. Most job shops win about 30% of their quotes. Consider the time required to build 100 quotes, when you will likely lose 70 of them. That’s a lot of time wasted – time that you will never get back. Let’s discuss the different pricing strategies and which ones are more beneficial for a job shop.
We will start with activity-based costing since that is the method that most shops use. Activity-based costing relies on determining and detailing the steps in the manufacturing process and factoring the cost for each of those steps. These activities include admin time to review the part, material ordering time, programming/engineering time, and set up and cycle times. Some job shops even get as granular as considering the weight of a part and determining what it is going to take to move that part around the shop floor. As you can see, you can go deep with costing. Shops that embrace this approach run the risk of “over-engineering” a quote in the belief they need this level of effort to ensure they don’t lose money on the job. However, costing is a time-consuming process. You could spend a lot of time building a quote for a job you never win.
Pricing, more specifically value-based pricing, is an entirely different approach. Value-based pricing includes the “added-value” you provide to your customers that goes beyond the simple cost of building the part. That added value can take many forms – faster turnaround time on quotes and orders, proprietary manufacturing processes, specializations such as building complex components in a shorter amount of time, or even phenomenal customer service. If you have a buyer who requires expedited turnaround and you “bump” three jobs to meet that deadline – that is added value that you are delivering to the buyer, and you should charge for this. Value-based pricing is a combination of the market value and differentiated value – those additional services or unique requirements a buyer may need – so start to think about the “whole value” your shop is delivering.
Pricing generally takes less time than costing, and not only ensures that you’re covering your costs but recognizing revenue for all of the value that you bring to your customers. Let’s explore what happens when quoting takes too much time. Consider the chart below, which details the cost of spending time on a low-price job versus a high-price job. When you spend too much time costing out a small job that is worth $1000, the “cost of quoting” grows exponentially (16% vs 1.6%). This means that you are losing money on that job, even if you win it, because you spent too much time quoting it.
Understand your buyers. Know what is important to them and highlight the value you provide that they are likely to pay for – faster turnaround times, great customer service, just-in-time manufacturing, more advanced shop capabilities, and articulate a price for that added-value.
So, what can you do to figure out what to charge and how much time to spend on quoting?
Here are some suggestions:
- Determine your break-even point – the minimum price you need to charge to break-even.
- Benchmark the competition. Take the time to quote a few jobs with your competitors and some of the sites that buyers are likely to hit (Protolabs, Xometry, Fictiv, etc.). Compare the quotes to what you are offering both in lead time and price to understand what you are up against.
- Conduct a job costing kaizen event. Most shops do not do true job costing. Take the time to map your quote-to-cash process for a couple of jobs and record exactly what time and resources are required for each of them. Use that information to understand what hidden costs might be overlooked in your existing process.
Value-based pricing is faster and more profitable than costing. The faster you can provide quotes, the faster you can process jobs and take on more business. You have built your expertise and differentiated your shop’s capabilities for a reason. Don’t be shy about charging for that, customers will pay for the value you bring. Tout your value-added services and stop over-engineering quotes, particularly small ones, spend more time processing jobs and bringing in revenue.