Pricing for Profitability Article
Craig Carrel, partner in Team 1 Plastics, and John Daly, author of the book “Pricing for Profitability” recently published their article “Pricing for Profitability: The Company with the Best Cost Accountant Wins” in the winter 2010 edition of Plastics Business magazine. It focused on the advantages of using activity-based costing (ABC) to price product. Traditional costing methods fail because they arbitrarily allocate indirect costs. They will routinely under-price difficult or low volume work and over-price the easy or high volume products. Companies who use ABC methods will identify up to 10 or more cost categories versus the three traditional cost categories; material, labor and overhead. This greater detail gives them a competitive advantage.
Team 1’s experience using ABC pricing models to quote their parts in automotive applications was reviewed. Their focus on launch costs, the cost to launch a new product which includes quoting, engineering, layout, PPAP, selling and other activities and how these are fixed costs independent of the number of units sold. ABC pricing models also are very volume sensitive and launch and set-up costs can be significant with low-volume product. The number of parts in a container is a key factor that they have identified and influences that amount of handling is required to take the parts from the molding machine to their customer’s dock.
Team 1 believes that the use of its ABC pricing models has been an important factor in their profitable operations for the last decade even in such a competitive marketplace like automotive. It allows Team 1 to translate its cost into an accurate price and negotiate with their customers so that they can be profitable while supplying the best overall value. It is a true win-win situation!
