Discussion

By Robert Lindgren on Feb 06, 2019

The primary use for estimating systems is to inform the pricing decision. By definition estimating is internally focused while the price is an external reality flowing from the value to the customer and the customer's perception of alternative prices. If the printer wishes to get as much as there is to get for the order but also to get the order, the pricing process must systematically focus on these external facts. Of course, a decision must be made whether the order should be accepted at the price that's available. The break point is just the amount that will be actually spent to produce the order (materials, outside purchases, productive wages, commission) not the cost of the equipment, plant or front office as they are unaffected by the acceptance or rejection of the order. Generally, there is enough daylight between the external maximum and the internal minimum, that a very simple check will validate it.

By Jonathan Stuart on Feb 06, 2019

I disagree with Robert Lindgren. Estimates can have multiple purposes: As a basis for price decisions; As a comparator of production performance (actual versus estimated); As an input to production loading and scheduling (aggregate estimated machine hours versus available hours).

In all these roles, estimates have limits to their usefulness. In pricing, it's tempting to price down to a level just above direct costs (Robert's "break point") to try to win the deal. But if you do this on every estimate the business will never recover it's overheads and will always make a loss, however busy the machines are.

The objective of pricing must be to generate the maximum margin at the least cost - easy to say but hard to put into practice. teh estimating system doesn't give much help, because you're trying to find the highest price the market will accept enough of the time to fill capacity. It means deliberately setting prices above what some customers are willing to pay, and focusing on those who will pay.

By Gina Danner on Feb 07, 2019

Costing and Pricing are always amazing discussions. At NextPage -- estimating is strictly costing. The estimators job is to determine the true cost for production of a job based on the specifications provided by the sales team.

The sales team's job is to figure out what the market will bear. The easy answer is "cost plus mark up". The right answer is more artful. Success has to do with understanding the client, the market, and the ultimate goals of the company.

And the key for profitability of the print organization is to align actual utilization to costing and then to pricing.

Do you figure costs based on a one, two or three shift model?
How do you weigh in the "cost of goods" and the "overhead expenses". At NextPage we treat our phone expense (and our marketing expense) as a cost of goods -- we sell more our phone and marketing cost goes up. Financial statements I've seen from other printers (and businesses for that matter) treat both of those as overhead costs.

That is one of the amazing things of managing a business and having the opportunity to look at other businesses. What is the philosophy that goes into every single cost element of the job and how do those distribute across the organization?

Just like a good sales team can make or break your company -- a great estimating team and a solid costing philosophy can make the difference from profitable growth or closing the doors.

By Chris Lynn on Feb 07, 2019

I think Gina's statement that "the key for profitability...is to align actual utilization to costing and then to pricing" is almost exactly wrong.

Absorption costing i.e. allocation of of overheads to hourly production costs produces sub-optimal decisions on whether to take an order and how to prioritize orders (and capital investments). I recommend Googling "Throughput Accounting" and "Theory of Constraints". Throughput is Revenue minus Totally Variable Costs. Everything else (including production labor and machine leases) is either an Operating Expense or Investment.

Revenue, as Robert says, is external reality - a measure of what the customer values and what the market will bear. NEVER use 'cost plus'.

The goal is to maximize Throughput. This means understanding where the constraint in the system is, and 'elevating' it. It also means, if capacity is available, being willing to take an order at below the estimator's (misleading) loaded cost.

By Robert Godwin on Feb 08, 2019

What visiting and speaking with 100’s of SMB printers over the past several years has taught me:
Estimating = costing -- Often inaccurate due to lack of operational diligence.
Pricing = Sales – What the market will bear (wet finger, hold above head)
Print bought online with provided design = lowest price point = lowest profit margins (requires volume + automation to justify)
Print bought through transactional sales-human = highest price point = highest cost-of-sale = loss on commodity products
Value assessment – not a function of estimating, and is decided by one of the two following sales channels:
1. Customer sets price -- Online = customer’s low-cost choice
2. Sales sets price -- Trade show tomorrow = transactional sales-human’s dream
Accurate estimating is the classic oxymoron.

By Dave Hultin on Feb 08, 2019

“Estimating is simply a time calculator” sounds eerily similar to a phrase that I often use: "Print MIS is just an overgrown calculator."

Calculating cost is one thing. As you imply in this article, the ability to TRUST in the time and cost data, and then the calculations that turn that data into an estimate, is of paramount importance.

How do you know you're covering your costs if you can't trust the data? How do you know you're able to cover the purchase of replacement equipment if you can't trust the data? Without trustworthy data and calculators, there's just no way to make trustworthy decisions on selling price and equipment purchases.

That's why I really appreciate Gina's statement about getting to a selling price: "The right answer is more artful. Success has to do with understanding the client, the market, and the ultimate goals of the company." There's just no one-size-fits-all answer, but the individual answers should all be derived from a platform of trust!