Index Pricing

Do you suffer from wild cost fluctuations due to changing commodity prices, but find it hard to pass rising costs through to customers? One approach is to create a separate line item for the commodity, tied to the actual price of that commodity. As your costs rise, the line item cost rises. If your costs fall, you pass those costs along to customers.

This policy does mean that you have to justify the value you add to the commodity, since the commodity component gets broken out. It also works best when you can tie the commodity costs directly to the commodity price. For example, Dow Corning implemented an index pricing scheme for platinum used in some of its products. You also have to show the customer that this is not a way for you to make money, just a way to insulate yourself from losing money.

This is easier said than done for important and volatile costs like fuel. How much of the increased cost of fuel should each passenger on a plane or pallet on a truck cover? For full truckload shipments, this method is easier.

Even if customers might balk at such a scheme, merely proposing it may show that you have serious cost issues in your supply chain as well, making customers less resistant to more typical price increases like surcharges.

Comments are closed.