PIA Sets the Table --Dickeson

Take a hard look at the included table. Ronnie Davis and Steve Kodey, of Printing Industries of America (PIA), provided us with the basic data. It's taken from the last 10 years of annual Ratio Studies PIA supplied its members.

In 1992 the series was modified to report sales by printing firms of "manufactured" products. The classification of "profit leaders" as companies with 8 percent profit and above on sales was changed. Profit leaders became the top quarter of reporting firms with the highest percentage of profit on value-added sales. Value-added sales are manufactured sales less Direct Order Additives.

First, the table tells us that for the past 10 years there's been only minor variation in value-added as a percentage of total manufactured sales for either the top 25 percent or the lower 75 percent of reporting printing firms. How can this possibly be? There have been major technological advances in these 10 years.

Materials prices have fluctuated. Is this saying that although technology has increased print productivity, and material prices have fluctuated over the 10 years, that those changes were passed through to print buyers? Yes, that's what it shows. Disagree?

Second, the table shows only trivial difference in average pricing (0.41 percent) between the top 25 percent and the lower 75 percent of firms over the years. Incredible! The top 25 percent averaged 63.83 percent value-added margin on manufactured sales while the lower 75 percent averaged 63.42 percent.

What is it then that makes the difference between upper and lower groups of printers? Either the upper 25 percent have less capacity or are using their man-hour capacity at a higher utilization rate. We've said for years that "our industry is plagued by over-capacity." Now change that, please, to "our industry is plagued by under-utilized capacity."

Third, the table says that, on average for the past 10 years, our industry has uniformly priced its products and services at 2.7 to 2.8 times DOAs (Direct Order Additives). It doesn't matter whether it's the top quartile of companies reporting or the lower three-fourths. Is this suggesting that expensive computerized price estimating systems aren't all that advantageous?

Three glittering coins in the value-added fountain: 1) constancy for both quartile groups for 10 years. 2) identity of value-added as a ratio of manufactured sales for both groups during the time span, and 3) 2.75 times DOAs pricing for the entire data set.

Am I misreading the data? Are the numbers incorrectly reported? Most unlikely. Why haven't we noticed this before? Perhaps it's because we never viewed the data as a time series until now.

Let's try another course. This is where you do the work. List your manufactured sales by year for the last 10 years. Deduct your DOAs (Direct Order Additives) for each year to find the value-added. Divide value-added by manufactured sales to compute your VA margin percent. Look at the data as an internal benchmark. Compare it with the 63-64 percent of the 10-year PIA Ratio Study table for an external benchmark view.

Subtract your VA margin percent from 100 percent to determine your DOA percent. Divide the DOA percent into 100 percent to find the number of times you're effectively multiplying DOAs for a selling price. You've now provided a VA margin percentage and a materials multiplier to establish your marketing price position.

Forget price estimating for the moment. Click on Excel and list the invoiced selling price for print manufactured jobs for a month, quarter or a year (your call). Deduct the DOAs for each. Compute the VA, VA margin and materials multiplier for each job. Sort from high to low on VA, margin or multiplier. What do you learn about your pricing from this internal benchmarking? Now sort by salesperson, product type, run lengths, binding type, ZIP code or whatever property may provide decision support insight for you. This is pragmatic marketing analysis.

OK, assuming my reading of that ratio table is correct, what action does it evoke? What do we do now? We go on pricing just as we have, but knowing our price position based on DOAs. If we're in that lower three quartiles group of the Ratio Studies, we've got to reduce our capacity expenses. We must maintain deliverable throughput, but with less personnel compensation expense.

A Target Selling Price is NOT the price you quote. It's a benchmark, a perspective; that's all it is. You must develop more information to help you "find" the price. That PIA table and the company price position are "global views" of price but, to paraphrase House Speaker Tip O'Neil, all pricing is local, not global.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached via e-mail: rogervd2@cox.net.