Cost-to-Serve Recovery: 100% is Too Low
Posted by James Marland on Thu, Aug 04, 2011 @ 10:17
Pricing managers always say they want to move away from cost-based pricing and toward market or value-based systems. While I applaud that, there seems to be a blind spot when it comes to surcharge recovery. We set the bar too low: 100% recovery of cost-to-serve is a good first step, but 100% is just not good enough.
Cost-to-serve are costs such as freight, packaging, setup, and configuration, which are incurred when servicing a customer. To cover these costs, fees or surcharges may be levied. Companies then analyze the ratio of costs to charges and try to improve it.
A goal of 100% is too low.
This is an area rife with cost-based pricing, and as we have learned, we should be looking to charge the value a customer accrues from these services, not what it costs us. Some examples:
- We are asked to set up and calibrate a machine we sold. This means that it will use 5% fewer consumables in its first 6 months of operation. Our surcharge should reflect that saving.
- We are asked to deliver a chemical directly to a customer’s line rather than a goods inward location. It takes our driver 30 mins longer but allows the customer’s line to be more efficient, increasing their throughput.
- Calls to our help desk lead to fewer expensive breakdowns which could be quantified in more up-time for the customer.
Value-based selling: it’s too good to not use everywhere.