A funny thing happened during a presentation on pricing strategies. Someone asked, “I don’t understand why so often prices are not competitive. Other companies’ bids are often way below ours. What is going wrong?”
My response was that there was something wrong with the costing model.
Unfortunately we see this frequently. Instead of taking the time to update costs correctly, companies make “adjustments.” The price of paper goes up and an adjustment is made. The price of consumables goes up and an adjustment is made. The cost of utilities, insurance, or something else goes up and adjustments are made.
I recall someone saying to me, “What’s wrong with making these adjustments? The only problem is if we over-estimate, we make more money.” I disagree. Over-estimated costs result in uncompetitive bids. You have to know your costs. In fact, leading companies update their costs every two years and know their costs to the penny.
Another problem we have seen is that many companies reduced staffing during the recession and never adjusted their costs to reflect the reduction in staff. In fact, most companies continue to staff at those reduced levels. Deloitte’s Biennial Cost Survey interviewed over 150 C-level executives in Fortune 1000 and found that many of these companies that originally focused on cost-cutting during the recession continue to use cost-cutting strategies to drive growth.
A third issue we have discovered are exaggerated time standards after hardware or software is upgraded or replaced. For example, if you changed or updated your Print MIS software, you may continue to use your old 45 minutes to estimate the time to create a job ticket when it actually only took 20 minutes. If you changed or updated your press, you may continue to use your old 30 minute makeready estimate and 1 hour estimate for printing, when actually it only took 15 minutes and 45 minutes, respectively.
Using some average budgeted hourly rates shows how overestimating time standards can result in higher estimates and the appearance of uncompetitive pricing.
If you’re wondering if your costs are up-to-date, here are a few questions to consider:
- How often are your bids too high?
- How many staff have been added or lost since you last updated your costs?
- Did you update your costs after your last capital investment?
- Do you make adjustments to your costs as opposed to updating costs?
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Howie Fenton is the Vice President of Consulting Services for IMG. He helps companies measure, identify and overcome operational issues. To learn more about measuring performance, benchmarking to leaders, increasing productivity, and improving your value e-mail hfenton@imgresults.com.
