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Do You Reduce Your Margin Just to Keep the Machine Shop Floor Full of Work?

6th August 2013
Do You Reduce Your Margin Just to Keep the Machine Shop Floor Full of Work?

 Any machine shop owner will likely tell you quite freely that, in principle, it’s not just about margins; it’s about the customer.  They will also tell you that embarking on unprofitable work projects, just so that you can keep your machine shop working is a mistake and that it is not worth doing the work if there is no profit in it.  And yet that self-same businessman of principle, at some time or other, has almost certainly done just that.  There is so much pricing pressure in the engineering industry these days and so much pressure to keep employees working in machine shops, that work is routinely undertaken even if it is not going to add anything to the bottom line.  It is almost Dickensian in its Mr Micawberish belief that if we keep the shop busy, “something will turn up!” 

Sustainability matters a lot in the CNC machine industry.  Keeping the CNC machine shop floor full of work can prove to be difficult.  One way to keep the shop busy is to reduce the margin but still offer the same quality products to the targeted audience.  Standing apart from the crowd is really important in this industry as there are a large number of companies offering these kinds of services.  This is why the business which delivers good quality services at affordable rates tends to benefit the most.
As a business owner, one needs to develop and implement certain strategies that may sometimes include reducing the profit margin in order to keep the business going.  Some of the steps that a business owner can follow are:
  • Firstly, select a target market; know what your margin is and whether your business is a high margin-low volume business or a low margin-high volume business.  This helps in setting the optimum pricing point.
  • Dependant on the margin/volume debate, you may need to ‘partner’ with another supplier; choosing the right partner is also very essential when it comes to growing the CNC machining business.
  • As a service provider, one needs to be able diversify the customer base on a large scale basis.  The company should be able to enjoy the economies of large scale production.
There are lots of ‘boiler-plate’ pricing-theories and we’ll touch on just a couple here:
  1. Doubling your prices will lose you half your customers (mostly the ones you’d be glad to lose anyway); it’ll create some head-room in the business and you’ll end up no worse off financially, in theory.
  2. When 20% of your potential customers reject your product because of price you’ve got your pricing model just about right; at that point, your price is optimum, in theory.
Handling a CNC machining business and making it successful is a challenging task.  This is the main reason why one needs to keep a check on the costs from the very beginning, so that the machine shop can run smoothly with minimum disruption.  But beware of inviting a ‘loss-leaders’ culture of desperation into the machine shop; that can lead to inefficiencies creeping into the business that translate into increased costs and less profit potential.

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