Or being taken to the cleaners?
When you submit a tender, proposal or quotation do you know whether your pricing is reasonable, that it covers all your costs and provides a margin of profit? It is so easy to assume that our costing and pricing are reasonable, when they just may not be, especially when the business is operating in the black. If your business is making a profit then things must be alright, mustn’t they?
Well, maybe not so. Consider the case of this laundry business which for the sake of anonymity we’ll call Cromar. Like most laundries Cromar serviced a wide range of clients from Mr. and Mrs. Joe Blow to sporting teams, businesses and accommodation houses. So they were dealing with individuals on a personal basis and businesses on a contract basis.
Individuals provide myriads of small individual transactions and are a valuable part of the business. However it is the business base which provides opportunities for volume over which to spread the fixed costs of overheads.
Why is volume important? Laundries are a commodity business. There is little opportunity to differentiate the product, except on service. So margins are low and throughput becomes important. The more units processed, the lower the fixed cost element per unit, and the higher the return.
Cromar was big enough to be more than local, operating in a number of regional centres. Get the throughput, spread the overheads, reduce the cost, improve the margin. Sounds good, and so it is, if you can get the fundamentals right.
Getting the fundamentals right became an issue when the business was asked to tender to a business which owned several large motels. The deal would offer them consistent volume over the year, more than half a million dollars’ worth in fact. A deal well worth winning.
But winning became a question when the laundry held discussions with the potentially valuable client. The client liked their prices on some items, but not on others, which in turn raised questions in the management’s mind. Were their costings and prices reasonable?
In fact the reasonable thing to do seemed to be to have them checked. Bring in an expert from outside to go through every aspect of their costing and pricing.
The results? Well, they were interesting. That is one way of describing them. Interesting because of the questions they raised about how costs were allocated and prices developed.
Essentially the outside review found that costs were not being allocated correctly and prices charged as a consequence were, in some cases, insufficient to cover costs, and in others more than sufficient to the point where the margins were, shall we say, generous.
No wonder the potentially valuable client had questions. He was happy to take the lower prices but less than enthusiastic about the higher.
There was a happy ending to this tale. With revised pricing Cromar were able to negotiate a satisfactory contract that kept both sides happy. But it does leave a question for you.
And that question is: “Do you know whether your costing and pricing is reasonable, that it covers all your costs and provides a margin of profit? How long since you have reviewed your costing and pricing?
A good contract based on poor pricing could take you to the cleaners!
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