Pricing For Small Orders
When you make your living with volume production, how do you cope with occasional one-off requests? January 26, 2008
Question
We are a small to medium size panel processor most working in melamine and MDF. Our own product line represents less than half of our production. More and more we are making products (shelving units and KD cabinets) for other companies who basically represent themselves as the manufacturer. Over the years I have figured out a pretty good way to price the work we do using spreadsheets and optimization software. All of the pricing has been based on either large quantities or repeat orders.
Lately one of our customers has been asking us to make one or two items at a time. When I use the same formulas for pricing one or two or even a dozen, the cost is just not high enough. I have been adding an extra $50.00 to $100.00 sometimes, but still don’t make money. I hate to stop production on a CNC machine that is making hundreds of parts for another job, for example, just to make a one of a kind store fixture. All the programming is done in the office, but with new, one of a kind items, I like to oversee the production to make sure the employee at the CNC machine understands what to do. Does anyone ever charge a design fee, or have a special formula to figure out what should be charged on a one of a kind item? Keep in mind that the customer who places these tiny, unprofitable orders also sometimes gives us orders that are tens of thousands of dollars.
Forum Responses
(Business and Management Forum)
From contributor T:
You may consider another approach. Look at your process and develop a new method that permits the small orders, and lots of them, to pass through your system at normal costs.
From contributor J:
You have just discovered why the government is always spending too much for common items they can get at a store. They, by their own rules, have to buy from a manufacturer. The manufacturer has to add in a setup charge and a breakdown charge for each production run, whether it's 1 piece or 10,000 pieces. If you did your costing right, you should have these charges figured out and can charge the customer accordingly. They should understand these charges when you explain them.
From contributor O:
One method I've read about, aimed more at small custom shops than big production ones, used base prices that assumed single items and then adjusted the price downward for multiples. A one-off piece would be charged at the base rate, two identical pieces would be 10% off, three would be 15% off and so on, to a maximum 30% discount at six or more identical pieces. Maybe that sort of approach would be useful?
From contributor W:
For moldings, we have a setup charge of $100.00 that is added in to the cost of the molding. Everyone pays it. If you order 10 lf, you pay 10.00 per lf for setup. If you order 1000 lf, you pay 0.10 per lf for setup. This is done on a pricing spreadsheet. You could do the same for CNC work.
From contributor R:
When you find that more and more you are making product for other companies who are representing themselves as the manufacturer, it is clear that they have figured out it is cheaper to farm it out to you. Onesies and twosies are called prototypes or custom and you need to charge what it takes to run them. It is what it is. Figure out what the full costs are for you to tear down, set up, and get back to your previously scheduled programming, too. If you are not careful and begin to let this type of work overshadow your larger runs, you will get into trouble before you know it. If there is a chance at a larger production run of the same pieces in the future, then let them know the now price and then repeat higher quantity pricing up front as incentive to keep them. Otherwise, why do it? There is no way you can afford to do much of this for short money like $100.00. Even your best clients will treat you exactly how you allow them to.
From the original questioner:
What this customer is doing is shifting most of their products in their catalog made by various other manufacturers to us. So, after I have redesigned the product based on the way I do things, it is easy to make more for future orders. Because of the freight costs, it is less expensive to have us make the item locally even though the cost is higher, than to pay to ship several hundred lbs across the country. On KD items, I have charged an extra $125.00 for assembly instructions and also do figure at least 50% more for time and materials. But, when we are really busy, I hate to take the time away from a CNC machine to make a $150.00 single item when in the same amount of time I could generate $500.00 worth of production parts. It was not as big a deal when we were not as busy, but now that we are very busy, I really am starting to feel the pressure to keep running the more profitable parts that require less of my personal attention.
From contributor C:
You are exactly right in addressing this now. I have found that when charging a fair price for me. Most of the short run customers go away if they don't like the price. But that's what it is, I can't invest in their company. You are not doing anyone any good by selling them products that lose you money. Revenue deferred until later while making somebody happy is money lost that day.
From contributor W:
Perhaps you could schedule time to do the one offs when you are not in the middle of a production run. There is bound to be some slow time for the machine. Explain to the customer that if you have to stop a production run, it will be $500, or $150 if they want to wait.
From contributor V:
Being the devil's advocate on the modern shop's need for the CNC, I have to ask... The big selling point of the CNC machines is "mass customization" where the guy in the plaid pants says you can run one part as easily as one thousand. I'm not so naive as to believe everything the salesman says, but that is part of the appeal of these types of machines - it's just digits. Is it really more costly to do these one offs? Are the additional costs in programming, material handling, training, inconvenience, flow interruption or where?
From contributor P:
If a client comes with a picture of a piece of furniture, like a table or showcase, from a catalog, and there is a price for that item in the catalog, I tell the client my price would be three or four times the price in the catalog. There is no way a shop can compete, making one of a kind, with a company that makes thousands of the same product.
