Pricing Wood Products

Bob SmithVirginia Tech

Outline

Basic ConsiderationsPricing ObjectivesStrategiesPricing AdjustmentsNew Product PricingWhat Wood Products Companies Really Do

Pricing Basic ConsiderationsPrice is the amount of money that is given up to acquire a given quantity of goods or services.

Price Elasticity is the sensitivity of customers to price change in terms of increases or decreases in the quantities that they will purchase.

The degree of influence a company may have over pricing is affected by the competitive environment

Market-controlled price environmentCompany-controlled price environmentGovernment-controlled price environment

Pricing Objectives

ProfitSalesStatus quoMost companies focus on short-term profit maximization

Cost-Based Pricing Strategy

Markup Pricing-The markup is a predetermined percentage added to product cost.

Product cost $100 to produce, I want 25% profit so I take $100/1-.25 = $133.33 is the selling price

Targeted Return Pricing-A price is established so that the sale of the product results in a targeted return on assets at a predicted volume

Price of Cabinet

Materials: LumberGlueHardware

LaborDirectIndirect

Fixed costsOverhead (utilities, depreciation, taxes)

Profit (>25% gross)

Pricing For Breakeven-Breakdown analysis determines the number of units required to attain breakeven between the sales volume of an item and the total costs needed to produce and sell that item

Breakeven Point =

___________Fixed Costs____________(Unit Sell Price) - (Unit Variable Costs)

Cost-Based Pricing Strategy

Learning Curve Effects - As production increases, per unit cost will decrease in something of a predictable fashion.

Marginal Cost Pricing

The marginal cost is the cost of producing and marketing one more unit of a product

Most logical in a facility operating at normal capacity with excess capacity available

Volume generated in this fashion is often referred to as incremental business

Demand-Based Pricing StrategyPerceived Value Pricing - The perceived value is the amount customers are willing to pay for the value they perceive in the product considering quality, service level, etc., as well as price

Consistent with customer perceptions and product positioning

Production costs are important in establishing the product price, but more important is the customer’s perception of the value of the product or service

What’s the Difference?

Perceived Value (and about $500)

Demand-Based Pricing Strategy, cont.

Price Quality Association - Value is offered when product quality exceeds that expected for a given price, or when price is less than that expected for a given quality level.

It is important that pricing create a value position that is compatible with consumer perception

Would you pay more?

Cherry/Maple Bedroom Set

Why?

Quality

Reputation of supplier

Beauty

Longevity

Demand Based Pricing Strategy

Loss Leader Pricing - The practice of setting low prices - sometimes below cost - in order to increase the sales level of other products.

Used in retail stores like Lowes to get you in the door.

Competition-Based PricingIn most commodity wood products, competitor pricing is the main determinant of price.

A Price Leader is a firm usually with a dominant market share that literally tends to lead the industry in terms of pricing.

Competitive Pricing is a situation where competitive firms bid on a job or an order. In these situations, a company prices based on their perception of how competitors are pricing

Price Adjustments

Discounts and Allowances• Trade Discounts• Cash Discounts• Promotional Discounts• Quantity Discounts

Seasonal Discounts and Early Buy-Ins

New Product PricingSkimming Price Strategy - Using a high price in the early stages of the product’s life cycle when the market is developing

Penetration Price Strategy - Using a low price to capture a large market share with the introduction of a new product

Practices That Effectively Discount Prices:

Inventory stocking without paymentDating terms that vary from established termsWillingness to offer a quantity discount and then ship in split lotsFinance charge stated without “true” intent to collectMarkdowns to meet competition, move inventory or temporarily increase volumeRebates offered by the manufacturer to stimulate activity

Some Other Considerations

FreightReview of Price AdjustmentsDistributors - Pricing ComplexityWithout product differentiation, competition is increasing and price differentiation progressively leadto smaller and less profitable market shareSome firms achieve successful differentiation throughproduct specialization, quality, service and other “extended product” factors.

Other Strategic Pricing Issues

Pricing Over the Product Life Cycle

Price Positioning Relative to Competition

Prices Relative to Other Items in the Product Mix

Complementary Products - Sales of one product increases with the sale of another

Substitute Products - Different products that satisfy the same needs

Price

The purpose of price is not to recover costs but to capture the value of the “product” in the mind of the customer.

- Daniel NimerPresident

The DNA Group

The Value Equation

VALUE =

PLUS ?

(Price)

The Value EquationQualityDeliveryGuaranteeColorDimensionsCredit termsTechnical supportReputationSales supportCommitmentCustomer RelationshipsEmployee satisfaction

+

So Value in the eyes of the customer can be created by…….

Increasing the product offerings (the total product) or….

Decreasing the price !!

The marketing concept tells you that you need to increase the product offerings.

Ultimately, the physical product can be a small part of the equation.

RelaxationNaturalTime with family/friendsDreamingPeace

What do Wood Products Companies Really Do ???

Many work off of published pricelists.Many wholesalers and retailers often use a markup method.Often more of an art than a science.Many try to compete on non-price items, such as service, credit, or quality.

Pricing your Product

Delivered log costs ?Manufacturing costs?Drying?Planing?Overhead?Profit?Shipping?

Pricing Your Product (What else?)

Understand the market.What do your customers value?Where are you in the distribution chain (how direct)?Research price reports, advertisements, trade shows and customers.

Pricing Your Product (What else?)What is market price?Is the customer in a strong need?Is there competition?Is your quality better?Is it a new customer?What is the customer’s potential for more sales?

Pricing Summary

Focus on value, not price.The better you understand the market, the better you can capture a higher price.The further you go down the distribution chain, the more value you should capture.Pricing remains as much of an art as it is a science.