INDUSTRY IN FOCUS
16 | HIRE
AND
RENTAL
NEWS
| MAY2014
ByChrisAlp, Partner, Fordham
BusinessAdvisors
Time and timeagain,wemeet business
ownerswho arenot happywith their
sales trends… theyaremissing tenders
or opportunities by just 5%or 10%
and endupwith idle capacity (under-
utilisedmachines and factories, people
withnothingproductive todo). The
consequence is lost sales opportunities
impact directlyon thebottom line. A
dollar of lost sales can sometimesmean
almost adollar of less profit.
Conventional pricingpractices see
business owners establishing a ‘cost’
for labour and factory. That cost covers
theamount paid for theworker, their
on-costs andof course, anamount for
administrationandother overheads. The
sameprocess applies for factory time.
These ‘costs’ areused for all quotations,
aftermargins havebeenadded to this!
Thatmeans if all goes tobudget, all
bills arepaid and a little is left over for
theowner in theway of profit. But, what
happens if themarket is tight and sales are
off by 20%? Perhaps becausewemisseda
coupleof big tenders… just!
Inall probability, your direct labour and
factory costswill change little. Youmayuse
lessmaterials or electricity, butmuchof
that 20%will comedirectly out of profit. If
your net profitwas only ever 15%of sales
anyway, youmay have justworked the
whole year for nothing. If youhadwon
those tenders at a lower price, whatwould
havehappened to thebusiness’ profit?
Perhaps another ‘supplementary’
approach is required to look at tenders.
Onewhich looks at theactual direct cost
of doing each job, rather than just an
imputed costwithall sorts of recoveries
built inand thenmargins addedon to
The ‘art’ of winning tenders
margins.
Then, as an exception
on important or
particularly competitive
jobs, you canpotentially
discount a littlemore
towin those jobs and
stillmakeagood (albeit
lower thanusual)
contribution towards
overheads andprofit. In
thisway, net profitmay
still be a littledownon
expectations, but better
thannoneat all.
Pricing remains an
‘art’ for theowner. The risk is youdiscount
everythingand thenhaveno chance
ofmakingprofits, or perhaps youget
busywithdiscountedwork andhaveno
capacity todo fully pricedwork (without
alsohaving tobear expensiveovertime
costs). Nevertheless, get the theory right,
understand your costings and you can
thrive ina toughmarket at theexpenseof
your competitorswhowill therefore, suffer
lesswork.
Case study: Long standing familybusiness
manufacturer
Wewere approached in 2004by
amanufacturerwhohadpreviously
dominatedhis industry. Their reputation
andqualitywas second tonone. However,
new entrants hadbegunwinning contracts
fromhis biggest clients suchhis sales
continued to fall and thebusinesswas now
sustaining significant losses.
We facilitated abusiness plan to
determine if thebusiness couldbe saved.
Hewas convinced itwas all over! During
theprocess, wediscovered theowner had
continuallymissed tenders by just 5% to
10%. Clients askedhim todropprices
to retain their business but he saidhe
couldn’t becausehismarginsweregetting
tighter and tighter. Sales continued to fall
and ‘costs’ continued to rise. Butwhatwas
happeningwas theownerwas applying
his full overhead to an ever shrinking
revenue. In fact, his truedirect cost had
never changed andhe couldhaveeasily
discounted tomaintain throughput and
keep competitors at bay.
In an awful irony, we calculatedhad
hemet thediscount demands of his
significant clients, hewouldhavemade
anet profit of $3m in theprevious year.
Instead, he sustained losses andgavehis
competitors amajor legup.
Nevertheless, our new client adopted
amore sophisticated formulatedpricing
model ensuring relevant pricingwould
be consistently applied, encouraging
maximum throughput andultimately full
cost recovery andprofitmaximisation in
theprevalentmarket.
Of course, thebusiness continues to
thrive today, akey lesson learned!
Formore contact 0396116066or visit
HR
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