Dickeson--Don't Play "Printers' Roulette"
Does your company have a clearly defined pricing policy? Is it written down? If it is written, how do you monitor whether or not, and how well, it's being executed? Even if your policy isn't in writing, how do you control and measure it in operation?
Experience indicates that 90 percent or more of printing companies don't have written policies for setting prices. Pricing at most printers is like the common law system of jurisprudence: We make it up as we go along, on a job-by-job basis. Then we try, as best we can, to make a decision based on precedent modified by circumstances.
But we don't have a written body of those cases, indexed and bound on a bookshelf, as lawyers do, to pull down an appropriate precedent to use as the basis for a pricing decision. So how do we set prices? They are far and away the most constant and important decisions we must continuously make that affect the survivability of our firms.
Most often our systematic approach to pricing is to first look inward, to predict our costs. Yet the results of setting a price are external, with the customer who neither knows nor cares what our costs are. Don't we have it all backwards?
In setting a price for a job, we must look first to the customer—look outside the business. Shouldn't the first questions always be: For what is the customer paying us? What value does the customer perceive we're adding to the raw paper and inks we convert to printed pieces? What are the results, the benefits, the "bennies," the customer expects to gain from our conversion services? What are the customer's alternatives for achieving those bennies? What makes our conversion service better or different from others? What do we add to perceived customer value that is special—that adds bennies—not available from other media or direct competitors?
Considering cost first in establishing a job, price has become a misplaced fixation among printers. We think the "customer-sun" revolves around the planet of our estimated conversion costs, don't we? Surprise, surprise. Our "cost-planet" revolves around the sun of customers. Results happen outside the business. Inside the business are only costs, to paraphrase Peter Drucker.
If we're selling a shelf item like business forms or over-the-counter repro services, then we price from a prepared list. Even then, that list must bear a relationship to perceived customer benefits constrained by competitive alternatives. Do we make up the price list by examining our costs and then marking them up, like a merchant selling shelf goods? No way!
A successful merchant knows what competition is charging for the same item and then must do things that add a value the customers can perceive and desire.
What's your strategy for pricing? That's a discomforting question, isn't it? It's much more comfortable and less of a nuisance to install a computerized cost and job estimating system and just mark up the costs to set the prices. That's really a cop-out—the nonthinking person's approach to print management. Three things can happen by pricing under that system:
- The price is less than the customer perceived value, thereby depressing the printers' profit margins;
- Price is greater than perceived value, resulting in lost business and depressed capacity utilization; or
- The price is consistent with value perception (strictly by chance) and satisfies the competitive conditions.
The latter is the usual pricing strategy—perhaps the prevailing strategy in the industry. It is "Printers' Roulette."
The cost-markup strategy explains why PIA ratio studies consistently report average net profit levels for printers at below 4 percent. It is, at the very least, a major reason, if not THE major reason, for unacceptably low returns from printing enterprises. As the saying goes, we spend our time trying to get costs right rather than concentrating on the right thing to be doing—evaluating the benefits to the customer.
If we accept the paradigm shift that price revolves around customers and not around our costs, good things can happen to the business. We begin to concentrate on special competencies that deliver greater perceived value for our conversion services.
We enhance the specialties, the distinctions, we have. We continuously and consistently think about the customers and seek out new bennies we can provide. We gradually eliminate business where we add insufficient perceived value. We focus on finding the right conversion services for our printing business to be doing. If we can't do that, then maybe it's time to sell out, merge, or get out of printing with the least possible losses.
That's putting it with brutal honesty, isn't it? But isn't that the way it works—and is supposed to work?
Let's say we agree. No more cost-markup roulette for pricing. We develop a systematic approach to customer-perceived benefits as our strategy and policy. (I don't suggest discarding your job-cost system. Just forget marking up costs as the way to price.)
How do we devise some systematic, statistically measurable, method of controls for monitoring our policy paradigm shift?
Aha! This is where the mighty microprocessors can really pay off—far more than they ever have for job-cost estimating systems. Think about a knowledge base, a rule base, job-capture reporting, every salesperson equipped and required to use Contact, Goldmine or other reporting applications for customer response. Think about a system that utilizes your many pricing rules interrelated in the same way Microsoft equips its technical support reps.
Focus with clarity on doing the right things and measuring the results. Exciting prospect? Go for it!
—Roger V. Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 419-8213 or e-mail at roger@prem-associates.com.
