What's Actually Going On
When many factories quote a price, they simply take production cost, add a rough margin, and send it off. But the profit that actually lands still has to survive the capital cost tied up in payment terms, possible returns and after-sales costs, currency risk, and the various concessions made to channels and buyers along the way. Without accounting for these hidden costs, a quote can look profitable on paper while leaving almost nothing by the time it's collected.
Payment terms in particular are something many factories never build into their pricing at all — if goods ship and full payment doesn't arrive for three months, who's carrying the cost of that capital being tied up for those three months? If it's not priced in, you're essentially financing the buyer for free.
A Real Example
A home textiles factory supplying a major buyer showed a 12% margin on paper. But once the capital cost of 90-day payment terms, a 2% return rate, and currency fluctuation were factored in, the actual margin that landed was under 5%. Only after rebuilding the pricing structure did these hidden costs get properly reflected in the quote.
So What Should You Actually Do
- Convert the capital cost tied up in payment terms into your pricing, using a reasonable industry cost-of-capital rate.
- Estimate a reasonable return rate and after-sales cost from historical data, and build it into pricing as a planned cost, not a surprise.
- During periods of high currency volatility, consider adding a currency adjustment clause to the contract, rather than absorbing all the risk yourself.