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After being in the pallet business for 13 years, I find it interesting that so many companies have what seems to be a wide disparity in pricing. Since most of our costs are comparable for raw lumber and or recycled cores, it makes sense that our basic costs are similar. Raw materials (or cores for recyclers), labor, freight, overhead and other miscellaneous expenses contribute to your cost factor, whatever it may be. Granted, there are more efficient saw lines, locations, labor markets, overhead, etc. However, this does not change the basics.
During my experience as a pallet broker, I realized there are many businesses that would do anything for a sale even though we knew they couldn’t make money.
I have been fortunate enough to be a broker and the owner of a few pallet businesses, and I am still mystified by the crazy (for lack of a better word) pricing that goes on. Our industry is swamped by competitors looking to get a share of the business no matter what the price is. These companies are usually the ones that don’t make it, change their names several times, or simply hold on.
There is nothing wrong with holding on. However, the problem is it leaves the rest of us reeling. The customers are holding all of us hostage to these low prices and non-realistic competitors.
How many of us know our true costs when pricing a pallet? It is nearly impossible to get it down to the penny, but we should be able to come close. With lumber or cores as our primary cost, we then have labor, freight, fixed and variable overhead, followed by sales, general and administration, and other miscellaneous expenses. The order may change according to your particular structure, but the basic costs are the same.
Looking at these expenses, there isn’t much we can do about our raw material costs. Lumber is what it is, and core prices depend on your relationships and other factors.
However, when you price a pallet, are you considering your scrap? Not every board foot will be utilized nor will every core. For example, if your average core price is $1.50 and you have a scrap factor of 10-15%, every pallet you sell has a raw material cost of approximately $1.71.
As for new lumber, it depends on the cut. One thing is for certain: you can’t get it right every time. Therefore you must have some scrap factor. This will vary quite a bit from one saw line to another and assuming your head sawyer takes the best cut every time.
What about your labor costs? You should be c
Freight is probably the easiest to figure. If you are using an outside trucking company, then your freight costs are usually straight forward. If you are using your own trucks, the most common way is to identify your cost per mile. Remember, there is a catch to this: shorter runs cost more per mile than long runs. Also, mileage numbers don’t take into consideration down time, either at a customers’ dock, your dock or breakdowns. One way to avoid this is to figure trucking by the hour. Either way works relatively well.
Fixed and variable overhead, selling, general and administrative, depreciation, along with other miscellaneous expenses vary from company to company. You must identify how much they are and figure the costs into your quote. If you do not, the result may be a pallet that is priced below your costs. This is a very important part of our business, and it must be reflected in our sale price.
Obviously, fixed overhead, no matter what the form, does not apply to every pallet equally, but variable overhead and other miscellaneous costs do. I believe this is where most companies go wrong. They do not understand or apply a certain figure to the cost of each pallet for their own labor, office labor, telephones, office supplies, waste removal, postage, interest expense, professional fees, taxes, and other costs of doing business. This is a certain percentage of each pallet you sell, regardless.
It seems that one of the largest misconceptions in our industry is that we can sell new pallets based on board footage, sell recycled pallets at market price and in turn make a profit. I assure you it is not that simple.
To be successful in this business you have to consider the way you price your pallets. We can not just sell a product and hope that it all works out!
Of course, you have to figure in profits along the way – that is, if you expect to make a profit. But that is another issue.
(Editor’s Note: Ernie Riling is the president of Tri-State Pallet Inc., a new and recycled pallet supplier, and Professional Pallet Services Inc. a full-service pallet consulting company. He may be contacted in
