Abstract: This article describes:
Attn: Manufacturing owners, CEOs, CFOs, and Product Managers wishing to increase their company’s profit.
Per McKinsey & Co.:
“Pricing is the most powerful lever for driving or destroying a company's operating margins.”
A company’s net profit is the sum of its product’s net profits. Therefore, each product’s net profit affects the company’s bottom line.
A company’s net profit is visible on its P&L statement, but not any individual product’s net profit. Until now, the inability to calculate an individual product’s net profit break-even price was why management couldn’t know any product’s net profit or breakeven price. Management had to be satisfied if the company’s P&L bottom line was positive.
Too high a price can hurt market acceptance, and too low a price diminishes the company’s profit.
GAAP Accounting Approved Product Net Profit Formula:
According to GAAP, calculating a product’s net profit requires subtracting its COGS and allocated companywide costs from its price.
The difficulty, in easy speak, was how to allocate the CEO's salary, health insurance, utilities, engineering, marketing, etc., to each product.
Product Pricing Truisms:
Note: None of the above product pricing methods subtract the allocated companywide costs from its price; therefore, they cannot calculate a product’s net profit breakeven price or prices.
Until the latter 1900s, manufacturers' companywide costs were minor vs. its COGS. But from 1980 onward, companywide costs due to explosive growth of technological and employee benefit explosions, i.e., desktop computers, inexpensive sensors, increased marketing costs, middle management growth, SG&A, and healthcare, etc., grew to equal or dwarf the company’s COGS. Non-allocation of companywide costs in product pricing leads to non-optimal product profit pricing. Thus, traditional product pricing tools that ignore allocated companywide costs are no longer accurate as profit indicators.
A product's net profit breakeven price should be its base price-setting starting point. The product selling price, including any volume discounting, should not be set below it.
Traditional product price-setting tools include salespersons' opinions, competitor prices, gross margin, 3X material cost, costs-plus percentages, etc. Traditional pricing strategies prevent manufacturers from optimizing their company profits because they:
The quickest and costless (No CAPEX automation, marketing campaign, labor-material reductions, or execution time) route to increasing profits is to set all product prices above their net profit break-even price.
OptumPricer is a SaaS, low-cost, net-profit product pricing software that optimizes company profit by calculating each product's net profit breakeven point and profitable price range by creating mini-product P&Ls and allocating companywide costs to each product.
OptumPricer is designed to increase company profits by:
To see OptumPricer in action, click on this link: https://www.youtube.com/watch?v=ffp9Jt0X59g
The graph below is an OptumPricer output screen of an actual subscriber’s product. Note that the Gross Margin is always significantly greater than the net profit price. This is because the Gross Margin is inflated by not subtracting the companywide costs.
Additional Optumpricer User Capabilities:
“All Product's Net Profit At Their Current Prices” Chart
The chart below was extracted from an actual OptumPricer subscriber’s account. It depicts the company’s product lines' profit at their current market price. Until this manufacturer’s management saw this summary, they didn’t realize that their highest-volume product line severely reduced the company’s profits and were enthusiastic about increasing its sales. They subsequently raised the losing product line prices to a net profit level and increased the company’s net profit from $354,000 to $654,000 or ~2X.
Additional OptumPricer User Benefits
What-If Modeling For Improving Individual Product’s Net Profit
If a product’s net profit is marginal or sub-marginal, OptumPricer allows management to conduct what-if scenarios. i.e., Modeling changes to a product’s “manufacturing minutes,” “material cost per unit,” and “labor rate,” etc. While these profit levers have always been available to management, the modeled what-if net profit and break-even point improvements are instantly visible with OptumPricer.
New Product Bidding/Quotations:
Manufacturers must frequently bid on product variations and new products. OptumPricer makes net profit bidding easy and almost instantaneous.
Periodic Recovery Of Diluted Product Profits:
Product and company net profits are continually vulnerable to dilution by the ever-creeping companywide costs. A product priced today at $10.00 with a $1.00 net profit will, over the next year, with zero material or labor cost increase, not yield a $1.00 net profit because of the ever-increasing companywide costs.
By annually or periodically updating company data and material costs, OptumPricer recovers the eroded profits by resetting each product’s net profit breakeven prices. The “Net Profit at Current Price” table (See above) indicates which products have unacceptable net profit levels. OptumPricer’s what-if capability allows management to decide whether to raise prices and/or persuade operations to lower material and labor costs.
Executive Summary:
The company’s net profit is the sum of its products' net profits, so setting all products at net profit prices optimizes its profit. Before OptumPricer, there was no commercially available pricing tool capable of calculating a product’s net profit or breakeven price. Management couldn’t know any product’s net profit and was satisfied if the company’s bottom line was positive.
OptumPricer increases company profits by:
The antidote for sub-optimal company profits resulting from traditional product pricing methods is to switch to OptumPricer product net profit pricing.
For a free OptumPricer 15-day free trial and or to see a demonstration of OptumPricer, please put the following link (Optumpricing.com) onto your URL bar and click “Start,” and then “view demo.” For further information, contact me at rudyzeidler@optumpricing.com
*H. Rudolf Zeidler, President & Co-founder of ProfitablePricing Solutions, Inc.
Before co-founding ProfitablePricing Solutions, Inc. and LoRu Management Consulting Associates, Rudy was the Vice President of Industrial Sales for Zenith Electronics Corporation, where he initiated and managed the company’s $280M+ Computer Electronics Components Division.
As a Turnaround Management consultant, Rudy created nearly 80 multi-millionaire company owners who were formerly facing financial failure. Rudy earned his MBA from the Graduate School of Business at the University of Chicago, majoring in Marketing and Economics.
