"Oh great! I thought it was going to cost a LOT more than that!"
The true reason why fabricators are not authorized to carry weapons of mass destruction is the reaction that happens in their brain when they present a quote for a good-sized project and hear something like these words. "O honey, isn't it great? We can get the countertops and still go to Aruba."
I think if I put my most honest and self-searching glasses on and surveyed my own fabricating career, I could imagine a huge pile of real dollars left on the table because of pricing.
I never realized the awesome power of pricing. Pricing is arguably the most important single factor that affects a company's bottom line. A flick of a pen can generate the same revenue as a shop toiling at warp speed for a week. My company, though profitable, never had a real pricing strategy. And worse, when thinking about pricing, I was trapped in a box without even realizing it: the mistaken idea that pricing is dependent on costs.
What we had, and what most fabrication companies I have seen since have, was a pricing system. This system evolved along with our business. By the time I sold the business, I had modified a Lotus spreadsheet into the niftiest little pricing software tool you could ever imagine. Like many others I have since seen, you entered in a whole raft of choices and information — brand, color, thickness, edge treatment, field seams, shop seams, sizes, sinks, radii and more; any discount or markup; delivery information -- and in the blink of an eye the printer would spit out a finished contract for the customer, a work order for the shop, and a cost analysis for management.
This may have been a fine system, but it wasn't a strategy, and that's where I missed the boat. Real strategic business thinking, I came to learn, is thinking about real-time present decisions in light of 1) long and middle-term goals (the business plan); 2) present and anticipated resources; and 3) the marketplace. It is an aggressive, fluid war plan that takes into account every detail inside and outside your enterprise.
Price-Quality-Service. We talk often about our basic business triangle, but poor Price never sat in at the many war councils that honed Quality and Service into dynamic revenue-producing powerhouses. Why? Because I always thought of price as an add-on. It was important, but it could never be part of basic strategic decisions because it was tied so inextricably to costs.
The Myth of Cost-Based Pricing
A few examples are in order. Every day the Hoover Dam generates huge quantities of salable electricity. When putting a price on that electricity, how do I figure my costs? What "costs" do I consider? The $2 million that it cost to build the dam in the 30's? The untold billions it would cost to build today? The zero costs of the free-flowing waters of the Colorado River? The miniscule maintenance costs on a system that has proved hardy and reliable for 70 years?
What is the cost of a barrel of sweet crude oil that flows without help from a 50-year-old Saudi well through a 50-year old pipeline to the waiting supertanker? Is there any true cost to the individual long distance minute once the wires, repeaters and other infrastructure are paid for?
These examples, and many more, show that costs are not always relevant to pricing. Yet when we fabricators go to give a job a price, where is the first place our estimator or software goes — how much will it cost to produce? We even use the terms interchangeably — we "cost" a job just like we "price" a job. This cost mentality was the box I stayed trapped in when I ran my own fabrication business. Yet such a mindset can be wrong — even ridiculous.