Friday, 3 September 2010

The price is right

Anyone that has read this blog will know that I regularly criticize the consultants that have worked on our project - but I have also indicated where I think that the company and our project team (and my staff and I) have not done so well. On this occasion, I'm going to concentrate on an area where I think we made a big mistake right back at the beginning and what we should have done and why.

First, I should say that I believe that there is only one way to determine the price for goods to be sold, no matter what they are, how they are made, how they are sold or what industry sector they are in. It's necessary to know what something costs you - the wholesale price of the item, the price of the raw materials, however it starts. You then add in the various costs needed to perform the tasks that add value to the goods, and any overheads. Once you have your final cost, you can then decide what margin you need and uplift the price accordingly, and of course then discount it to help sell the goods. Within that process, it is possible to have a myriad of different techniques - but it all starts from knowing what something costs you.

However, not everyone does it that way, and I regret that we are the same. Many years ago, someone sat down and did the calculations, then produced a "price list" that gave us a reasonable return on the sales. But since then, all that has happened is that each year the prices are uplifted by a fixed amount (or percentage amount) - and now after 20, 30, 40 years of trading, the price we charge bears little relationship to the cost price.

In fact, we don't actually ever know if we are selling something for a profit - the only time we know that the organization has made a profit is after the year end when all of the accounts are settled and we can declare a profit. And it gets worse - we have more than one price list. In fact we have so many that we have more price lists than we have sales staff and different customers get quoted from different lists. Despite what our sales people try to say, I know that they regularly used to make pricing errors when providing detailed quotes for customers.

Now the introduction of SAP was a superb opportunity to correct this - we could have had just the one price list and based it upon what the costs were. In fact, it was one of the key requirements for the new system that we should be able to determine costs on each individual product, so that we could achieve a sensible and balanced profit margin across the board.

Some work was done on establishing the costs, but it turned out that these fiugures were from our old system, and modified based upon certain assumptions. Unfortunately, they have proven to be less than accurate. Worse, instead of developing a new pricing system based upon this, the old price lists were entered into the SAP system and we are effectively still using the old pricing.
that we used previously

Now all is not lost - after operating for a year, we are starting to get some information from the system that means we can start to put some sensible values in for the costs and activity rates. These show that some of our intial assumptions were way out, but some were not too bad under the circumstances. The general feeling is that in about a years time, we will have values that are about as accurate as we could get, and most people would be happy to use those.

However, we are still no nearer getting a pricing structure that will give us confidence of selling anything for a profit. I know that our sales people don't agree with me on this - but I can guarantee that not one of them actually knows what sort of a profit we make on any sale at all. As it happens, I am sure that we are making a profit, but I'd be very surprised if we couldn't do better at both selling and making a profit if we had a better pricing structure.

I suppose that we can say that this is a project for the future, and I'm certain that if we did do this, we would see some benefits. But I doubt that there will be any pressure from the sales staff to change - they are happy with their current method and they see no problem at all in continuing with the same old system. I just feel that we have missed a golden opportunity to make a significant improvement to our processes.

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