(Part 1 of a 4-part series discussing “Change and the Cost of Not Changing”)
“Price is what you pay. Value is what you get.” -Warren Buffett-
Here’s another quote from Conrad Hilton… “The buyer is entitled to a bargain. The seller is entitled to a profit. So there is a fine margin in between where the price is right.” This can really be applied to just about anything that is sold in the marketplace today, including heat treating. If you do a search on MTI’s website, they have had various blog posts related to the topics of value and price. Pricing is driven and supported by the value that customers see in the product/service to which the price is attached.
Price and value are usually tied together in some way, and feed many business decisions. For example, you may decide to change the pricing and leave the value alone; or you may change the value of your services (possibly through integrating your QMS to the production line) and leave the pricing alone; or you can change both value and pricing; or leave them both alone. Any of these changes can have an impact on your bottom line, but they may also have very different effects on your customers’ perception.
An example of changing the price without changing the value is when a grocery store announces a sale on a dozen large eggs. Frequent shoppers have a very good idea of what a dozen eggs are worth. If a store charges less than that amount, shoppers will be attracted. If they charge more, then shoppers won’t buy it (and may even form a negative mental opinion about the prices at that store). Many businesses change value without changing price. For instance, cans of ground coffee have surreptitiously shrunk from 1 pound to around 13 ounces. This has allowed coffee makers to maintain the public perception of holding prices steady, while they are in reality increasing the charge per-ounce for their coffee. Shoppers who notice may end up resenting them. What about Reese’s Peanut Butter Cups? A few years ago they began putting less product in the same size package. I know quite a few people highly bummed out about this. Anyway, back to the article…
If a competitor changes value, many companies feel they must follow suit to stay competitive. Many businesses who are tracking these things will tell you they get the best long-term results from increasing price and value; while others find that they can cut their production costs while increasing value. Attention needs to be given to the weight and size of the part, the time and processing steps required to accomplish the desired outcome (e.g. normalize, quench, temper), the cost of fuel, labor, capital equipment, maintenance, and doing everything you can to eliminate rework. Pricing usually comes down to what the market will bear; not how much it costs you. Just so it stays above, or well above, the breakeven point.
The key consideration when talking about value and price is that these elements of your business can be adjusted to move demand and increase sales without changing what it actually costs you to provide a finished product. Careful attention to tracking and controlling what happens out on the shop/production floor, and ensuring that your well-thought-out processes and procedures (along with your quality management practices) are adhered to by your equipment operators, will go a long way towards helping with pain-free, profitable growth.
Next Article: Minimize the Pain of Change — Creating Value in Times of Change
Article written by Ron Beltz, Throughput Consulting Inc., MTI Diamond Member Supplier.