The Hedging Corner: Pricing choices for sales and profits

13/07/2011

As discussed in last week's Hedging Corner, reliability, quality, and service have gone from being 'game changers' to 'admission tickets' for manufacturers to compete for new business, and hold on to what they have. It's not fair, but the evidence for this "unfairness" is clear; the latest provided by this study on a plastics processing, "Utilization of injection molding machinery is very low, averaging under 40% on a 24/7 basis" and "many companies routinely low-ball quotes to keep the presses running."

So product price is critical to new business, but must it be "low-balled"? That is, must manufacturers sacrifice profit for utilization? Not if they offer pricing choices that give customers cost certainty and price protection while providing reliability, quality, and service. Three such choices, common in energy markets, are:

1.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.
2.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.
3.Capped price. The customer pays the lower of the capped price vs. the market price at time of delivery....
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