Companies involved in capital intensive manufacturing must plan production far in advance; yet their pricing programs can be flexible based on the correlation between demand and capacity.
Capital Intensive Manufacturing businesses require large capital investments but typically have relatively low incremental costs. Their businesses are often limited by the production capacity of their plants. The industrial world has many examples of this type of business including companies involved in such diverse outputs as:
- Building materials
- Consumer electronics
- Packaged Food
- Paper products
- Petroleum products
And many more.
Traditional cost plus models cannot compete with dynamic pricing.
It’s very common for companies involved in Capital Intensive Manufacturing to base their pricing on a traditional cost plus model. They spend a lot of time trying to estimate demand far in advance and then execute a production run based on that estimated demand. If they produce too much they are left with unsold inventory they must discount to move. If they produce too little they leave money on the table as well as leaving room for competitors to grab their customers.
During downturns, manufacturers like this often shut down machines and production lines. They know, in the short term, it will cost them a lot of money to shut down a line or plant – and it will cost a lot of money when they start up again.
Optimize profits based on capacity and demand.
PriceGain works with Capital Intensive Manufacturing companies to develop dynamic pricing models to maximize the relationship between supply and demand. Our experience shows that the best way to optimize profits in a Capital Intensive Manufacturing business is to try to maintain supply levels while altering price rather than only starting and stopping production capacity as demand changes. This provides the highest long term gross profit.
When companies understand this and are willing to execute dynamic pricing strategies correctly, they can increase their profits even in market downturns.