Discussion

By Robert Lindgren on Dec 17, 2019

Discounts come in two flavors: one is a recognition that there was a problem with the job and we didn't deliver what we should have, the other is an adjustment of a "one size fits all" pricing policy coming out of the estimating software and solely focused on the mechanical aspects of the job. This second one is the key to profit as the price should be a function of the value of the project to the customer not the mechanics of production. The guiding principle should be: get as much as the customer will pay, but get the order.

By Pat McGrew on Dec 17, 2019

Hi Robert! We are in agreement that discounts - no matter the flavor - should be treated as seriously as any other facet of the business (including that estimating system.... !) and must be tracked to ensure that margins aren't given away.

By Robert Lindgren on Dec 17, 2019

The business reality is that "margin" (the difference between the cost sheet (calculated with BHRs and marked up materials) is an artificial number. Reality is contribution to overhead (the difference between what is actually spent to produce the job (production wages, materials, buyouts and commission) and the invoice to the customer. If the guiding principle is followed "get as much as the customer will pay, but get the order" contribution and therefore the firm's total profits will be maximized.

By Robert Godwin on Dec 18, 2019

Pat,
in regard to the the points you list:
1. Charge for all work you do for the client. If the salesperson accepted the work and says the client shouldn't be charged, deduct from the salesperson's commission.Watch issue evaporate, and profitability increase.
2. Duh
3. Double Duh, and closely review #2.

By Robert Lindgren on Dec 18, 2019

There's no question that this draconian approach will eliminate "discounts." However it will also eliminate sales and contribution to overhead and thus profit at the end of the month. Isn't the problem that the estimating system ignores value to customer?

By Pat McGrew on Dec 18, 2019

Bob Godwin: You and I have had this conversation before. Interesting approach.

Robert Lindgren: You bring up a good point about the estimating system. It's worth digging into how to fix that problem, or at least surface it!

By Robert Godwin on Dec 18, 2019

Admittedly, when I worked with transactional salepeople that agreement was splitting the cost of the 'extra work' to make the job printable.But in the end, value added work wss not paid for. I cant do that at the grocery store or with my dentist. why are printers left holding the bag?

By Robert Lindgren on Dec 19, 2019

Pat McGrew: Estimating systems are a problem because they ignore the external reality of the market. They can be helped by using the printer's experience with getting orders (the hit ratio) to get pricing that will produce orders.

Bob Godwin: Generally printers actually spend about 60% of the invoice to get the work done. So on a $1,000 quote there will be $400 to contribute to overhead and thus month-end profit. If $100 more was required to get the job done, that would probably imply an actual expenditure of $60. Even if you didn't get paid for it, would it make sense to pass on a $400 overhead contribution over $60 non-payment?

By Robert Godwin on Dec 19, 2019

Robert,
And that is the exact logic BPO's like Innerworkings use to negotiate pricing for their print buying clients. Margin erosion is the seed that sprouts commodity pricing. So I guess printers either do it to themselves (as you illustrated) or wait until the client has a 'hired gun' do it for them. Either the printer is perceived as having bloated pricing or just not all that much value for the work they do.

By Robert Lindgren on Dec 20, 2019

I understand the concern about margin erosion. However the reality is that maximization of contribution is what counts. The traditional approach is to push for high prices but that is limited by what the customer is willing to pay. It also leads to dramatic underutilization of plant and equipment--the one shift print shop. A more powerful approach to profit is pricing that focuses on value to customer and competitive relationships enabling the printer to drive volume much closer to full utilization of the overhead that he is already paying for. The combination of "charge as much as the customer will pay but get the order" together with a push to 24/5 operation will maximize the firm's profit at the end of the month.

By Robert Godwin on Dec 20, 2019

Robert,
First, excellent discussion on a critical issue facing virtually every printer I have visited this year, from the 3-person family shop to 250 person 3-shift commercial plants.

-Filling the 2nd (and 3rd shifts) with commodity products is a utilization approach;
-1st shift for high-touch complex/custom work with the type of support, and;
-willingness to flex the sell price, and;
-deliver value-add service levels you described.

Commodity products keep the cylinders turning and custom work adds to the profit margin.
The weak point we both have been dancing around in this discussion is the management skills to make these things happen:
-Production management, and;
-Sales management.

The main weakness in print today is lack of discipline in exercising simple business and manufacturing principles.

My opinion of course, but i have seen too many shops that lack these skills.

By Robert Lindgren on Dec 20, 2019

Absolutely right! The concept is correct but the challenge is developing the management skills necessary to make it work. I'm familiar with a firm which has managed to drive utilization up to 24/7 using four crews on each press and producing amazing profits as a result. Getting to this point required more than yours of effort.

By Mark Myers on Jan 08, 2020

Interesting conversation from multiple perspectives...Before I got into the software end of the printing business I owned a 106 man plant in South Florida that ran 24/7 and thoroughly understood the value of using all of the plant’s capacity to maximize profits. I wanted my sales-force to be able to give discounts where necessary and bring back the order, but I was also concerned that they would always sell for the lowest price to make that happen so I developed a discount sharing solution which I wrote into my estimating software that automatically calculated and reduced the salespersons commission with us eating 60% and the salesperson eating 40%. The program I wrote allowed me to vary this to any % share. When I got into the software end of the business exclusively with www.estimatorcloud.com I added another component which would allow the selection of the reps discount share to also be a % of the value added portion as many printers use that option with their sales force.

This negative incentive penalized the salesperson but how much pain he was willing to take changed the calculus and at the same time gave the salesperson the ability on the spot to close the sale...

By Pat McGrew on Jan 08, 2020

Hi Mark! I always like the gamification approach to dealing with sales teams. Sounds like you found a way to codify it and market it!

By Robert Lindgren on Jan 08, 2020

I like the idea of sales reps having skin in the game, but I'm concerned that the 60/40 story discourages reps from getting the firm to full utilization which is the key to profit maximization. A better approach would be to base commission on contribution or value added. Both numbers run in the same direction and both are key to profit growth through utilization. Value added has the advantage of being easier for reps to understand.

By Pat McGrew on Jan 08, 2020

It would be a killer A/B test, wouldn't it?

By Robert Lindgren on Jan 08, 2020

Question: "What's a killer A/B test?"

By Pat McGrew on Jan 08, 2020

Try two differnt compensation models and see if the gamification makes no difference, improves, or causes a decline in sales behaviour. Same as we do in marketing when we are trying to figure out what campaign message works.

By Mark Myers on Jan 09, 2020

I never liked the option where the salesperson adds what he wants to increase his commission... I always believed that you should have consistency with the customer as such we never offered 2 options the only option was the salesperson could cut the price but he also took a hit... We found that was the best protection for integrity and the customers comfort level... Mark Myers CEO EstimatorCloud.com

By Robert Lindgren on Jan 09, 2020

I agree with the need for consistency. However, consistency should not be with the printer's sales as a whole but consistency by customer recognizing that some customers regard their printer as a sole source and others are strict price buyers. Also, pricing should be situational as some projects are critical for the customer and seriously out of time while others are unimportant throwaways. The bottom line is that pricing should focus on value to the customer and the relationship the customer has with the printer. Neither of this components is reflected in the typical estimating system which is focused on the mechanical specs.

By Mark Myers on Jan 09, 2020

I agree with you that customer value is not in the usual program, and that is why EstimatorCloud.com has that value added component in the customer profile and when the customer is selected if appropriately re-evaluates the pricing and can be set for different values for every customer

By Robert Godwin on Jan 10, 2020

While the discussion on gamification so far has focused on sales, our print division has used gamification on the shop floor. I did a presentation at an Idealliance conference a few years ago. Here is the link. https://vimeo.com/216442691 The audio had be added over the phone because the recording at the presentation wasn't functioning. Always something.

By Pat McGrew on Jan 10, 2020

Bob! This is a great story!