Economics & Research Blog
Price Cutting and Print Competition
I was recently asked a common question in today&
By Dr. Joe Webb
Published: February 17, 2009
I was recently asked a common question in today's industry: how can printers survive while other printers are slashing prices by 15-20% just to keep cash coming in to cover their payrolls?
Through the years, I cannot remember a single discussion about industry conditions that did not involve price cutting or our supposed problem with overcapacity. These discussions were in good times and in bad times. They're constant!
I've addressed the capacity issue many times (it's meaningless, but it does help print owners to start conversations and bond with each other as they consume adult beverages in taverns and hotel bars). One can run old equipment at 100% capacity and produce non-competitive work. But at least you're busy! Another can run new equipment at 50%, have more output, less waste and spoilage, better quality and improved turnaround, and lower selling prices. The capacity discussion almost never considers the prices of what is produced. As we know, some print jobs have better margins and market prices than others.
I've never really discussed the pricing issue, so here is a different way of looking at it, or at least I hope it is.
There are printers who cut prices in the hopes of getting dollars in as they rob Peter to pay Paul and get by for another week or another month. It's a horrible existence, and all it does is buy time, but it is a sign that a print business is down for the count. Competitively, healthier printers are likely to cut prices selectively to help the count get to 10 (business is competitive, and this is part of the game, and we know it when we go into business).
There are businesses that do have lower prices as part of a well-planned business strategy. The most important part of that strategy is to have significantly lower costs than competitors. The cost differential compared to competitors must be greater than the price differential for it to succeed. That is if Company A's price is 100 and Company B's is 90, it is often the case that A's costs are 85, and B's should be 70, giving them more profits than their higher priced competitor.
We do need some history here. Wal-Mart offers lower prices because its costs are much lower than competitors. The company's logistics are vastly superior to most every retailer. They realized a long time ago that their prices mattered far less than their costs. Their consistently lower prices also mean that they have to spend far less than competitors on advertising and promotion. The lower prices actually save them money in many other areas.
Southwest Airlines' capacity utilization is consistently below that of the rest of the airline industry. Yet, there are times when they are the only airline making any notable profits. As a regular user of their services, I am always impressed at their predictability and consistency. They make few promises beyond getting you where you need to be, on time, and with your luggage. These are basics that other airlines seem to have problems understanding. In the process, they actually treat you like they're happy to see you. They have the lowest prices in the business. They can do that because they have the lowest costs, as part of a well-planned, long-term strategy, supported by their capital investments and their procedures.
Long ago, John D. Rockefeller built a fortune by selling his oil products cheaper than competitors. The Vanderbilts started on their wealthy ways by selling ferry trips on the Hudson River cheaper than Robert Fulton, who should have had a cost advantage. Instead, he attempted to have the government fix prices for the harbor ferry trips, alienating customers, and sending more businesses to the Vanderbilts.
I know a person who recently started a business and wanted to have 500 brochures printed. The cost was to be $260. That weekend, an office superstore had a color laser printer on sale for $230. The choice was easy. Buy the printer instead of getting the brochures, and print them as needed. The printer also allowed customizing brochures as needed, and also to create correspondence in full color, which would be a nice touch for the profession service that the new entrepreneur was starting.
For this reason, the comparing the price of a print job from one printer compared to another is less relevant than often thought. Sure it may determine which printer gets the job, but there are larger forces at work. Prices need to be in context of all of the potential alternatives and competitors.
We need to look much beyond the price of print and understand it in the larger context of a very dynamic communications market. Print competes with technology vendors whose desktop equipment and software make “do it yourself” easier and cheaper than ever. It competes with web sites, blogs, and other electronic media. It competes with online video and other streamable media. We don't often realize it, but these are the choices communicators make every day.
What do we do in response? From a cost perspective, there is nothing worse than having too much equipment, especially if it is not modern. It hogs resources, and means that employees do not have the opportunity to improve their skills, and it becomes difficult to attract new employees. Better to have less equipment that is used well, and replaced often with newer technology. Emphasizing business process value-added, such as outsourced services or project management go a long way to making the ink-on-paper part of the job a lesser portion of the job's total selling price. Finally, integrating print with e-commerce and electronic media, and the management of them, changes the print business into something quite more valuable to clients.
We also must deal with the fact that big print users have equally big incentives to shift their expenditures to other less costly media. For that reason, I have believed that out eventual role is to bring all media alternatives, including print, to small and mid-size businesses that need logistical services to support their communications more than large companies do.
It's not the price. It's what you do that creates the price that matters most. Price slashing competitors distract us from the larger task of making sure print is competitive with other media, and also has synergy with them.