[3537]

Manufacturer pricing

Date:
October, 2015
Prototype:
proto$ gen VIII mod 5A1E22 (Ultima)
Customer:
Rosshokolad
Something a little more complicated than Newton's binomial if done in a clever way.

How do manufacturers price their products in most cases?

Of course they will use that cloying Excel affair.

Depending on how diverse their products are, they may have one or a Mighty Handful of spreadsheets, for each product category.

For each individual article, an individual Excel file will include several price columns depending on the lot size; the bigger is the order, the lower is its price.

While forming an order, the sales manager will open the respective spreadsheet, look up the price corresponding to the product lot being ordered, and fill it into the order.

But where do the sales prices come from — in those Excel spreadsheets being kept since high antiquity, so long ago that corporate history may have forgotten their first author’s name?
We can hardly resist the temptation to cite that legendary joke about somebody getting all his money from his wife — who takes it from the cabinet where he himself has put it. You may Google for its full text.
In theory, that legendary author of the Excel price list would figure out the cost of an article or product category to be included (in layman’s terms, of course), look for competition’s prices for similar goods and then add the required profit rate.

The problem is that "all things are in flux" © Heraclitus.
The raw material prices float considerably, and exchange rates are even more volatile, which is now quite a problem with imported components.
Changing availability of inputs (for which we can only thank our "anti-sanction" shot in the foot) may necessitate changes in recipes and/or manufacturing processes that will make previously calculated cost outdated.

The market conditions may also change, as competition may increase or diminish, with the resultant changes in price pressure from colleagues in the dangerous business.
?And so on.

So even the spreadsheets that were ideally calculated in their time become utterly outdated. Updating them is hellish toil, especially for the complicated production of a broad goods mix.
There are usually neither personnel nor time to do it, and it is unclear when and how to update and what logic should be applied.

Moreover, a manufacturer who uses Excel to keep its records on a minimally serious scale will never understand which goods items are actually profitable, if at all.
Inadequately priced or non-profitable goods items and whole categories will transpire by chance, but always late.

Also, nothing made by man is ideal. Human factors mean that any Excel operations will collect errors at every stage: from a goods item being included in the assortment and until the manager simply copies its price from the price list into the order document.

How does dia$par do a typical manufacturer’s pricing work?

A Goods Category’s Price List

For each goods category (or even a single goods item if desired), price columns are set to determine the price depending on the size of the lot ordered.
?For example, the price "within 50 pcs.", "up to 200 pcs.", "above 1000 pcs.".
Or kilos, or litres — anything.

A profit rate is set for each price column — e.g. 200%, 150%, and 50%, respectively.

At the right moment, the exit price is altered by re-calculating the article’s current cost increased by the planned margin (adjusted according to the rounding rules). The right moment may be indicated by the user pressing a button, by the scheduled task, or be pre-set as a trigger event, e.g. a change of the entry price of any component of the product.

The result is a ready-made price list guaranteed to be up-to-date and to contain the planned profit rate.
It is also guaranteed to be error-free, as all calculations are done automatically, the component prices are taken from the actual waybills, and the component mix, from the actual process charts.

Voilà?
Nowhere near.

This is only half of the task, Comrades — and, honestly speaking, not the trickier half.

You’ve got competitors (you wouldn’t read this if you had none; the management of State monopolies earns by theft, so the intricacies of keeping a business efficient in a competitive market are naturally of no interest to those crooks).
So we have the market, which, in turn, means that the actual sale prices will inevitably differ from your desired ones, calculated using the above algorithm.

The question is, by how much.
The answer determines whether the goods item should be retained in the assortment at all — and if it should, how its prices must be adjusted to both keep the profit rate acceptable and respond to the competitive situation, given the brand’s and individual products" market positioning (if applicable).

Efficient automatic control of prices in a competitive market (which is really a tricky affair) is the theme of a separate text: Trade Business Essentials. Part II: The Pricing Policy.
And let the reader not be confused by the word "trade"; any manufacturing business becomes a trade one as soon as its product enters the warehouse. And the antithesis between traditional retail and e-commerce is just a
particular case of the opposition between low-competitive and highly competitive markets.

Being inside dia$par. Some stories
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