Is Pricing An Art Or Is It Depending On The Market Rules?
Question arose within Broder Metals Group after we had maintained our policy of replacement pricing, and as prices for stock such as Alloy 718, Alloy 625 and Alloy 286/660 are going down, we reduced our prices.
I was surprised at the internal debate. Should we make extra margin by keeping prices high? Should we average our stock prices? Should we price each receipt on a cost plus basis and have prices jumping around. However, we stuck to our policy – when stock prices are going up we need to make sure we recover enough cash to pay for higher priced replacement stocks. On the reverse, we need less cash to replenish stocks when stock prices are falling so we can help our customers.
The fact that we had a debate was interesting though, and set me wondering.
The Economist’s view would be that what we paid for stock is irrelevant. There is only a market price, and we should sell at the market price. However, how do we determine the market price? What our customers tell us? Or what other suppliers tell us? Take our PRD-AT41(the enhanced version of durehete 1055). As soon as we took in tour 163 tonnes of stock, the main UK competitor slashed their market price according to our major customers – well they had either been ripping off those customers for years or our customers though it might be a good idea to benefit from the extra competition. We believe our customers obviously (well those with whom we have a long standing relationship and they know our offer is based on honesty).
But, what do we do when we cannot set prices using replacement costing – for example when we price our manufacture of bespoke flanges and fittings in grades such as duplex / super duplex and titanium? Here we have a good idea what the cost is going to be, but the market price is what will be determined between us and our customer. So our negotiation determines the price offered – and our customer can decide whether the price is economic, and we can determine whether the return we will get justifies the risk we will take in buying the material & manufacturing the product – ah, but subject of another blog!