Your Ad Here

Thursday, June 9, 2011

The Price is Right

by Smyth Performance on Friday, March 18, 2011 at 10:42am
After all 40 betas ship over spring/summer Smyth Performance will have to address the a real pricing strategy for the production kits.  As a segue into this topic I am using my experience with FFR as a guide for discussion.

Pricing strategy is one of those topics that slips by the wayside in companies that have been around a while.  It seems so obvious that it is not worth talking about at length.  In business your products cost you x to make and you sell them for y...the difference is your gross profit. Every now and then you realize that margins are tight and you are already at rock bottom cost wise so you raise prices.

As the business matures and the brand strengthens it is easy to forget WHY your prices are what they are...cost plus pricing seeps into your mind as a business owner and you slide away from the value added model that launched the success of your firm and should still drive your business.  Why are people buying your product?  What are they really spending overall if it is a complicated product offering? Is your product the same as it used to be?

The FFR case study 1995 to 2010

My dialogue with the Factory Five guys over the years as the owner is the best example I have to show how pricing plays a strategic role in the growth of a small business and brand.  It is no secret that I have been pushing brother Dave who runs FFR to raise prices on the cars we sell over these last years.  Dave is right in his assessment that the market has been challenging and is committed to a policy of price maintenance and some discounts. From the outside and about to launch a diesel kit car down the street at Smyth Performance there is another way to look at it....a start up pricing methodology that makes a nice chapter in the book.  So here is the rough start....remember these are my thoughts and are meant as a chapter framework and are not a reflection of any actual current numbers for FFR.

Cost plus is the starting point...the financials and income statement will tell you your real cost of doing business.  You have to forecast a volume based on history and combine it with a sales forecast,  but most basic managers find this a simple quarterly requirement...nothing new here.  If you are not doing forecasts and proformas because you are "too busy" we can't help you here in this are trapped in a reactive business mode that is hard to emerge from without a plan...learn a bit more and join the class later.  Now for the rest of you using your forecasts and your income statement you know what your real  costs of doing business are...ok.   Now how do you know if your pricing is right?  Your competition gives you an idea...but I am assuming you are doing something different or you wouldn't be the success you I said, we are not talking commodities here.  We will start with generalizations from my peers in the  manufacturing "pack" and move on from there.

A side bar bit about pricing and a crisis...Once the economic meltdown occurred I made it a point to call about 5 guys I know who run or are high up in manufacturing companies.  I would call once every few months and compare notes...we all needed the input since it was a scary time.  We all made it through the year of challenge with different strategies(some way better than others) but those that made it reacted quickly to the crisis.  Discount pricing was a key weapon.  Price drops were temporary for the well run businesses and became permanent for the poorly run firms.  Price drops didn't always work to build volume but for most it worked enough to survive. Getting through the insanity was the goal with all of us for about a year...reason had left the consumer.  This crisis revealed weaknesses that were hidden by high margins over the boom times of easy cheap capital.  All of us are lean and efficient now and most are gearing up for some growth.  Now we can talk about real margins and real pricing again.

The basic rules for a manufacturing company that has a couple layers of distribution you are usually looking at around 5% net income on sales. We are talking about value added manufacturers that make a product with some form of differentiation.  The distribution channels eat up 15% of your margin but provide a valuable network to move product.  If you are a direct sales manufacturer like FFR, you get to keep that 15% but will spend 10% on selling....for an expected net of around 10% on sales...not bad for a manufacturer in the U.S.  This 10% is when the place is doing well at good capacity utilization and proportional staffing.  It feels good, you are making a bit of money from your generic 10 million dollar company, you have employees and systems that support the product...not a bad life.  Cost Plus works when you look at it from this comfortable perspective.

In this installment of the pricing talk we will look only at inflation and the cost plus model. The next session will cover the value added story and a discussion of the real product under the fiberglass shell...this one is about establishing a  pricing baseline...I will be very hard on your comfortable cost plus business in the next installment....for now lets look at bare minimum pricing tactics that will keep your organization alive and kicking.

My standard MBA speech to anyone I talk to over the years is that my company Factory Five Racing makes the most complicated consumer product in the world.  Building an automobile at home combines leading edge product technology and engineering at every turn for the manufacturer...computers, wiring, anti corrosion chemistry, robotics, welding and plastics/molding.  When you, the customer,  embark on the project of making a car from parts in your garage you are starting on an amazing path...a car kit..  ie..."the most complicated consumer products you can buy".  So does cost plus really reflect the value of the product when so much of the value resides in the experience you have building the car?  No way, but lets finish the baseline talk.

Find your business in big business: The quick look

The big three GM, Ford and Chrysler know costs better than any companies in the world and we will start with them for a price study/comparo for Factory Five.  1995 is our baseline since that's when we launched the first FFR car kit for a fabulous 1995 price of 9900.00.  We are going to use Ford and the Mustang as a price anchor since the product is one of the few that has maintained the same niche and price point relative to the target demographic that FFR goes after.  Mustangs are still Mustangs and are as popular as ever after a 45 year run.

Product                            1995 price                2011 price                

Mustang base v-6            15,030                     22,995

Mustang GT v-8                18,605                    30,495            

FFR Base kit                      9,900                       12,990

FFR Base Discounted         9,900                      11,990

Look, you are a tiny little 10 million dollar company...use Ford/GM if you make cars, use GE if you make big machines, use any  large company that makes something close to what you do as a guide to real manufacturing costs and pricing...they have more experience and resources.   Let's use the "car" weighted inflation adjusted pricing for the Ford Mustang as a guide.  Both FFR and the Ford Mustang have upgraded their product over the last 15 years so the prices should be a bit higher than the cpi inflation rate since you are getting more product today than 1995.  This can be in safety features or longevity....anything that relates to content...there is a bit more over the years, but since both lines have added features the slow change in product can be accounted for...lets do some quick numbers.

price 1995/price in 2011  is .65 and .60 for the two mustangs.

To be as fair as possible we will use the v-6 elemental mustang number of .60 as the ratio.  A 9900 dollar FFR kit in 1995 should cost 15,230 delivered after any discounts etc.  We are at a price of 11,990.   Over 3300 bucks a car is left on the table with a discounted FFR and that is just adjusting for "car" inflation.  The cpi inflation number that accounts simply for overall inflation leads us to a 14,430 price point in 2011 for the base FFR car.

Here is the impact on the business.  With these low margins brought on by noit keeping up with inflation, there can be is incredible organizational pressure and a constant struggle to stay alive.This downward pricing spiral over time is just as real as having to lower prices every 6 months. In our study here the quality of the engineering and manufacturing team at FFR is amazing...keeping costs low to keep the company going at a profit in a decreasing price scenario. Using a hard working team such as FFR's as a guide you can see a mirror for what is happening to manufacturing in America...they have kept FFR profitable for all these years in an environment of decreasing real prices.  For some basic manufacturers this would be pressure from chinese goods.  Kudos all around to the team at FFR and other manufacturers who are making it in a competitve world manufacturing environment.

However....we are NOT talking about commodity manufacturing.  Lets take a look at where the margin pressure is really coming from.  Ford has to fight the Japanese cars as well as the cheaper korean imports as they get hit with the same pricing pressure.  Is the pressure coming from the chinese imports or is it management not staying awake as real prices escalate.  We have to at least stay with Ford and their price structure....then we can assess how we are doing on the value added side.

For FFR my suggestion is to mirror this Ford pricing model since the buyers and pricing environment is almost the same.  At the very least we would all expect a 9900.00 car to go up with the basic CPI number right? So let's pick a sample 10 cars a week as a round number for some quick math.  3300 times 10 is 33,000 bucks a week or 1.7 million bucks a year in lost inflation based revenue. Think of what the company can do with that kind of EXTRA income.  That is a new factory or complete robotization of a new product line every year. Remember at 10% numbers above they already making plenty of money as a lifestyle business...this is money they have earned that can be used for growth.

Now can FFR just go out and raise prices 3300 way.  But can they implement a pricing strategy that fixes this disparity and pressure on bet.  I am the bad guy if you are a customer wanting to buy a kit at a lower price since I am pushing so hard for higher prices...but I will convince you that a healthy FFR is in your best interests as a customer...and that might cost you a bit more than what it costs right now.  So go buy your FFR now if you disagree with me, but the reality of inflation can't be ignored.

If the Smyth car costs me 8 grand to make am I selling it for 9...probably not if I want to grow and take care of my employees.  The number one way to grow the business is to pass a hunk of that extra revenue on to the people that will do the work here and invest the rest....magic.

In the next note I will try to convince you that the Smyth car should be 15 grand as well....with less in the boxes....and how you might just be ok with that. (Hint: paint)

Mark Smith
· · Share · Delete

No comments:

Post a Comment