How to set the price to optimize equipment utilization?


2

I'm in a technical position, soon to be launching a service company that receives orders from electronic component manufacturers to perform laboratory measurements on their products, charging them for the results. There's no competitor offering a similar service to use reference pricing.

Since the number of measurement results generated per month depends on the throughput of the physical measurement system(s), the question of how to price, based on utilization comes up. That is, if I'm ready to accept business and there's no orders, lowering the price seems to makes sense. That is, until the point when there's such a large backlog of orders. Then, I'd like to raise the price.

This seems to fairly balance pricing based on market demand, and somehow I think it best utilizes my equipment resources (meaning, if there's no orders, the equipment is underutilized and therefore selling time for it at any price seems better than having it just sit there; the goal is to keep the equipment running at all times so that it's always generating money).

I wouldn't think such a business model (that is, having a process based on equipment throughput where utilization is critical) is anything new, but then again, I can't think of any existing businesses using elastic pricing like this. Maybe my thinking is off (perhaps it just drives customers crazy with all the inconsistency). Any ideas on how to optimize pricing in this scenario?

Pricing

asked Dec 19 '11 at 13:37
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Tim8691
17 points

2 Answers


1

Actually if you take a microeconomics course you will find that the goal is to maximize profit, not utilization. Think of the big auto companies who have shutdown weeks when demand is slack, they don't just keep producing.

In your case as a startup perhaps you should publish a "standard" price that you can live with for a couple of years and then offer specials, just like the stores you are familiar with.

So for example in one month you could offer to do a more comprehensive set of tests for the price of the basic test; assuming that makes sense. (Like a free cup of coffee with a gas fillup). Or perhaps "Get 5 tests for the price of 4 if you pre-pay" (helps cash flow:-)

Another option is "free expedited testing on your first order", if you can. So if the normal turnaround is 2 weeks but you could do the test in 2 days if you had no other work. (I assume you normally charge extra for rush service don't you?)

The key here is to give incentives that bring in business, deliver increased value to your customers, but which don't cost you money!

answered Dec 19 '11 at 16:15
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Jonny Boats
4,848 points
  • Great ideas, thanks so much. – Tim8691 9 years ago
  • If you like the answer please upvote and/or accept it. Thanks. – Jonny Boats 9 years ago
  • I tried initially but looks like I need 15 reputation pts to vote up. – Tim8691 9 years ago
  • tim8691: Hang in there and you will have points in no time. Also good luck with your business. – Jonny Boats 9 years ago

0

Believe you're talking about pricing optimization model or pricing science.

If there's no directly product/service to compare your offering to, you should still understand the value it presents.

For example, it's not clear based on the information you provided, but it's possible that your future customers would lose time or assets as a result of not using what you offer. The time or assets your company saves them would be the "real" value, though if it provides strategic value, your pricing might reflect a multiple of the real value.

answered Jan 2 '12 at 13:23
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Blunders .
899 points

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