by Mateusz Kuczera
Published March 20, 2023
A few weeks after having received and paid her updated invoice with a new lower toilet, Shelly receives a new invoice. She opens it, looks at the prices, and calls Mark directly again. As soon as Mark picked up, and without even waiting for a greeting, Shelly impatiently initiates with a loud “Are you kidding me?!”
Shaken and confused, Mark replies “Uhm, hi Shelly. There’s clearly something that tipped you off but you’re going to have to tell me what the issue is for me to help you…”
“The price! It’s the same as last time!” she continued passionately. “I thought we talked about this!”
“What, the toilet?”
“Yes, the toilet!”
“Hold up,” says Mark. He opens up the invoice and realizing that Shelly is right continued “yeah, we have a new dispatcher who used the old price. Sorry about that Shelly, won’t happen again.”
“I very well hope so!” says Shelly as she hangs up.
Mark once again changes the price and thinks “we need to fix this…”
Any company which has been doing business for more than a few months realizes that it cannot function without a price list. However, some businesses operate with prices that are not automatically linked to an invoicing system. This in turn generates the risk for errors and mismatches, resulting in potential customer frustration. To mitigate this risk, creating an electronic price list automatically linked to the parts that are used is highly recommended.
Any service company in the construction industry will be faced with the challenge of having to price thousands of items. And although the first manual pricing pass is difficult to eliminate, automating the yearly update of prices is not all too difficult.
The first step is to create Stock Keeping Units (or SKUs), names, descriptions, and sales units (EA) for each item which will be sold to clients. SKUs should of course be created to be unique and independent from suppliers. Names should be short enough to be quickly human-readable but long enough to be clear. Sales units should either be pieces (or each, ea.), lengths (inches, feet, etc.) or hours.
Once internal SKUs have been created, it is recommended to link them to all available supplier SKUs. Should the company decide on an automated inventory management system, having readily available SKUs will significantly facilitate the implementation.
When SKUs and associated steps have been completed, categorizing each item is helpful to determine common characteristics between items. For instance, initial item mark-up can be assigned by category and subsequently adjusted based on other criteria like price sensitivity or competitive intelligence.
Mark-up should remain stable throughout the update cycles of the parts. If a part’s cost gets reduced and mark-up remains fixed, the price will be reduced. The same logic of course applies to cost increases. With this system in place, updating prices based on cost becomes very fast.
In the event where prices must be adjusted due to input like customer feedback, competitive intelligence, market conditions, or any other reasons, the price should be adjusted by changing the mark-up, and not the price itself. This will ensure that automatic price updates always consider the updated mark-up. New items added to the price list will also require a manual input at first to enable future automatic updates.
With a sufficiently complete list which includes company SKUs, supplier SKUs, costs, mark-ups and prices, an automatic update can be done. This is true however only if supplier price lists are available. Without readily available supplier electronic price lists, automatic updating cannot be done.
With price lists in hand, a simple algorithm can update costs. With mark-ups unaffected, prices will be updated, resulting in an update price list which can be used with customers. When set-up correctly, this process is extremely efficient and quick and can be done whenever needed.
For companies selling only a few different items, creating and maintaining a price list may not be a big challenge and may not even be necessary. However, for companies akin to distributors, a price list is mandatory. And companies which use manual price lists tend to maintain the same prices for years, therefore ignoring any fluctuation in parts cost and most importantly ignoring the effect of inflation. Maintained for too long, inflation can significantly affect margins, reducing overall profitability only based on an obsolete price list.