The Price Is Right? --Dickeson

Pricing decisions are the most mysterious and least understood in the business of commercial printing. We want our prices to be fair. We want them to cover our costs. We want them to provide a profit. Our salespeople moan that everything depends on the price of the job. Our accountants wail that we mustn't drop our prices below a given level or we'll go broke.

What the Sam Hill is the right price for a job: the fair price, the competitive price, the price that covers the costs, that yields some profit? Where and how shall we decide?

Looking for Answers

We want the Lone Ranger's silver bullet—some magic price to ask for a job that covers all these things. So, maybe, we look to our black box, our computer MIS (management information system), for the answer. (See the 30 or so listings in the July 2005 Master Specifier of Printing Impressions magazine.) How many of those systems tout their "estimating" programs to provide the right price? How many of them are still using Spencer Tucker's model of machine-hour rates published back in 1962?

Know what the most feared competitor of all these machine-hour "estimating" systems is? It's Microsoft and its Excel desktop computer program. Excel doesn't rely, necessarily, on Tucker's ancient and outmoded model. But does Excel provide the silver bullet for pricing? No. It does free us from that hoary old model, with whiskers down to here, of budgeted hour rates.

The "right" price is the customer's perception of value constrained by the competition. It has nothing to do with our "costs," does it? Therefore, it's remarkably silly to spend time noodling with budgeted hourly cost rates in establishing the price of a job, isn't it? Yet that's what a lot of us still do. Why do we do it when it has nothing at all to do with the price that the customer will accept? Beats me. Just habit, maybe our—very own paradigm—way of doing things.

But, maybe, it's a way of finding out what the competition might ask. At least that's what one printer told me. We're all making the same goofy mistake together since we all behave like lemmings running to the sea. Kinda ridiculous, don't you think?

Do you recall "Par" and "Sim-par?" I was asked, not too long ago, whether I thought it would be helpful for our industry to have an updated version of them. I hadn't thought about 'em for years. As I recall, these were "standards" of speed on various machines used in estimating. Great guns, what means we resorted to in order to avoid thinking and being the entrepreneurs that we must be!

Have we forgotten what we learned in the mid-'80s? We cannot predict with accuracy. Our thinkers taught us the lesson that small changes in variables having profound implications. Commercial printing is a world of small variables for each job: materials, machines, people, humidity, the sequence of forms and the demands of customers.

No Price Works for All

So where is our magic price decision bullet? It doesn't exist.

There just isn't any price that's fair, covers our costs, leaves us some profit, and makes salespeople and controllers happy. We must simply do the best we can to make the most people the least unhappy—especially our customers.

In "Monday Morning Manager" I've suggested that we just throw up our hands and resort to "pragmatic" pricing. That is saying to just go on doing what we've been doing all along. At least we've been able to get some jobs. There's one wrinkle, however. Use a metric such as Value Added (VA). Use that measuring stick for every job. Price, less raw materials, is Value Added. Basically that's the price you've actually charged minus paper, ink and outside purchases for the job.

Do that for every job over the past three or six months. Now we can crank up our Excel spreadsheet. Enter every job by account and number, name or whatever. Provide, and fill in, these columns for each job: Selling Price; Materials; Value Added; Percent Value Added; Count; Job Type; Salesperson; Customer Service Representative; Days to Invoice; Days to Collect; and any other classification you believe relevant. Get some averages for the numeric columns. Now you know your average Value Added by job.

Now, sort from highest VA to lowest. Divide into quartiles and find the averages for the Upper, Upper Middle, Lower Middle and Lower Quartiles.

For some Excel magic let's call up "Pivot Tables" under "Data." Pivot to look at a sort by percent VA and quartiles. Do the same for Count, Job Type, Salespeople, CSRs, Days to Invoice, Days to Collect and then tell me what you think. Remember always that these are "hard" numbers—our own past experience. No assumptions, projections, budgeted hourly rates or other gimmicks are used. Now, tell me what we're going to do about the jobs!

Waste Is the Key

No, let me tell you. The first thing we do is look at our raw materials waste. The smaller our materials waste, the higher our Value Added. Right? Reduce future materials waste by 5 percent and we increase our bottom line by that amount. Watch my hands. They never leave my wrists.

You say I still haven't told you the price to charge? Nope, I haven't and I never can. You, no one else but you, are going to have to set that price after looking at all those sorts on Excel of what you've been doing. You're going to ask a lot of "why's," aren't you? You're going to look at that waste metric first and see how valid it is and what you can do about it by job.

Then you're going to look at accounts, counts, salespeople, types of jobs, time to bill and collect. You're going to make some adjustments for the future, aren't you?

You will find the right price for your business—the price that will leave the most people the least unhappy.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing consultant located in Pasadena, CA. He can be reached at rogervd@sbcglobal.net. A PDF copy of his recent book, Monday Morning Manager, is available without charge by e-mail request.