- Commercial printers often do not possess accurate or detailed cost estimates per print job.
- A 2019 InfoTrends study showed that almost 40% of North American commercial printers do not have a management information system (MIS) in place. The same was true for only 13% of European printer companies.
- In the case of digital, print service providers (PSPs) need to learn an effective communication theory which includes 1:1 marketing and practice as much as they can in order to better help their customers.
By German Sacristan
Introduction
Knowing the detailed cost of each print job might not be a concern if the pricing model is based on value differentiation (meaning margins are larger). That said, this strategy is risky if the model is market-based and modeled to reflect competitor pricing.
Wanted: Accurate Cost Estimates
It is unfortunately common to see a percentage of commercial printers not possess accurate or detailed cost estimates per print job. Without managing costs in detail, it is impossible to differentiate when a job makes money from when it drains resources. In addition, it can be challenging to decide when to produce a job on an offset press vs. on a digital press.
In a 2019 Keypoint Intelligence – InfoTrends (InfoTrends) study (North America Software Investment Outlook), almost 40% of respondents said that they do not own a management information system (MIS) for their business. Without this solution, companies cannot easily track their costs efficiently. Interestingly enough, a similar study focused on European printers showed only 13% did not have a MIS print system, a 27% improvement over their North American counterparts.
There are different approaches to try to calculate the total cost of a print job, regardless if it is produced on an offset or digital press. Here are several outlined methodologies.
When companies possess offset and digital printing capabilities, they first need to define what percentage of the general business’ fixed costs go to offset and which go to digital. Typical general business’ fixed costs are:
- Administration (includes insurance, taxes, management, real estate, office, etc.)
- Sales and Marketing
- Operations & Production (only prepress and logistics in the production site for general fixed costs)
There are several options when it comes to dividing and applying the general business’ fixed costs to offset and digital. Some PSPs might do the split by comparing sales revenues or profitability between offset and digital. Others may even do it based on production metrics such as hours of operation or number of impressions.
Once general business’ fixed costs have been allocated to offset and digital respectively, companies can then calculate the fixed production costs by technology (offset and digital) and add it to the general business fixed costs. Production fixed costs by technology include:
- Production labor
- Print equipment costs and depreciation
- Maintenance/service fixed charges
- Cleaning materials and other miscellaneous production costs
- Utilities in the production site (water and electricity)
- Others
After having estimated all the fixed costs (general business and production by each technology) organizations need to define how they will measure the cost of a job. This can be done by hours of production (BHR) or number of impressions.
BHR models have been commonly used by printers for decades (sometimes only applying production costs). Now, for the sake of argument, the click model, which in some cases measures the cost of service and supplies per impression, was introduced when digital printing devices first entered the market in 1990s.
Whether they consider a BHR or “per impression” metric to measure the total cost of a printed job, commercial printers will have to divide all the fixed costs by the number of estimated annual hours of production or number of impressions produced. Another option could be to use BHR for fixed costs and number of impressions for variable costs discussed below in point 4. Keep in mind that if we don’t hit our estimated number of hours of production or impressions then our cost will go up or down.
When a print job is received, companies know what the fixed cost is (general business and production by each technology) either in BHR or number of impressions.They can then add the variable costs to that print job, which may be based on:
- Offset: Ink, plates, and paper
- Digital: service & supplies (in the case of a click model), only supplies (in the case of service being a 100% fixed cost), ink if not part of a click model, print heads in the case of inkjet and not part of a click model and paper.
Once the printing cost has been calculated (fixed and variable), the job may still require finishing. This means companies will have to add the finishing costs. The finishing cost could be calculated by BHR and based on:
- Labor
- Finishing Equipment
- Maintenance
- Materials
- Once the total print product cost has been calculated, organizations can add the profit. Last but not least, companies should add cost to deliver the printed products to the customer.
Some printers might decide to just cover costs for a particular print job, or even go below cost to keep a customer. It is also usual to have a contract with a commitment number of impressions per month in the case of digital printing. At times, it might happen that the printer has not used all their pre-paid clicks and therefore becomes more price aggressive in order to win the business. In either situation, the issue with not adding profit or selling below the cost is that the company is devaluating the value of print and therefore risks losing profitability in an act of desperation, furthermore is setting up an expectation that can’t be maintained in the future with negative implications for the market itself
Equally important to managing costs is the ability to provide value and differentiation to the customer. In the case of digital, print service providers (PSPs) need to learn an effective communication theory which includes 1:1 marketing and practice as much as they can in order to better help their customers.
The Bottom Line
Profitability is at the core of any company but especially vital in the printing industry, as this space is under severe pressure not only from their own printing market competitors but also from outside communication technologies/channels.
Managing costs and feeling the stress of tight profitability can motivate PSPs to be more focused, not only on reducing costs but on creating unique products and services that their customers will be willing to invest in.
German Sacristan is the Director of the Production Print & Media group. In this role, he will support Keypoint Intelligence customers with strategic go-to-market advice related to production printing in graphic arts and similar industry segments. German’s responsibilities include conducting market research, industry and technology forecasts, custom consulting and development of analyses, editorial content on technology, as well as support to clients in the areas of production digital printing.
Discussion
By John Zarwan on Aug 29, 2019
This isn't true only of printers. It's a very rare business that knows its true costs. Most cost accounting is just that, accounting. In the early 80s when I was a strategy consultant, I had a client that couldn't figure out why they were losing money. They had moved the bulk of their business to high value added. Turns out it cost $1.50 for every $1 of "added value, while the basic, boring commodity business was profitable. Even though I'm basically a product marketing guy, most of my Zarwan Partners work has been focused on assisting printers know their costs.
By Robert Lindgren on Aug 29, 2019
The issue is what are "true" costs? The article assumes an approach which allocates every cost of the business to each unit of production. That implies that if we run another job, the building, the equipment become more expensive. Since that's clearly not true, how can it be "true?" When another job is run, we spend money to get it done (paper, click charges, operator wages, sales commission, etc.). the difference between what we spend and what we get paid is contribution. When the contribution for the month equals the overhead we've broken even. If it's more, we're into profits.
Contribution is reality, true cost is a useless fiction which actually leads to bad decision making by passing up opportunities that would produce additional contribution.
By Wayne Lynn on Aug 29, 2019
I agree with Robert. Contribution, if applied properly is reality. BHR's are useless. There is typically so much double counting of overhead costs when you compare summary cost reports to the P&L that it's toxic for your business. Some in the industry are afraid of using contribution because of the dangers of loading a plant with work that was priced without the notion that overhead must be covered before there is profit. There is that danger if you don't manage pricing as a strategic part of your business plan. Pricing is not recognized by many as the most important decision you make in your business on a daily basis. Get clear on that and quit overthinking job costs! Overhead is overhead. Don't try to apply it to jobs.
By Chris Lynn on Aug 29, 2019
Robert and Wayne (no relation) are right: cost allocation is futile and misleading. You need to find out what the value of your work is to each client and price according to that and not according to some internal accounting fiction. 'Throughput Accounting' describes the approach, as I explained in this article: https://www.piworld.com/article/how-to-think-about-digital-printer-investments/
By German Sacristan on Aug 29, 2019
Thanks so much for your comments. I agree with John that true cost is hard to achieve because is based on sales estimations not actuals, but you have to start somehow.
An extra job if it is within your estimations should not cost you more as you planned your resources based such estimations.
Now if you sell more jobs than estimated those jobs might require extra resources but also come with extra revenues, and many fix costs already been covered
I think is important to allocate costs to the different technologies otherwise when do you know where is the most cost effective way to print your next job? Or when do you know if you have the most cost effective technology to produce what you sell?
I personally would not mind to pass on jobs that even though bring a contribution such contribution isn't enough to pay for my SG&As (sales,general and admin) I feel that the more I sell the more I loose if I can't cover my total costs.
Now this article is about cost which I think is important and relevant, at the same time I agree with Wayne that pricing is critical, but not just pricing, what links into pricing which is not just value as John mentioned but value that is different from competition.
Adding value is not enough and could also lead into a commodity. Printing is a relevant valuable communication enabler but could also be a commodity. Now doing something that no one else can do or something better than anyone else is key. Then you can charge more and have bigger profits, only then perhaps you worry less about your cost because you know they are covered.
Focusing on just the cost is important but not enough, we need to seriously focus again on creating products/jobs/projects that not only bring value but differentiation to our customers.
By Robert Lindgren on Aug 29, 2019
German Sacristan says, "I personally would not mind to pass on jobs that even though bring a contribution such contribution isn't enough to pay for my SG&As (sales,general and admin) I feel that the more I sell the more I loose if I can't cover my total costs." I we take his suggestion, aren't we now further away from paying for the SG&A than we were before?
He also is concerned about print becoming a commodity. Like it or not, the customer determines the maximum that can be obtained because they write the check. That maximum is determined by the value that is being conferred on the customer and the customer's perception pf what they would have to pay to an acceptable alternative supplier.
The fundamental pricing principle must be: "Charge as much as you think that the customer will pay, but get the order."
By Chris Lynn on Aug 29, 2019
German, you have two fundamental misconceptions unfortunately shared by many in this industry:
1. You propose that pricing should be done on the basis of cost. ("Once the total print product cost has been calculated, organizations can add the profit.")
2. You think that fully-loaded machine cost is a good basis for decisions on what machine to use for a job. ("I think is important to allocate costs to the different technologies otherwise when do you know where is the most cost effective way to print your next job?")
Other commentators have addressed the pricing point. Regarding the second point, read 'The Goal', or my article, or just Google 'Theory of Constraints'.
By Robert Lindgren on Aug 30, 2019
Chris is making two great points
1. If you could price based on fully loaded cost, add the profit and then sell the job, every shop would have a large sign reading "work slow" as that would maximize revenue.
2. Using fully loaded machine cost to decide which machine to use is the primary reason that printers have more equipment than they need. They believe that they need a machine to exactly fit every situation rather than fully a few. A six color press can print a two color job or a four color job. Running a six color three shifts is far better than paying for a two color, four color and a six color which are only used on one shift.
By John Zarwan on Sep 03, 2019
Great to see this discussion. For each job (and press, and don't forget the customer), both contribution margin/cost and total allocated cost should be tracked. The problem with contribution margin is by ignoring fixed costs, you can marginal cost yourself to bankruptcy. And, as various comments indicated, focusing on total/allocated costs implies more work means higher costs...yet the building and presses have to be paid for somehow. The real key is knowing your costs, and sometimes it requires multiple views.
By Robert Lindgren on Sep 03, 2019
The concern that you could marginalize yourself into bankruptcy implies that would reject a positive contribution to overhead because it wasn't enough. Having rejected it, you would be further away from overall profit that you were before. On the other hand, if you maximize contribution dollars by getting all there is to get, but getting the order you make it most likely that you'll be profitable. All of the really high printers that I've known
understand that their goal is full utilization of overhead and they achieve it by customer and job specific pricing--not fully allocated cost.
By German Sacristan on Sep 03, 2019
Thanks for all the comments and sorry for the late response.
- I talked about adding profit to the cost but did not say to add that profit based on the cost, in fact at the end of the article I speak about differentiation and value which is what drives bigger profit. What can you do for your customers that others can't or what can you do for your customers better than others can? and the focus there is not on price but customer potential ROI
-I personally would like to know the whole cost not just part of it, therefore I like to add the SG&A as it is part of the cost. In the case of having different output technologies (offset and digital) the challenge is how do we do the split/share of the SG&A costs? based on what? sales revenues, profits? and is that enough? The fact is that SG&A costs are influenced by what we sell and how we produce it e.g. higher number of short runs (jobs) in digital might require more sales, CSRs and billing reps resources, even a VDP job might require more sales time than an static print job, digital print consumes electricity...how about real estate share? How do we make the split? I am working on it, as I want to make sure that I'd be reducing the risks in not having enough contribution to pay for all my cost, and yes there will be estimations as most likely we will have to divide the SG&A costs by annual number of impressions/pages or perhaps hours of production outlooks but that in my opinion is a better reference than not knowing all your costs.
By Robert Lindgren on Sep 03, 2019
I certainly agree that pricing should focus on value to the customer and how your product helps the customer differentiate themselves for their competitors. The central concept is that price is customer, not printer specific.
Your discussion of the difficulties of assigning overhead costs (SG&A, etc.) is an illustration of the impossibility of the process. It could be achieved with a set of allocation and machine hours assumptions. This result is artificially correct, but only if reality matches the assumptions.
The basic reality continues to be contribution: the difference between you spend to produce the job and what you receive for it.
Assuming that your pricing system gets all that the customer is willing to spend while it's getting the order, contribution is increased by increasing volume. The limit is the physical capacity of the plant. Remember that there are 168 hours in every week
A plant operating 40, 60 or 80 hours a week has enormous excess capacity.
By Chris Lynn on Sep 03, 2019
OK, we’re getting closer: we all agree that pricing should be based on customer value and not cost-plus. We also agree that every printer ought to understand all their costs - both fixed and variable.
Where Robert and I differ from your position German, is that we are saying that allocating fixed costs to machines does not help you to decide which jobs to take or what machine to run them on. These decisions need to be based on considerations like whether the price will damage your pricing in future in a key market, and whether the resource used on the job is a constraint. Most printers I know with analog and digital presses allocate work based primarily on machine loading almost irrespective of run-length, not on what their cost accountant tells them about fully-loaded hourly rates. .
By Robert Lindgren on Sep 03, 2019
Agree. Prices come from customer value, not cost plus.
However, fixed cost becomes relevant when considering a decision that would change it, e.g. buying a major piece of equipment, building a new plant, etc. Then it's not a matter of pricing but return on investment using the discounted present value of the estimated cash flows arising from the decision.
By German Sacristan on Sep 04, 2019
There are printers out there that have crossover points based on cost and send the job to offset vs digital. That to me makes sense. Other bigger printers with larger run lengths they use offset for all the static work and digital for variable print.
Again to me even though the fix cost is an estimation is important to have it down to the per impression/page or hourly rate, and again the biggest challenge is based on how to do the split.
Great that we all agree on the price value
By Robert Lindgren on Sep 04, 2019
Deciding whether a static job is run offset or digital (assuming the specs make a choice possible) is simply a matter of comparing the amounts spent to do it either way. Spent means variable cost only. I don't understand what the cost of the machines or the other overhead has anything to do with the decision. Generally the breakpoint will be related to run length. Of course, if its non-static it has to go digital.
By Wayne Lynn on Sep 05, 2019
I quit following this conversation for 4-5 days but I'm going to add one last bit of input. Price is at the core of the economics of the firm. It determines how fast we accumulate contribution dollars which determines how fast we cover overhead, i.e., break even, and yield a true profit. In my mind, I don't see the fear some people express about contribution-based pricing because you must cover your overhead or you reduce the equity in the business. Moving on, focusing on job profitability is myopic because, in the long run, customer profitability is the key metric and you will always have a mix of varying returns of individual jobs. So, manage company level pricing at the customer level. Lastly, pricing is determined in the market by the interplay of customer preferences, print competitors, and alternative channel competitors. This is where the value is determined, not by the print buyer. The print buyer drives demand levels as a result of buying decisions that weigh out the prices of alternatives and the projected returns on using various alternatives. If you want to create value in your sales offerings this is where it's at. If you can prove your value ratio is better than the alternatives, even if your quote is a little higher, you should win the order. BHR's and the assignment of overhead costs in the pricing equation helps with none of this. And, Chris, while I am a huge fan of Eli Goidratt, using throughput accounting can turn into quicksand if you don't remember the deep fundamentals of microeconomics. Sorry for the rant, I'm done!
By Robert Lindgren on Sep 05, 2019
AMEN!!!
By BILL RILEY on Sep 05, 2019
Hi, lots of very interesting comments.
We talk a lot with our clients about helping them to better understand their costs, and what elements impact their business the most.
There is no perfect, one size fits all model. And, in fact firms have quite rational reasons for assigning and weighing costs differently than a similar business may have.
When talking to customers we look to understand costs that adapt to the environment and utility of the end user. Not the other way around; not here is the size and process you ought to fit to, but rather, let’s work together to find the right costs analytic fit for you.
Everyone we speak to in N America, UK and EU wants and needs to understand their costs better: for pricing, profit and competitive reasons. Their printing business model has changed radically in the past decade and continues to change even more rapidly. Their dynamic manufacturing elements are different almost every day; modeling jobs and batching jobs for efficient production is a challenge that grows ever more difficult. Shops need to better track, report and understand their costs today. These costs can certainly contain all the points mentioned above – yet their value and practicality differ from shop to shop. We work to help each shop understand their own cost reality better, faster and more accurately.
By Robert Lindgren on Sep 05, 2019
Bill...
What does cost reality mean?
What is cost reality used for?
By BILL RILEY on Sep 05, 2019
Hi Robert,
Defining the cost reality today is the same conundrum as answering the classic question of: how long is a piece of string? As you've noted in your articles and above, cost is many things, including contribution, and can become an exercise in futility. Given the daily dynamics inherent in digital print manufacturing, folks are tasking us to help them measure the labor and consumable costs that constitute about 90% of their variable manufacturing costs. The futility factor comes into play when you shoot for 100% of every single cost element. Like many other endeavors, that last 10% is not worth the effort, and it can be reasonably bucketed as “other = 10%”.
We are not users; we are providers. What clients tell us is they use cost to understand their profitability better. They use cost to better understand the ROI of their technology investments. And they use costs to understand the value of existing contracts, and the potential value of pending contracts.
Cost reality is best used to help run a business better so you can add value and grow more profitably.
By German Sacristan on Sep 06, 2019
It is clear by everyone that the cost can't be ignored and it is what it is and happy to see so many comments in that respect.
Now the real focus is on the value and therefore pricing (value drives the price, and more specifically value and differentiation), there is where you can grow the most.
We can't control and try to reduce the cost till we can't anymore then there is only one way to go "value differentiation" to justify a higher price and keep being profitable.
To me value is determined by the print buyer, and in fact the ones that confirmed that value are the print buyer' recipients of the printing products. They are the ones that actually tell all of us (including the print buyer) if we are right or wrong. They do that by responding or ignoring that print piece.
Now they are different type of print buyers:
1. The ones that buy a commodity print product based on price (procurement). Those people' job responsibility is to find the lowest price possible and most of the time they do a good job at it. They are not responsible for value but price.
2. The other print buyers (e.g. marketers/brands) have the job responsibility of ROI and effectiveness of the printing product. Those are the ones that we can sell real value vs specs and price based on value (as much as you can justify). Now ultimately in commercial print applications/products it is the print buyer' recipient that will determine the real value of that print product by reading it or ignoring it.
In commercial applications (which is a huge printing market) no one knows the real value of the printing product (not even the marketer or the expert") Till that product is launched and tracked. We can only sell potential value and that is ok, by helping the print buyer visualized potential ROI and effectiveness. Now in order to do that we have to move away from the product specs conversations to product strategic conversations which in return should increase the odds of a better ROI for the print buyer and therefore higher pricing and profitability us.
Now in order to do that we have to have the right people that can have those strategic conversations with the print buyers.
By German Sacristan on Sep 06, 2019
sorry for the typo, "we CAN control and try to reduce the cost....." ( no can't)
Discussion
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