Price the product the standard sheet got wrong.
If the cost feeding your quotes is a distorted standard cost, your prices are wrong in a predictable direction: high-volume commodity work is overpriced, and custom, low-volume, high-complexity work is underpriced. The second error is the expensive one, because that is where the real cost is highest and least visible, and where a competitor pricing on true cost will quietly take your best margin.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Manufacturers who price on real, fully-loaded product cost capture 3 to 7 percent more margin than those pricing on standard cost, and the gap is largest in custom and low-volume work where setup and complexity are heaviest. Because a 1 percent price improvement lifts operating profit by about 8 percent, pricing on true cost is one of the highest-leverage moves a plant can make.
Overprice the commodity, underprice the special.
A standard cost overstates the cost of simple, high-volume work and understates the cost of complex, low-volume work. Price on it and you do both wrong at once: you carry too much price on the commodity, where competition is fiercest, and too little on the special, where the real cost lives. Customers happily take the underpriced specials, and your most complex work becomes your least profitable without anyone deciding it should.
Worse, quotes built on an annual standard cost are stale by mid-year, with 15 to 25 percent distortion as run sizes and mix drift. Even disciplined pricing inherits the costing error and compounds it.
WHAT THE WHAT-IF RECOVERS
Illustrative. With a minimum run size and a meaningful setup reduction, gross margin lifts into the mid-30s and operating margin into the high teens, most of it through pricing and order discipline rather than cost cutting.
Feed quotes from the model, not the sheet.
Quote from the TDABC cost
Load setup per run, changeover, capacity cost rate and quality time into the quoted cost, then add margin. The quote rests on what the work takes, not an average.
Make complexity a line
A complexity surcharge turns hidden cost into a transparent line a customer can see and a sales team can defend, instead of margin given away silently.
Price minimum-order economics
Set the order size below which the work does not pay, and price the rush and the special so they carry their own cost.
Price dedicated capacity
Where a customer needs capacity held for them, price the readiness. Shared capacity and dedicated capacity are not the same cost.
A 1 percent gain in price is worth about 8 percent of operating profit. In manufacturing, the largest, safest source of that gain is the complex work the standard sheet underpriced.
Frequently asked questions
- How much margin does true-cost pricing win?
- Manufacturers who price on real, fully-loaded product cost capture 3 to 7 percent more margin than those pricing on standard cost, and the gap is largest in custom and low-volume work where setup and complexity are heaviest. Because a 1 percent price improvement lifts operating profit by about 8 percent, pricing on true cost is one of the highest-leverage moves a plant can make.
- Why is custom and low-volume work underpriced?
- A distorted standard cost understates the cost of complexity, and complexity is concentrated in custom, low-volume, high-mix work. So quotes built on standard cost overprice simple commodity work and underprice the complex specials, and the second error is the expensive one because that is where real cost is highest and least visible.
- How do you price on real cost?
- Feed quotes from the TDABC model rather than the standard sheet: load setup per run, changeover, capacity cost rate and quality time, then add margin. The same model supports a complexity surcharge, minimum-order economics and customer-specific pricing for dedicated capacity.
Find the work you are quietly underpricing.
The Profit Check needs no data upload. It shows where your quotes are most likely wrong, and what pricing on true cost is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
Call +351 910 313 731
