How Budgeted Hourly Cost Rates almost put a printing company out of business.

Case Study - "We learned our lesson the hard way."

An essential tool for being a successful printing or packaging organization is budgeted hourly rates (BHRs). Inaccurate BHRs can put an organization at risk by making them less competitive, less profitable, and less productive as Quality Printing found out in the following case study:

Quality Printing* is a digital and offset printing company with 45 employees located in the Midwest United States. Quality Printing purchased a new Management Information System 3 years ago. Budgeted hourly cost rates were indiscriminately created in order to implement the estimating and job costing software.

For 3 years, Quality Printing continued to produce estimates and job cost reports using the original BHRs with minor changes. When they finally updated their rates using Cost Rates Advisor, they found that their old rates had significantly impaired revenue, profit margins, and growth. Quality Printing had unintentionally been deceived by the estimating figures used for pricing, and the job cost figures used to measure job profitability. Below is a summary of their findings:










Using their old BHRs, smaller jobs were being under-estimated by 4.2%. Unknowingly, Quality Printing was selling smaller, short-run work below their cost. This was causing the organization to drift towards smaller, less profitable work, which required more administrative costs and machine setups to produce orders, and ultimately lowered the organization's profits and efficiencies.

Quality Printing also found that larger, more expensive jobs were being over-estimated by 10.2%. The old rates caused Quality Printing to overprice and lose a substantial number of higher priced, more profitable quotes over the years. This also caused excess capacity and lower levels of productivity in the shop.

"The BHRs we calculated by Cost Rates Advisor has provided insight to our real costs. We have more faith in our estimates, which has helped us shrewdly price jobs, be more competitive on profitable work, and shy away from less desirable work. We're now processing less orders, but at much higher profit margins. We learned our lesson the hard way. Now we update our BHRs at least annually!" -  John, President

If Quality Printing had not updated their BHRs with Cost Rates Advisor, they would have continued to lose profits and would have eventually gone out of business.

Proven Pricing Strategies
Used By Printing Industry Leaders

By Craig L. Press

President, Profectus Inc

Printing Industry Business Consultants

Devising an effective pricing strategy is one of the most critical elements for sustaining a successful printing business. After all, you cannot make a sale without first setting a price.

Nevertheless, most companies give little thought to formulating an appropriate pricing strategy. Many companies utilize simple pricing approaches predominantly to beat the competition, cover costs, and sustain the business.

The industry market leaders tend to implement more innovative pricing strategies that are designed to maximize revenue, cultivate growth, earn higher profits, and generate the highest shareholder value. These price-savvy companies typically apply numerous pricing tactics intended to address distinct short-term and long-term objectives.

The process of setting an adequate price is not an exact science. Here are a few of the many pricing strategies used in the printing industry.

Cost plus Markup Pricing Strategy This is the most common pricing strategy used by our industry. A sell price is determined by forecasting the cost to produce the order using estimating software, spreadsheets, or worksheets, and then a desired or tolerable profit markup is added to the estimated cost. It is often left up to the estimating department to set the price based on the estimated costs.

While cost is an important factor for determining price, this strategy has some serious flaws. Estimators are generally unfamiliar with the marketplace, product demand, perceived value, and the long-term value of winning the customer's business. It often restricts sales, leaves money on the table, and decreases a company's ability to compete and grow. In general, companies depending on a cost plus markup pricing strategy don't become market leaders; they are perpetually the underdogs.

Skimming Pricing A skimming pricing strategy is when a company charges the highest initial price that customers will pay for a new or innovative product that may not be easily assessable from the competition. As the demand of the first customers is satisfied, the company lowers the price to attract another, more price-sensitive segment. Eventually, the price drops as the product matures and competitors offer a similar product or service at lower prices. A good example of Skimming Pricing is when the early adopters of large format printing were able to charge higher prices before large format printing became more available and price competitive.

Gain Market Share Pricing With the gain market share strategy, prices are set low to gain market share against competitors. Lower prices will eat into your profits, but there are good reasons for this approach. A company may lower prices on digital printing orders to get new customers, knowing that later they'll be able to sell these customers other, more profitable services such as long-run offset printing or mailing services, once they get comfortable with your company. You don't make as much early, but you plan to make money later with "back end" sales.

Versioning Pricing
The versioning strategy is a very effective tactic that can be easily implemented. The idea is to quote the customer slightly different versions or alternatives of the product, for less money. For example, you can quote alternative prices for a more economical size, paper, binding, packing, etc. This strategy can also be used for up selling; i.e. only $79 for an additional 2,000 copies.

Versioning is often frowned upon by the estimating department because it creates more for work for them, but it's proven to win more quotes and customers. Taking the additional effort to present the customer with cost-savings alternatives demonstrates your will for their business and improves their trust in future pricing.

Customer Demand Pricing A customer demand pricing strategy is typically driven by an event, a new trend, niche, or the availability of similar products. For example, a company that specializes in political signage can increase prices during the Senate and Presidential elections, when demand is up. After the elections, demand for political signage will decrease and so will prices.

Perceived Value Pricing
Perceived value pricing is the valuation of a company's products or services according to how much the buyer is willing to pay for it. To price based on perceived value, the customer needs to be convinced of the tangible and intangible values they will receive by choosing your company (i.e. capabilities, on-time service, friendly staff, trust, quality, stress-free, ease of doing business, etc.) Some buyers will not take a company seriously if the prices are too low because they often associate low price with low quality or poor service. To price base on perceived value, consider the following questions:

Conclusion These pricing strategies are just a few of the many schemes used by companies. Other strategies include; value added pricing, product line pricing, promotional pricing, psychological pricing, differential pricing, bundle pricing, and volume pricing. To become a market leader, you need to have a good understanding of a number of different strategies and adopt the strategies that best fit your company's short-term and long-term objectives.

To learn more about developing and implementing an effective pricing strategy for your business, attend Craig Press' "Pricing Strategies for the New Economy" seminar:
- March 2, 2012, Graphics of the Americas Expo and Conference, Miami Beach Convention Center Graphics of the Americas Seminars Page

- April 17, 2012, Printing Industry Midwest, Ricoh Print Learning Center, Roseville, MN PIMPricing Strategies for the New Economy Workshop Registration Page

Printing Business Seminar: Calculating Budgeted Hourly Cost Rates

By: Craig L Press,
The Printing Industries of Wisconsin (PIW), &
The Institute for Graphics and Imaging (IGI)

November 11, 2009
9:00 am - 3:00 pm


In today's economy it is essential to know your true costs so you are more competitive on the desirable work and avoid the less lucrative work. This workshop will teach you how to develop and calculate hourly cost rates of your production equipment and employees. You will learn how to distribute 100 percent of your expenses among your cost centers so that your costs are fully absorbed in your estimates, actual costs, and pricing. All participants will receive forms and a spreadsheet that can be used to develop your own hourly cost rates.


What Attendees Will Learn?
- What budgeted hourly rates (BHR's)
- How to develop BHR's for your equipment
- The components of budgeted hourly rates
- Where to get the information and numbers
- How to recover your overhead costs
- What to do when equipment is fully depreciated or paid for
- How to compensate for under-utilized equipment
- Calculating direct manufacturing and all-inclusive costs
- Example prepress, press, and finishing BHR's
- Software and publications available to help develop BHR's
- How to use BHRs for pricing and job costing
- What to do when your cost is more than your customers will pay


Who Should Attend?
Principles, managers, financial officers, estimators, cost accountants, billing personnel, department managers, or anyone wanting to improve estimating, pricing, and costing skills.


Click here to download the seminar brochure and registration information.
http://www.igi.org/events/IGI_CPress_CalcRates_F.pdf

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