Incremental Cost-Free Revenue is a Tip Worth Taking

The start to just about any work day finds me walking purposefully into the local coffee shop for my first cup. Some days it’s the Starbucks not too far north of my house, other days it’s the more local, less cookie-cutter Colectivo just south. They’re different in many ways, but one similarity is the prominently displayed tip jar at each store’s checkout counter. I like my coffee black. I like the people in both stores, and despite that it takes relatively little effort for them to fill my order, I almost always leave the change in the tip jar.

I admit to being less of a fan of McDonald’s, but if there are no other options, its coffee works well enough. I order it black there, too, and it’s served up just as quickly as it is in my preferred locations, generally by a friendly server. But I leave no tip. The reason I leave a tip at Starbucks, but not McDonald’s, is because Starbucks has the guts to put the tip jar on the counter. 

Should contract manufacturers be more inclined to put out the tip jar? When we go above and beyond, bend over backwards to fill a customer’s request or provide a higher than standard level of service, we often do so without touching the customer’s price. We don’t have the nerve or the guts to ask for more.

Many projects require up-front work in advance of winning the business. Customers may be willing to pay for process engineering time and other resources consumed in developing a new and better method for producing their parts. Similarly, manufacturers may be able to recoup costs associated with requisite specification development and quality approvals. They shouldn’t be shy about asking customers to pay for sample runs or for investments in new equipment or tooling required to process production orders.

Consider adjusting price for non-standard services such as deviations from standard processes, custom packaging processes or materials, storage of materials and inventory pre- or post-processing (if required by the customer) and quality or inspection requirements or reporting if they are inconsistent with standard processes.

For those who run their own transportation fleets, assessing a fuel surcharge when the price of diesel fuel fluctuates is another way to offset cost and augment revenue. Others who don’t operate their own fleets may mark up the cost of pick-up and delivery services provided by contracted carriers, thereby creating additional margin.

Implementing an energy surcharge to cover volatility in the cost of natural gas and electricity presents another opportunity to increase revenue. One manufacturer even initiated such a surcharge at zero percent for a year, and then adjusted it upwards when natural gas cost later spiked. Instituting a surcharge to offset fluctuations in materials and metals can pay dividends as well.

Finally, don’t be afraid to charge more to customers who regularly stretch payment terms. The days of near-zero interest rates won’t last forever; when the party’s over, the cost of financing the accounts of customers who delay payment for more than 30 days will be significant.

A manufacturer needs to exercise care in whether and how additional revenue opportunities are implemented. Every manufacturer and customer relationship is different. I pride myself in being a generous tipper, but I’m turned off by a server who, when picking up the check and my payment, presumptuously asks if I “want any change.” In the same fashion, a manufacturer must take care not to risk upsetting a customer to the point of adversely affecting the relationship.

On the other hand, manufacturers who accommodate extra service requests from customers and then fail to charge for them are, in essence, doing so on the backs of the customers who don’t require such extra efforts. In other words, they end up charging all customers for the non-standard requests of a few. What’s more, often when required to pay ratably for an increased level of service, the customer may come to the conclusion that the extra level wasn’t quite so important in the first place.

The beauty of additional revenue opportunities is that often, there may be no incremental cost to the manufacturer. Thus, to the extent they can be implemented without compromising customer relationships, the additional revenue drops right to the bottom line.