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Sign Pricing Series - Article II: Digital Print Pricing
By Scott St.Cyr
The biggest challenge in answering the question "How do other companies price their digital prints?" is simply that the digital printing industry is very segmented and comes from many different traditions. Reprographers that have moved to all digital still typically price like reprographers that have not. Screen printing companies with digital capabilities still typically price like they are printing signs. Vinyl sign companies also tend to approach the pricing question from their familiar turf.
Of course, these generalizations are only that. And there is a convergence of pricing techniques we normally encounter in digital printing companies. By saying digital printing companies, I refer to companies for which digitally printed output makes up 50% of more of their sales. What we see in these companies is a continuum between two pricing philosophies - a square-foot approach and a machine run-rate approach.
Question: What is the most common technique used in pricing digital prints?
Answer: The majority (in number) of small and mid-sized digital printing companies we encounter use a square foot approach to digital pricing (square meter approach for the international crowd). A typical pricing scheme might look like this:
If the use of this table is simple, the derivation of the square foot price is not. In practice, most shops using this approach seem to adjust their pricing more based on the market factors (i.e., what the other guys are charging) than on an underlying cost structure. But since you are reading this, you are probably looking for a more systematic way of pricing other than to "adjust for local factors".
Let's begin by clarifying a few points. First, the size breaks above are arbitrary. Why give a break at 51sf and not 100sf? Once the printer is running it doesn't matter much. Usually, the logic centers on the concept of amortizing the "setup". If we address the setup idea directly, figuring the costs are much more straightforward. An alternate version of the above, which uses variable setup rather than variable pricing, might be:
Note that this is not an exact match. A graph of the original versus alternate pricing shows how the two compare.
However, by breaking the setup and square foot charges apart, we can now tackle each of them systematically and determine their parts.
You can debate about which columns some of these things belong in (bigger prints often require more design and ripping, etc.), but this breakdown seems to work as a first-pass. I'm sure you can think of many components you would add.
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Once you have the parts organized, now you can estimate the costs associated with each one. Commonly a multiplier is applied to each part, so the price becomes:
With an automated or semi-automated process, it is common practice to apply different multipliers for Labor and Materials. The setup is also normally simplified (since it is relatively constant), so that the price becomes:
Question: OK, I know my costs. What are the multipliers I should use?
Answer: That is the question, isn't it? Of course, the answers vary tremendously based on your volume, overhead and competition. Commonly, many shops will not include labor at all and use a material multiplier of 2-5. Others include labor at one multiplier (1.5-3) and materials at another multiplier (1.5-4). The answer will also depend on whether this is your core business or just an additional sales opportunity.
I would encourage you to experiment with your current pricing and see how different multipliers compare. When you find a combination that matches your existing prices, you will understand the factors you are implicitly using in your business.
Question: What other pricing techniques are commonly used?
Answer: For larger digital shops, the cost of materials and labor become less the driving factor in business profitability. For these shops, the cost of the digital printer (i.e., the note on the loan) is the dominant factor and a machine runtime charge is the dominant pricing variable. If you paid $250,000 for a digital printer your monthly note (assume a 3 year payback at 8% interest) is about $8,000. This is in addition to the material and labor needed to run the machine. In this case, you are probably keeping the machine busy (or you have other problems) and you really need to make sure the machine is operating profitably.
Rather than focus on the labor or materials (though they may factor in), the hourly run rate of the machine is used as a factor. To expand on the above, we need to add a third column to our previous example.
This formula only looks the same to the mathematicians. In the real world, the factors are such that the most significant part of the equation is the Machine Hourly Rate. In fact, many shops build the labor into machine rate and don't even bother with the human cost!
There is one caveat here. We've increased the calculations considerably in this step. The run time of the machine will vary based on width, resolution, horizontal and vertical head speeds, etc. If your pricing is not automated, you will need to simplify the calculations (and lower the accuracy of the quote) in order to handle this complexity.
Question: So what multipliers should I use with machine runtime processing?
Answer: This is a tough one to answer. Usually multipliers on materials and labor are in the 1-2 range. The machine hourly rate calculation usually looks something like this:
This is very rough, but basically factors what the machine costs (printer plus service contract plus operator) divided by the usable hours (160 hours per month times an efficiency factor) and then adjusted for a markup. With our $250,000 machine above, a $1,000 per month service contract, and a 60% efficiency measure, this calculation might result in something like:
This would imply I should charge $231.25 per hour for the customer to "rent" my machine. If this seems high, then you are probably not the person paying the note! Also, running two shifts instead of one (common with this dollar volume) will also bring down the machine's run rate or increase the potential contribution.
Question: What about Overhead?
Answer: Overhead is a topic that will require an entire article by itself. Overhead is most commonly factored in afterwards (usually as a percentage markup on the whole job) or built into the multipliers. It may be added to labor multipliers, equipment multipliers, material multipliers, or some combination of the three.
How to apply your overhead is both a philosophical and mathematical challenge. To calculate overhead you have to assume certain sales volumes, hours of operation, etc. However, winning or loosing jobs can affect these very assumptions that go into overhead.
Question: What's next?
Answer: The next step, as a professor of mine liked to say, is that "you have run the numbers for yourself". None of the ideas will help if you don't bring the idea into your business. If you are using an automated system to price, many of these variables are already explicitly known. If not, then chances are you will have to do some work to determine what they are. Knowing this information will help you decide what jobs to take, how high or low you can go on a job, and where you are making your money. In the end is it all about knowing where you are profitable.
In the next article, we'll cover some of the basic approaches we encounter in Screen Print pricing. If you have a question before then you can contact me at firstname.lastname@example.org.
About the Author: Scott St.Cyr is the C.E.O. of Cyrious Software, Inc., a software company that specializes in pricing and business management software for the sign and graphics industries. He formerly owned 5 sign companies with Vinyl, Electric, Screen Printing, and Digital Printing departments. He holds a BS in Electrical Engineering from the University of Louisiana and an MBA from Harvard University.
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