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Clarity of Your Cost Price Can Be Your Best Friend

Wed, May 2, 2018

After meeting hundreds of smart people in companies all around the world I have a question that I always ask without fail to gauge just how good a grip they have on their pricing and margin strategy.

It’s a question that more often than not causes the client to squirm uncomfortably or play down the importance of, knowing full well that it’s a critical factor. Some clients have a totally different response in that they ‘mea culpa’ and admit “No, we don’t know and we should”. So here’s the question:

Do you know your cost price, how that builds to your list price and how your list price builds to your net price?

This can perhaps be explained in the screenshot, which shows an example of a price waterfall, starting from cost of goods through to the net price. You are quite possibly wondering, does this price waterfall end in a profitable, break-even or negative margin result? (Find your answer at the end!)

Price waterfall managed by Flintfox pricing software
*Click image to enlarge

So we start with the raw cost of goods. It is common at this level to add some margin protection to get to a cost plus price break. Then more margin protection and handling fees are also normally added in order to get a list price. After list price there are various terms of trade and trading discounts applied and sometimes freight, split case, warehouse upcharges, to get to a net price. After the net price there can still be further incentives and rebate related chargebacks to take into account.

Understanding this explanation is critical to profitability and sustainable growth.

What happens if your understanding of cost/list/net pricing is wrong?

Global pricing becomes inconsistent amongst brands because sometimes cost of production across regions differs, and without the necessary price builds or adders, you get the same product with highly variable pricing around the globe. I have seen cases where premium brands are cheaper than mid-priced brands in some markets and vice versa, purely because of this type of inconsistency.

This happens when product margins are lower than they should be due to the product being made in more than one location with each location often having different costs of production, etc. Most companies then continue to sell under the one SKU. So how do they account for different cost prices to protect their margin? Easy, with price management software like Flintfox which leverages the powerful concept of product attributes.

Promotional levers like off invoice discounts and rebates often become the tools that drive negative margin results because the price waterfall and resulting margin is obscure.

So if you want to see whether price management software will work for your business, click here.

Oh, and the answer is that the illustrated price waterfall results in a break-even margin!

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