Before you rush to cut prices get a handle on your job costing process

Those of us who have been in the printing industry for more than a decade have seen tough times before, and know that the strong will survive. How do we become one of the strong ones? The reality is that there appear to be fewer projects to quote on, and more people quoting on them. We are too often told that our quotes are too high. But what happens when the lowest price is less than your paper cost? To quote Mick Jagger, “what can a poor boy do?”

Your first reaction might be to reduce your price to match the competition. That means that as you cut prices, you will also cut your margin. Since most printers have razor thin margins to begin with, you can only do that for a short time. If you reduce prices for some customers, does that mean you can raise prices for other customers? If that is your strategy, it won’t be long before your best customers find out and lose confidence in you as a supplier.

The first thing is to have a good handle on your costs—in particular, your job costing process. Most operations have a version of this. It will not necessarily be the same approach for digital and offset operations.

Basic job costing for offset production can consist of simply recording information on a hard copy docket. Recording time spent in each profit centre, materials required and any outside purchases will provide the basis for accurate job costing. But to ensure accuracy, the budgeted hourly rates also need to be accurate. As this is a process based on estimates for the upcoming period, accuracy will depend on factors out of your control. Making revisions part way though the year to reflect less volume of work will result in higher rates, which could result in fewer jobs and customers. Price increases in a competitive period take a long time to have effect.

Digital print operations must have other ways to track costs and charge back. Recording “time” for a small job produced is not a practical approach. This is where a batch costing process would be appropriate. Tracking material, spoilage, equipment costs, overhead and labour over a period of time, and then comparing that to the amount of production done and revenue generated, will help to confirm your costs/sales balance. Unacceptable margins force you to either increase revenue (more work), or reduce expenses.

To put your operation costs into perspective, there are industry ratios published by the Canadian Printing Industries Association (CPIA) and by PrintImage International. These ratios are useful as guidelines to compare your operation to the industry. For example, comparing your labour expenses for sales, administration, production, etc., will help guide you as to where differences exist. If you have not invested in a management information system, you may find that you have more staff performing administrative tasks compared to other companies.

With extreme pricing pressure, you need an estimating system that has accurate data so you can accurately predict your costs in order to cut costs. As I mentioned earlier, you also need to understand how estimates are calculated. Material costs and time estimates are straight forward enough, but do you understand what the effect of the budgeted hourly cost rates is, and what flexibility you have?

The alternative to cutting costs is to increase sales and perhaps charge more. The only way to effectively charge a premium is to specialize or differentiate yourself from the competition. But if your equipment is similar to other printers and your funds are limited, how do you specialize?
Specialize in a service. My father-in-law had a courier service for a time. He differentiated himself from dozens of courier companies by offering service 24 hours a day, seven days per week. He did not want to compete for the $6 delivery that would take him across town in rush hour, but he did not mind getting a call at 2:00 a.m. for a pick-up and delivery that would be worth $30 to the customer. He could never make up for price with volume, but he could with service.

Specialize for a distinct market. What customers do you have that are in a common industry? Are they in health care, the entertainment industry, the restaurant trade? Do you understand their needs better than someone who has never dealt with them before? Does your unique service provide your customers with the confidence that you understand their needs better than your competition? Hint: Start looking at some of your most challenging jobs in industries that you can specialize in.

Once you identify the right target customer, you must make sure you have the capabilities to meet their requirements, while exceeding their expectations. The repeat orders will come, and you can build on your specialization with others in the same market.

The goal is to build relationships and expertise with clients—to become their sole source supplier. I know one company who has almost achieved this utopia with good quality and service as well as being able to turn around an estimate within a couple of hours! In some cases a job was awarded before the competition even had a chance to return a price. This kind of relationship is built on trust and is earned, not requested. It may require shortcuts that speed up the process, but do not compromise accuracy.

Here is some advice for those who just get caught up in the price discount game:
You better stop, look around
Here it comes, here it comes,
Here it comes, here it comes,
Here comes your 19th
nervous breakdown!