Pricing based on inflated costs and assessment of market factors

Figure 6.7 show the different organizational levels involved in the pric-ing decision at Delta.

Sales manager/

management team

Internal sales rep

• Responsible for pricing and managing other commercial issues for his/her accounts

• Pricing decision is made according to cost parameters and own commercial judgment

• Each internal sales rep has an assistant who manages administrative issues (allows the internal sales rep to focus on commercial issues)

• Commercial issues at Delta are managed from an internal sales department headed by a sales manager who is responsible managing the work of the internal sales reps and the day to day pricing at the plant (and pricing of larger/strategic accounts)

External sales organization (SSO)

• Delta operates with an independent national external sales organization that sells the products of several SCAP plants (SSO)

• Operating with a national external sales organization makes it possible to offer customers a complete product portfolio independent of manufacturing site (increases customer orientation)

• External sales organization is responsible for turnover but has no formal input on price

Cost calculation unit

• A special cost calculation unit consisting of two costing specialists does all product costing

• Main task is to optimize the pre-calculation to produce a good routing and a competitive price and to manage the post-cost calculation

Figure 6.7 Organizational levels involved in sales, costing and pricing at Delta.

6.5.4 Pricing based on inflated costs and assessment of

im-possible to sell at the calculated full cost (for conventional products).

This means that the internal sales reps are to some extent kept in the dark about the real limit where Delta starts loosing money on the order.

The hidden added margins in the calculated price, and not letting the internal sales reps know the exact break-even point, are maintained by the general manager and the sales manager to be important tools for inducing the internal sales to always try to get as high a price as possi-ble.

The consistency and credibility of Delta’s pricing policy is according to the sales manager an important success factor (which to some extent contrasts with the “customer by customer” approach to pricing de-scribed above). According to the sales manager, Delta mainly works with large customers that expect stability and consistent prices. Thus, consistency is a key factor to gain the long term trust of the customer so that he does not collect competitive offers for new products. A pricing policy that relies too much on the negotiation process to set the price would, according to the sales manager, damage Delta’s credibility. Be-cause relying to much on the individual negotiation is perceived as a dangerous approach that is not suited for the type of customers Delta wants to build a relationship with, much effort is put into gathering information about the product and customer at the inquiry phase. This allows Delta to more “objectively” establish the willingness-to-pay of the customer based on product characteristics and potential competi-tion for that order. Having done this thoroughly, according to the sales manager, allows Delta to set an initial price which does not need to be further negotiated. Delta’s pricing mechanism is illustrated in Figure 6.8.

• Pre-/post costing system

•Personal judgment and experience of decision maker

• Internal system/form for registering inquiry/specification

•Sales reps ability to gather/structure information

1. Inquiry and internal specification

2. Theoretical routing and cost

calculation

3. Pricing decision and quotation

4.Negotiation

• A lot of effort is put into the initial information gathering about product/customer details and competitive situation

• Registering correct and sufficient information at the initial stage is crucial to making the pricing decision (because negotiation is not emphasized this activity becomes more important)

• The pricing decision is influenced by both cost- and market factors

•Process is not formalized in one explicit routine but contingent on circumstances surrounding the individual order

• Special products (displays, etc.) are priced 80-90 % based on cost considerations due to allowed market premium

•Conventional products are prices 70-80 % based on market considerations due to market restrictions

• Negotiation is not used as a significant pricing tool

• The design and use of the costing system plays an important role for what price is set in that it; a) decides what calculated full cost that will be used as a benchmark, b) decides what the lower calculated price level will be (i.e. full cost minus 15%)

• Characteristics of costing system (used cost items, level of input costs)

•Post-cost calculation system (allows SCAP measure and consider true costs)

•Ability of costing unit to create a commercially valid theoretical routing

Figure 6.8 Pricing at Delta.

The pricing at Delta is influenced by both cost and market factors. The process is not formalized in one explicit routine, but contingent on idiosyncratic circumstances surrounding the individual order or cus-tomer. According to the sales manager, pricing is very different for spe-cial and conventional products. What is termed spespe-cial products is to a large extent priced according to cost factors while conventional or com-parable products are priced according to market factors. This implies that being able to base a price on costs, as for the special and non-comparable products, simply means that the customer tends to accept the higher price generated by the costing system. For the conventional products, which according to the sales manager are priced based on market factors, customers do not accept the higher prices generated by the costing system because there are easily available alternatives on the market.

As there are no formal routines or guidelines for establishing the cus-tomer’s willingness-to-pay other than the full cost price given by the calculation system, the judgment and experience of the individual in-ternal sales rep are crucial when setting price for products that are not readily comparable to other products. A sales rep describes the factors that he takes into account as related to calculated costs, old prices, in-formation from external sales reps, experience from other projects, competitor prices, and feedback from the customer. Another internal sales rep describes pricing for a new project as; doing the cost

calcula-tion (which is a quite routine activity), establishing what separates the offer from competitor offers (differentiation) and making a comparison with historical prices or similar orders. Further, the internal sales rep emphasizes that the often time-consuming, or main task, is not doing the cost calculation, but finding out what price the customer is actually willing to pay. Instead of focusing on the calculation, the internal sales rep emphasizes the importance of knowing and being able to value the so called “extras” on the product (the differentiating attributes of the product).

6.5.5 The role of separate pre- and post cost calculation