Do you know what those four bright lights are to the left of the runway? That’s the PAPI or Precision Approach Path Indicator, and these lights tell a pilot if their plane is coming in too high, too low, or just right.
Wouldn’t it be great if we could have a PAPI to guide us when we provide a price quote to our clients? A trustworthy guide to know whether our quote is too high, too low, or just right?
In a conversation with one of our distributor members last week, they asked for my input on quoting a large apparel order of brand name jackets. Prior to our conversation, this distributor had an idea of the margin they were comfortable adding to their cost – and let’s just say, they would have completely missed the runway.
PAPI Shows 4 Red Lights
Four red lights means you’re coming in too low, and this is very dangerous for your business. There may be times when you lowball a bid but this should by no means be your norm.
Some distributors look at the dollar value of their profit instead of their margin. In our similar scenario, one could reason that they would be thrilled to make $5k on a single order. Please don’t take this approach. Again, coming in too low is dangerous and can be fatal to your business, especially on larger orders.
Really, you should establish a minimum margin for your quotes. With every job there is risk and there is your time which has a cost. Know what these are and factor them into any given job to determine your minimal margin. Do not base this on the dollar amount of the order.
In our scenario, I would consider the retail price of the jacket. This client specifically asked for a high-end jacket so they have a price expectation. Asking for their budget is always a helpful indicator.
PAPI Shows 4 White Lights
On the flip side, four white lights means you’re too high. Again, your client has an idea of the price they want to pay, or a budget for the promotion. One risk of being too high is that your client could decide to compare pricing with other companies and you could lose their trust. Therefore, try not to come in too high.
If you have a good relationship with your client, and they tell you the price is too high, you can take the opportunity to play this one of two ways. First, and the approach I prefer, would be to suggest another product with a lower base cost, keeping a similar margin. The reasoning here is that they can’t aﬀord the higher priced one. This way you are not compromising on margin/price. The other approach reminds me of the car salesman who goes back to his manager for negotiations. I think you know where I am going with this.
PAPI Shows 2 Red and 2 White Lights
This approach is considered the optimal path for a successful landing. There are several factors that can guide you to this price. For example, since the quote request in this case study is from a current customer, it would be helpful to know what your average margin is on their orders. If you normally make 35% margin on orders with this client, you have a good starting point.
Another consideration is what the going rate is. Google the product and evaluate the high, low, and median price in the marketplace. In our scenario example, as a brand name jacket, the retail price is likely to be twice your net on the blank item, or approximately $100(a). Now on a large quantity, the buyer is likely expecting a significant discount. But what is significant? Certainly a 10-15% discount could be significant, and that still leaves you with a 35-40% margin.
In our Fireside Friday Zoom chat that week, I posed this same situation, asking what margin others would seek. 25% of those responding said 30% margin; 13% said 35% margin; and 50% said 40% margin. How much would you have charged?
Another approach I like to take is to give your client three options: Good, Better, and Best. In our scenario, you could show them a $90 jacket, a $100 jacket, and an even higher $110 jacket.
In conclusion—quotations are not always easy, especially on larger quantities. “Am I being too greedy, quoting with a 40% margin?” That is the question many will challenge themselves with, in eﬀect talking themselves out of a fair margin. But trust your indicators and your guides. Consider your experience and history with that client, and realize your professional value, and your own risks.