Job Shop Pricing Strategies: Balancing Profitability and Competitiveness

Introduction

Unlike large OEMs, job shops typically have a wide variety of customers across many industries, each with unique, low-volume orders. This puts job shops in a challenging position when it comes to pricing – you need to balance profitability with remaining competitive for customers who can easily source from other shops.

Pricing too high means losing bids and customers. Pricing too low leaves profit on the table. So how do job shops find the pricing sweet spot? This article will provide strategies to help job shops set optimal pricing that maximizes profitability while staying competitive. We’ll cover understanding true costs, setting minimum margins, analyzing the competition, and making strategic adjustments to find the right balance. With the right approach, job shops can price profitably while winning business.

Understand Your True Costs

It’s crucial for job shops to know their true costs for setting competitive yet profitable pricing. Many shops only consider direct labor and materials when estimating costs, failing to account for important overhead expenses. To price accurately, job shops must:

• Calculate overhead costs per hour by adding up all fixed costs like rent, utilities, equipment leases, insurance, software, etc., then dividing by total estimated billable hours for the year. This provides the overhead rate per hour.
• Factor in all labor, materials, equipment usage, consumables, purchasing, handling, and delivery costs. Accurately estimate labor hours required for each step.
• Analyze which support activities like engineering, programming, and quality control add value and ensure their costs are covered in overhead rates.
• Compare actual job costs to original estimates and investigate any significant discrepancies. Revise quoting processes based on the reasons for gaps between estimated and actual costs. This is the most important but point.
• Update overhead cost estimates yearly to account for changes over time and keep pricing current.

Among these, the most important point is to verify the differences between the actual results and the estimates, which are shown in bold. However, this can be a time-consuming task, and it is easy to overlook.

If the actual situation and the estimates remain misaligned, even if the estimates were made meticulously, they will be meaningless. This can lead to missed opportunities to receive orders, and increase the risk of not securing profits on the orders that were received.

Whether the continuous checking of the actual-estimate differences is done in detail on a per-project or weekly basis, or is done roughly on a monthly or quarterly basis, can make a significant difference in the competitiveness of a job shop.

Set Minimum Profit Margins

When setting your pricing, it’s important to start by determining the minimum profit margins you need to sustain your business. This requires understanding your true costs and then setting acceptable minimum margins accordingly.

• Research industry standards for margins – Look at profit margin benchmarks for your industry and business size to get an idea of typical ranges. For example, average net profit margins in the machine shop industry tend to fall between 5-15%.
• Account for all your costs – Calculate your direct job costs like materials and labor, plus indirect overhead costs like rent, utilities, equipment maintenance, etc. This gives you a full picture of your total costs.
• Set acceptable minimum margins per job – With your total costs in mind, establish the minimum profit margin you need per job or project to cover those costs and earn a reasonable profit. For example, you may decide you need a 10% net margin at a minimum for each custom machining job.
• Consider margins by job type or service – You may want to set different minimums for simple quick-turn jobs versus complex multi-day jobs. Quicker jobs often have lower margins but make up for it in volume.

The key is knowing your baseline – the profit margin floor you need to meet for every job to sustain your shop. This gives you a starting point for pricing competitively.

Analyze the Competition

Researching competitors’ rates for similar jobs provides an important reference point for setting your own competitive yet profitable pricing. To gather competitive rate data, check rival job shops’ websites, request quotes for sample jobs, and tap your industry network for insights.

It’s also vital to assess your shop’s competitive strengths and weaknesses relative to rivals through win/loss analysis on previous deals. Identify areas where your capabilities, quality, or service give you an advantage and where you may be less competitive. Use this to focus resources on job types and customers that play to your strengths and offer the best win rates and margins.

You may find opportunities to increase prices if your shop provides superior capabilities or faster turnaround times that warrant premium pricing over competitors. However, competitive research should inform your pricing strategy, not dictate it. Ultimately, your pricing must cover your true costs and target profit margins to sustain your business.

Make Strategic Adjustments

Job shops have to strike a delicate balance between staying profitable and staying competitive with their pricing. While covering costs and hitting profit margin targets is crucial, pricing too far above the competition risks losing customers. Making strategic pricing adjustments requires:

• Offering discounts selectively to win key projects, not as standard practice
• Increasing rates incrementally when justified to avoid driving away customers
• Staying attuned to competitors’ pricing moves and market trends
• Considering tiered pricing or service packages at different price points
• Promoting your shop’s unique value, quality, expertise and service to compete beyond price alone

Leveraging Technology for Smarter Pricing

Job shops can gain a competitive edge in pricing by using advanced solutions like CADDi Drawer to capitalize on past drawings and quotations. CADDi Drawer automatically scans and extracts data from PDF drawings, including handwritten ones, making it easy to search your entire drawing archive by any criteria.

By connecting quotation data, costs, sales prices, and other supply chain information to drawings, job shops can quickly identify similar past projects to inform new quotes. This saves significant time calculating costs from scratch.Analyzing won and lost bids on comparable drawings also reveals the optimal pricing ranges for different customers and jobs.

With CADDi Drawer, job shops can dramatically speed up quoting, improve quote-to-order ratios, and leverage past data to optimize pricing for profitability and competitiveness. Implementing a tool like CADDi Drawer, along with the pricing strategies outlined here, empowers job shops to consistently price at that optimal point that maximizes margins while winning business.