By MPMC Select Committee Member Mark Campbell, Edelbrock

As we all see prices rise, many times we forget about all the changes that truly affect pricing (and profit) and how it impacts the cost of a particular item. We simply can't just look at the component cost, but we must truly evaluate everything surrounding that product and what it takes to sell it – and don't forget about the cost that may be incurred to service the product after the sale! If you are reselling a purchased finished good, that can be a much simpler product to sell, but there are many things we must evaluate even when selling a simple part. Some questions you must ask yourself – some are easy, and some are more complex:

  • Is there freight involved to get the part to me or to my customer? This is easy as we can adjust based on a charged freight cost.
  • Do I have to pick up and/or deliver the part? The person who is driving your truck may have just gotten a raise, your insurance costs may have risen, gas prices are certainly on the rise, and the costs of parts to repair your delivery vehicle certainly haven't gone down.
  • Does this product you have just sold come with a warranty, or will you be responsible for the warranty (or some part of it)?
  • How long did it take you to sell that part? Was it a quick sale or is it an in-depth technical process to sell that part? You must pay yourself for that time!

The above examples are a bit simpler, but once you get into a manufactured (in-house) product, the scale of complexity rises dramatically. This is where it becomes more imperative that you not only cover those extra hidden costs, but you are more proactive about change or keep up with these costs as it can kill your bottom line quickly. Some examples of these are:

  • Maintenance and repair on your machines – people and parts all cost money to fix and maintain that machine.
  • Operating costs – Tooling wears out, coolant / lubricant is consumable, power for the machine, the operator for the machine and so on.
  • Earned hours – how many parts can you produce in a given time and can you do it consistently? The machine will most likely not run 24 hours a day.
  • Tooling change over time – this can be factored into the earned hours above.
  • Indirect costs and overhead factored into the overall cost of the parts.
  • Selling expense and warranty expense – these are like what was in the points discussed above for a purchased finished product. Warranty expense must be factored in here!

As you consider all these points, many times you will find that a simple break-even point may be higher than you realize.  This break-even point could range from 10%, to as high as 20 or 25% margin for manufactured goods. With costs changing rapidly, you can see that margin disappear quickly. Now you are not only not making money but losing it quickly. 

Watch the market, know your products and be proactive! We all hate to raise prices but closing the doors on a great business is even worse.