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Question: The recession has put added pressure on price. How can specialty imaging businesses determine the right pricing model in this competitive market?
Drisler: We see people approach pricing from two basic paradigms. The most common is to develop a strong costing method that includes material required for the job and an accurate representation of the overhead of the operation. From there varying mark ups can be applied factoring in the competition, the product, the customer and the market in which they are working.

The other method considered very effective by many in extremely tight markets is the use of “value added.” A simple definition of value added is price minus the hard costs for any materials or outside services required to make the product. The resulting number obviously needs to cover overheard and profit. Estimating software gives the user the ability to refine the value-added, balancing the unique considerations of each opportunity against the cash flow required.

Nachmany: Print service providers (PSPs) should take a closer second look at their per job cost structure, including fixed cost allocation, to understand if they are really optimizing their profit with their decisions on job allocation between presses. There are a variety of tools available today (such as HP SmartPlanner, provided free of charge to users of HP Scitex high-end equipment) that can help PSPs make the right pricing decisions.

St.Cyr: The “right” pricing model is usually determined by the niche in which an imaging business plays. Generalist producers will need a pricing strategy which produces a pricing consistency across the entire product line. This can be cost or area (aka square-foot) based. Niche players, in general, should emphasize a market-based approach to pricing and should be able to command higher margins. This is partly due to greater efficiency (compared to generalists) and partly due to a higher service delivery component.

Question: What are the most common pricing mistakes you’ve run into?
Drisler: It is shockingly common to encounter a company that has no true concept of costs. Pricing is driven totally by the market and profit is determined by what is left in the checkbook at that end of the month. When an economic downturn develops, these companies tend to disappear.

Nachmany: When performing job cost estimations, we’ve seen many PSPs that do not account for fixed costs correctly, if at all. If these allocations or overheads are not included in job costing, pricing will give an inaccurate picture of job profitability, which will ricochet in the form of lost profit or even loss at the end of the accounting period.

We’ve also seen PSPs that sell the technology (“this job will be printed on screen/digital”) rather than the application, product or service. By doing this, they expose themselves to pricing discussions about technology and lose the opportunity to price according to job value. If the print buyer is savvy enough, they will know the different cost structure of a job printed by each technology, and will identify where the PSP has a higher margin and can potentially be squeezed.

St.Cyr: The most common pricing mistakes we see revolve around not understanding the underlying cost structures. Area based (aka square-foot) pricing works well within a narrow range, but it is often way off on big and small jobs. I like to use the rule of three — if the order is three times your average order, you shouldn’t use your normal square-foot pricing. This is related to another problem of not knowing your costs. Without a well defined system (or software) to automatically estimate your costs, it will be very hard to price with accuracy over a wide range of sizes and options.

Question: What’s the best advice you can give businesses to help them get the ball rolling in the right pricing direction?
Drisler: Step one is to get a comprehensive handle on your costs. Implement one cohesive method to know the cost of any item going through your plant, both direct and indirect, so you are able to make your pricing decisions from a point of strength. From there you can factor in all the variables associated with each opportunity: The competition, the product, the customer and the market.

Nachmany: Always account for fixed costs and overheads accurately beforehand. Avoid talking to your customers about technology (unless there is inherent added value such as variable data prints) so you can price based on value. Also, make the job allocation decision based on a combination of job costing, breakeven and press utilization.

St.Cyr: Don’t estimate — calculate. Too often businesses just guess at their pricing. Even if they win some of the jobs, guestimation provides no framework to build on. The businesses that are successful, approach pricing methodically so that they can intentionally adjust their pricing rather than just try to get lucky.

This article appeared in the SGIA News, June 2010 Issue and is reprinted with permission. Copyright 2010 Specialty Graphic Imaging Association (www.sgia.org). All Rights Reserved.