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Quoting and costing methods
Quoting is commonly the first process required in order to receive a sales order. Companies go about quoting their products and services differently. There is no right or wrong way as long as you are making profit and the product is as it should be. Manufacturers quoting methods are often determined by a range of factors. One of the main and most common influences is your competition. Going head to head with other manufacturers in order to win a job often drives prices down, and so in order to win the job you may have to forfeit some of your profit margin. On the other hand, some manufacturers costing method is driven by the industry itself. They may have patent on a unique product that sits in a niche market of its own, meaning that they can determine its pricing structure.
A common method used by manufacturers for quoting is to use the cost of making the product and then add either a mark up or a margin. The cost of making the product can consist of things such as the raw materials used, machine overheads, employee overheads and even any specialist tooling. Quoting in this way allows you to always see how your costs compare to your sell price, and so give you the ability to cut prices to a reasonable degree and make informed decisions. You do, on the other hand, have to put detail in as you are applying your profits based on the cost of how long something is going to take along with what’s consumed to make it.
So what’s the difference between markup and margin you ask? They are terms that sound very similar but do in fact produce completely different outcomes. Mark up is the amount by which the cost of a product is increased in order to derive a selling price. For example, if we have an item that cost us £70 to manufacture, and we apply a markup of £30, we get a sell price of £100, which is a markup of 42.9%. The calculation for the mark up % = (mark up / cost to manufacture) x 100. On the other hand, margin is the sell price minus the cost of the goods sold. Using the same example as before, our item sells at £100 and costs £70 to manufacture, its margin is £30, or as a percentage, 30%. The calculation for the margin % = (margin / sell price) x 100. So as you can see, we have the same cost of manufacture and sell price, but two completely different percentages.
So the method above can be very useful if you are quoting bespoke items as you can always ensure you have money in the job. But what if you have a product range that is commonly sold and has a set price structure? Another method is using a recommended retail price as a platform. Companies will often then apply different discounts to the retail price, taking into account factors such as the quantity quoted along with the monthly expenditure of the customer who has requested the quote.
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