所有你应该了解的有关ICE产品定价的事实

Part 3 in a 3 part series about copper and wire pricing (Part 1, Part 2).

Today’s topic is ICE’s pricing. 4 things you’ll learn today:

  1. How does ICE know what our prices should be?
  2. Why are some manufacturers always higher/lower than others?
  3. Are some prices too good to be true?
  4. Does product quality make a difference?

How does ICE know what our prices should be?

Essentially, we ask ourselves, “If we sit down with a customer, knowing that they’ve probably got current pricing from our competitors, will we be able to stand behind these prices?”

When the answer to that question is yes, then we know that we have the right prices. To get there, we use human judgement, informed by extensive analysis. Here’s how we do things.

Margin Analysis

It all starts with a margin analysis. We take our current prices and the copper price they’re all based on, and throw them all into an epic piece of custom software. That bad boy gives us gross margins, in both percent and dollars, on all of our products.

Then we feed it a new copper price and it churns out a bunch of new prices for us. The new copper price we feed it is simply an average of the copper prices that all of our on-hand inventory and in-process production runs are based on.

For each product we make, the software gives us two prices; 1) the price we have to sell at the make the same percentage margin, and 2) the price we have to sell at the make the same dollar margin. So, why both percentage and dollar margin? Why not one or the other?

Well, they’re both useful for different reasons. Imagine a world where we sold the same quantity of each product every month. In this imaginary world, if we kept the dollar margin the same, whether prices went up or down, we would make the same amount of money every month. Our overhead costs don’t really change much, so this would be the ideal scenario for us.

But this is like one of those ideal scenarios in a textbook that’s good to illustrate a concept, but doesn’t actually work out in real life. There are other factors that come into play when prices change. Usually, when prices go up, customers buy less of the product. So, if you kept dollar margins the same, you would be making the same profit per item, but selling less items, and thus making less money.

Percent profit has the opposite problem; if you keep your percentage profit per item the same, you end up with prices that are too high. Think about it; if you raise prices by, say, 10% and keep your percentage profit the same, you end up making 10% more profit. If you magically start making 10% more money, it’s pretty much guaranteed that your prices are too high.

So, same-dollar acts as the lower limit on prices and same-margin acts as the upper limit on prices. Think of them as goalposts; the real prices have to come in somewhere between the two. That’s why I said price changes are about human judgement, informed by analysis.

Competitive Analysis

Okay, cool, so that’s it, right? Nope, that just tells us where we’d like to be price-wise. The problem is that we don’t exist in a vacuum. We can’t just go to market with the prices we’d like to be selling at. We have to be sure our prices make sense in the competitive landscape.

We call this phase the competitive analysis. We consider where we’d like to price our products in the context of the current conditions of the marketplace. If, based on those conditions, we need to make changes, we do. Amongst the questions we consider are:

  1. Has the rest of the market moved their prices yet?
  2. What is the timing of this move?
  3. How does their quality compare to ours?
  4. The competitive analysis is done when we feel confident that our prices are competitive in the marketplace.

Why are some manufacturers always higher/lower than others?

Two reasons really:

  1. Different Production Costs
  2. Management Efficiency (or Inefficiency)

Different Production Costs (overseas vs. American)

Differing labor and overhead cost structures are a common theme in any industry, but the wire and cable industry has a built in divide between companies with factories in the U.S. and companies with factories overseas.

As you can imagine, labor costs in the U.S. are much higher than they are in, say, China. But labor’s not the only cost that’s higher in the U.S.; land and buildings (or Plant & Equipment, as our accountant calls ‘em) are also more expensive. The result of this difference in cost structures is that U.S. wire companies tend to be more expensive than wire companies, like ICE, who manufacture overseas.

Now, as the price of copper goes up and copper becomes a much larger portion of the cost of a box of wire, this price advantage diminishes because everybody pays the same price for copper. Still, this cost advantage is always there and it makes a pretty big difference; we’re significantly less expensive than almost every American wire company.

Management Efficiency (or Inefficiency)

Okay, fine, that covers American factories, but how do we compare against other companies who manufacture overseas? Or, more generally, how do companies with similar production costs compare to each other?

Some companies just get more work done with fewer people, for various reasons. We don’t know why exactly. Maybe some companies are too top heavy with managers. Maybe others just get more work out of their people. Look, we’re not saying we’re Harvard Business School case study material, but we’ve definitely noticed that some of our competitors are always just a bit too expensive.

So, to recap, we’ve got two types of wire companies: 1) those with different labor costs (overseas vs. American), and 2) those with efficient or inefficient management.

Are some prices too good to be true?

You bet! Pretend you’re bidding on a modest sized home theater project. You bid $30,000. You know your costs pretty well. You know this is a solid bid. Not too lean, but not really fat either.

If you lose the project to a $27,000 bid, you wouldn’t think much of it. Maybe your competitor really needs to keep his guys busy or something. But what if the homeowner told you that you lost to a $15,000 bid. You something’s wrong; one way or another, that job is not going to turn out well.

Yeah, that’s the kind of stuff going on in the wire industry. To really illustrate what we mean here, let’s take a look at this breakdown of Cat 5e cost components that we included in Part 2 of this series:

  • Copper: 11 lbs
  • PVC: 9.5 lbs
  • Box/Packaging: 2 lbs
  • Labor
  • Shipping & Handling

We’ve already talked about labor and how that affects price, so if there is a third type of company with a drastically different cost structure from the first two, the difference has to be somewhere in Copper, PVC, Box/Packaging, and/or Shipping & Handling.

We can take shipping & handling off the table, because everybody gets pretty much the same rates from UPS, Fedex, and the trucking companies. We can also take Box/Packaging off the table, because the cost difference between our best-in-class Big Mouth Payout pull boxes and a no-frills, brown pull box just doesn’t affect the final cost that much.

That leaves two ways for a company to drastically change their cost structure: copper and PVC. Ain’t that the darnedest thing? But, you ask, does this actually happen? Are there really wire companies out there swindling misleading their customers like this?

Sad to say, it is in fact true. Don’t take our word for it though, here’s CE Pro magazine and Cabling Installation & Maintenance magazine saying the same thing.

It kind of makes sense in a sleazy way. Copper and compound are the easiest ways to reduce cost in wire. If you reduce the amount of copper in Cat 5e from 11lbs to 9lbs, at $4.50/lb., you just reduced your cost by $9 per box. Imagine if your Cat 5 cost $9 less per box.

That’s actually a true story, by the way. As we’ve mentioned, the price of copper has skyrocketed this year. While it was on it’s meteoric rise, we noticed that one of our competitors was somehow keeping their prices incredibly stable.

It kind of struck us as funny. The cost for us to produce Cat 5 had increased by over $10 per box over the course of about 6 months. But here were these guys who had barely raised their price on Cat 5e by two bucks. We were kind of like, “That’s weird.”

So we obtained some of their Cat 5e through side channels. Lo and behold; it’s missing 2 pounds of copper. That was a real eye opener for us on the sleazier side of human nature. We had always kind of suspected that this type of thing was going on, but we never really thought somebody would actually, you know, rip their customers off like that. Sorta like an “only happens in the movies” type of thing.

But there you go, it’s happening. A lot. We’ve got tons of other stories just like this one. Basically, for any given way you can reduce cost by removing and/or substituting expensive materials with low cost, subpar alternatives, there’s a company out there doing it.

Some guys are reducing the thickness of their copper conductors. Other guys are substituting an aluminum conductor in place of what is supposed to be a copper conductor, then putting a copper coating on the aluminum to keep it from being obvious. We’ve also seen riser rated compound substituted for (much more expensive) plenum rated compound.

Does product quality affect price?

Absolutely! But it depends on what aspect of product quality we’re talking about.

Some enhancement and innovations are inexpensive to implement, but can have a huge impact on the usefulness of the product. Other features, like our Big Mouth Payout (BMP) boxes boxes can be very expensive to implement. However, we work very hard to ensure that the overall impact on the final cost of a box of wire is minimal.

Still other things, like having the proper gauge conductors and using the correct jacket compound, do affect price. But we feel like these are the aspects of product quality that matter the most. Wire & cable stay in walls for a long time, often decades, and having the right gauge wire, built to tight specifications, with the right jacketing material are important.

So, how can you tell if you’re buying quality wire? It’s easy enough with the right equipment and some spare time, but do you really have the time? Does your customer? The best way to make sure you’re installing quality wire is to work with a reputable vendor.

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