Unit Price v Total Cost

Today’s blog update comes from Mindshop founder, Chris Mason.

“In today’s ever increasingly competitive global market the question on how to compete on price always comes up.

People believe that the only way to compete is to be the lowest price supplier of their goods or services. Unit price is only one factor in deciding who to deal with. The more compelling factor is what I call the Total Cost.

For example, I want to get my car repaired, do I go to the person with the lowest quotation if they are located in a city four hours away; of course not. Do I go to someone locally just because they have the lowest cost; probably not.

So what is causing my concern? I know from experience that I need to check the total cost, will the unknown supplier use quality parts, will they do it when I want, do they take my preferred credit card, and can I trust them to do the repair well? I cannot always put a financial price on each of these factors but they do impact on my perception of the total price. The bottom line is that not always is the lowest unit price the lowest total cost.

This concept works in any sales situation. A lot of manufactures were tempted to source their components from emerging nations such as China and India, only to find that there was a sting in the tail of the total cost. In this case factors such as communication, quality, on time delivery, minimum order quantities, and freight, added to the unit price. Many have subsequently brought their business back on-shore because of these extra costs.

Think about your own business, what are the unit costs and what extra costs can you manage for your customer.

You should be able to work on making the total cost of buying from you lower than the total cost of buying from your competitor even when your unit cost is higher. If you find you really cannot create a lower total cost perhaps you need to change the way you price and pull waste out of your processes.

The worst case scenario is that you withdraw from that market, but the need to do that is rare. Start with the price that you need to be competitive and work backwards to determine your target material, labour, and overhead costs. When talking to your customers, talk total cost rather than unit price and you are less likely to have to compete poor quality and unreliable competitors.”

As always, if you have any comments or questions on the above blog post, contact jim(at)accountsplus(dot)ie.

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