Logistics Managers – Does Your Sales Director Ask You to Help Set Selling Prices?

Well, I think we all know the answer – a few might do so, but most will not even give it a thought. Prices charged to business customers are frequently based on volume. There might be a higher charge for a customer abroad, but more often than not two customers buying the same amount of goods will be charged the same price.

Should you think again?

My short answer to that question is “Yes”. Customers can place very different demands on their suppliers, most of which will cost the supplier money. These might relate to delivery – some customers may accept a single delivery into a single, centrally situated, National Distribution Centre; others may require smaller deliveries into regional depots; and some may demand deliveries to individual stores. The first will be the cheapest to serve, the last the most expensive. There may also be differences in presentation – full pallets of the same item; mixed pallets; or even pallets presented in a prescribed way, such as all cartons facing the front, so that they are ready for display in the store. Packaging, labelling, and even paperwork requirements will also vary. There may even be hidden costs – one customer may be efficient and unload vehicles promptly on arrival; others may keep them waiting for hours so that you are charged waiting time by hauliers.

All of these differences have a cost implication: let us take a hypothetical example.

Imagine that you sell electrical appliances, which are imported from the Far East by seafreight and held in a warehouse in the English Midlands. Costs up to this point will be the same for all customers, so we can ignore them for the moment. We will assume the goods are stored on pallets in the warehouse, with 180 boxes on a pallet, and you can get 26 pallets in a full artic load.

Every situation is of course different, but let us consider just two hypothetical customers:

Customer 1. Accepts full artic loads of complete pallets, delivered to their UK distribution centre near Doncaster.

1. Picking and dispatch cost: £3 per pallet, or £78 per load
2. Delivery £250 per load
3. Total cost £328 per load, or 7p per carton

Customer 2. Requires palletised deliveries to individual stores, with mixed items on pallets and different quantities for each store. On average there are 100 cartons on each pallet. The customer also insists that you put a special label on each carton.

1. Picking and palletisation 20p per carton
2. Labelling cost 5p per carton
3. Dispatch £1.50 per pallet, equals 1.5p per carton
4. Delivery average £50 per pallet, equals 50p per carton
5. Total cost 76.5p per carton

That is a difference of nearly 70p per item! My guess is that is a pretty big proportion of your profit margin, and it should not be ignored. If you are only making 50p per unit in profit, it is a very big problem.

I realise that selling prices are often dictated by what a customer will accept, and market rates relative to competitors. However, I would advise anyone to at least be aware of the differing costs to serve different customers. You can add up the various elements – you could include sea or air freight, customs charges, customs duty, and storage as well as handling and delivery.

Ideally, selling prices will be increased to match the costs of serving particularly demanding customers. If not, at least everyone will understand the effect on profit margins, and be better able to make the right business decisions.