Pricing Strategy for Machinery 6

[rlee53]

I have some machines that I design and sell, they are a semi-standard design that I've created and then I adapt it to the particular need. The 1st ones I sold at a very slim margin over the cost of the components. In order for my business to survive, I need like to adjust the price to a point that is more realistic and fair to myself as well as the customer.

Here are some ways:

1) I've heard 2x manufactured cost as a rule of thumb. So it would be the price =(cost of the components+labor+ expenses)x2

2) Whatever the market will bear. I don't know the answer to that one.

3) Cost of parts + my time + expenses; My profit being the fee for my time, but then the customer is getting all the pre-engineered work for free.

Is there anyone else out there building machinery that has a simple method that works well? Keep in mind this is something that I have 80% of the engineering/design done already, then tweak to the particular application.

 

[bvanhiel]

2 is the only one that really matters. It is related to 1 and 3, because if the machine is not profitable to produce it will disappear from the market.

You should price based on the value your product brings to your customer tempered by their ability to find a similar solution elsewhere.

-b

 

[rlee53]

Thanks, I was afraid of that. I've always felt similar competitive devices were way overpriced. They are priced more than #1 or #2 would be for my company, but then the other companies have a lot more overhead and mfg reps to support. But, apparently they are able to sell at that price or they would not still be in business. Maybe I should be somewhere in the middle of 1,2, and 3?

 

[bvanhiel]

You should target 2. 1 and 3 don't consider the time and effort to sell the machine.

 

[GregLocock]

Cars sell for two to three times the cost to manufacture, but options are sold at about 5 times the cost to manufacture. The margin includes development costs, tooling, facilities, distribution costs (dealers) marketing etc etc.

If your product is better than the competition, price it higher than them. There's no real need to be fair to the customer by cutting your own throat.

I'd love to work in an industry like that.




Cheers

Greg Locock

SIGlease see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[gerhardl]

You need to establish a communication with your market, as said above, only the market will give you the price.

Suggestion: take a talk with your already existing few customers:

Are they satisfied? Do the machines perform as expected? Do they have suggestions for alterations or improvement? Do they think about buying more? Either way, whould they buy if the price was three times higher? What actually would they recommend as a sensible price?....

See the point?

Try the same sort of interview cautiously with prospective customers.

You will probably not get the correct answers or wished for reactions from all, but in my experince you will often get surprisingly honest and direct answers by involving customers and asking direct questions.

At the same time you would of course build customer/marketing relations.

Maybe too obvious, but anyway....

Good luck!

 

[ShaggyPE]

To add to gerhardl...
I assume your customers use your machines to do some task that would have previously be done manually, or at least not as elegant. How much of a cost savings does your machine give your customer? If you find out that information, you can better determine how much a similar customer would be willing to pay. You will also be able to advertise that using your equipment will offer X amount of cost savings and that the equipment will pay for itself in X amount of time.

-Dustin
Professional Engineer
Certified SolidWorks Professional

 

[GregLamberson]

rlee53

Generally there are 4 factors that go into the pricing of equipment/machinery - 1) capital cost, 2) overhaul/maintenance costs, 3) ownership costs, and 4) mark up.

1) captial costs - pretty straightforward - this means the capital cost component is equal to the difference between the purchase price and the residual value, divided by the total number of hours operated during the machinery's life time.
2) overhaul/maintenance costs - in words, this means the major overhaul component/hour = a factor (major overhaul%, times the capital cost, divided by the major overhaul interval.
3) ownership costs - this is equal to the sum of the interest rate and the insurance rate and the tax rate times the average value of the machinery over its years of ownership divided by the total lifetime hours for the machinery.

You can do the above all based on lifetime hours to come up with an hourly rate. Mark up will depend on many things, including what the market will bear.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[bvanhiel]

Greg seems to be walking through a cost justification of a piece of equipment that an end-user might do. He's only outlined half the equation. The other half of the equation is the benefit side, the bit that Dustin is describing. Knowing the benefits and the rate at which the piece of equipment will pay for itself will help put a ceiling on the "what the market will bear" number.

-b

 

[tygerdawg]

This is a marketing question, isn't it? I've seen different situations for different types of capital equipment:

For custom machinery, selling price was developed using the standard approach of design labor + component costs + build labor + +install labor + other expenses + profit markup. At the end, they adjusted the "raw" price for whether the customer was good/bad/one-time/repeat, or whatever the reason. Revenue had to be sufficient to keep the lights on and employees paid. System integration like this is a very very tough business.

For standard and semi-standard equipment, I've seen margins very low. The selling price X sales volume kept the lights on and the employees paid. The profit for company growth came from service and support. Customers paid very high prices for spare parts and support labor because it was a captive customer base. This is what happens when a robot company sells 4000 robots to a major automaker. The robots themselves are sold at cost or even at a loss. But the support cost is tremendous and makes up the difference.

Your situation may require a hybrid approach. For example, the "standard" design is rock-bottom. But your profit is created on the customization for each customer.

TygerDawg
Blue Technik LLC
Virtuoso Robotics Engineering

http://www.bluetechnik.com

 

[rlee53]

Very insightful response. Thanks.

 

[GregLamberson]

You have to cover your costs - period. If the market will not bear what your base costs are, then you can't provide the equipment. Once you understand your cost components, then you can see what the market will bear and set you mark up & hence the final pricing of that piece. But you have to have some basis for starting. This is a break-even analysis.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[tygerdawg]

I also forgot to mention the "bean counter" issue, and how money has different uses, costs, and value. Purchasing equipment requires CAPITAL which is taxed a certain way, requires requisition from the available funds in the corporate budget, etc. Service & support is usually considered EXPENSE, and doesn't require justifications & payback analysis. When your factory is down, the production manager doesn't care how much it costs to get it up and running again. It affects profitability, not taxes. Really big difference.

TygerDawg
Blue Technik LLC
Virtuoso Robotics Engineering

http://www.bluetechnik.com

 

[dmech]

rlee53

A company I used to work for used 4x to 5x material cost as an MSRP. I also worked for a couple consumer product companies, which used the same 4x to 5x factor for MSRP. However, the pricing must adhere to option 2.

"2) Whatever the market will bear..."

The reason these companies used 4X to 5X was due to the distribution channel. The OEMs (previous employers) sold to distributors at 2X to 2.5X and the distributors sold to the end user at 2 - 2.5X (i.e. MSRP = 2.236 * (2.236 * X) = 5X).

Personally, I would look at the competition, make your design better or hit a different niche, and price below the competition by 20% - 25%, with enough margin to turn a 10% annualized profit at a 50% discount. Why?

If your business grows and you take on distributors, they'll only pay you 50% of MSRP. If you can't turn a least a 10% profit selling through distributors, your better off handing your money to a money manager who will turn that kinda profit annually.

Keep us posted and good luck.