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What's your pricing philosophy?

May 1, 2004 12:00 AM

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Pricing is the Holy Grail of the graphic-arts industry: Many are in search of the mathematical formula and, just when it seems that the formula is about to be set in stone, competitors complicate life by refusing to play by the same rules.

One of the consequences of a three-year period of intense price competition is dialogue about pricing theory. I'm often asked whether I prefer cost-plus pricing or so-called “market-based pricing.” Before dealing with the merits of these concepts, let me say that I am in a bunker wearing a flak jacket, awaiting the barrage of criticism I'll no doubt get. But here goes.

Cost-plus pricing

Cost-plus pricing makes little sense to me in concept and makes even less sense in its implementation. Having said that, it is common sense to first calculate complete and accurate costs in order to ensure that a job won't be produced at a loss.

Yet cost-plus pricing poses a problem because of two issues:

  1. Even assuming that most companies actually know their true costs, these are confined only to manufacturing activities. Sales, customer service, transaction and other overhead costs are usually applied equally to every dollar of estimated sales, ignoring account-specific differences in payment records, the number of estimates required to win work, proofing, etc.

  2. Perceived value to the customer is inadequately considered. Too often, there is a lack of understanding of the reason(s) a specific customer buys from a print supplier. This is especially true regarding companies for which an estimator calculates both estimated costs and price.

While cost-plus pricing may not be a good concept, it admittedly may serve as the best framework for pricing given the limitations of available, accurate information. But consider this: If florists used cost-plus pricing, the selling price of a dozen roses on August 14 would be the same as on February 14. After all, roses use the same soil, air and water regardless of the date.

Competitive pricing

Let's look at market-based pricing, a notion that presumes that a company must be competitive and that its costs, operations and standards must reflect the demands of the marketplace. It's a great theory and may work in a highly concentrated, even oligarchic industry such as automobile or cell-phone sales. Yet despite the mergers and bankruptcies of recent years, the marketplace for print remains highly segmented. Despite the best efforts of industry trade associations, the term “print standards” borders on being an oxymoron.

The concept of market pricing carries some assumptions:

  • A rational marketplace. Not every company, however, estimates work or prices in the same manner. Some sheetfed printers still arrive at a price by calculating the cost of paper, then multiplying by three.

  • There is consistent pricing within a company. Yet many printers allow salespeople or estimators to price — and no two individuals follow the same logic.

Many argue that market-based pricing has a destructive feature: It focuses an organization on competition and price as the sole issues, detracting from determination of customer needs and the addition of those values. Frankly, in an industry dominated by custom-manufactured products and services, I have difficulty translating the theory of market-based pricing into practical, profitable, everyday activity.

Activity-based costing

What do I favor? First of all, I fully subscribe to the theory that whereas estimating is a science, pricing is a philosophy or an art form. There is no precise mathematical formula for the latter, although it is best accomplished through (a) improved information about estimated non-manufacturing as well as manufacturing costs, and (b) an account's perceptions, needs and objectives.

The former is commonly called activity-based costing. It has several permutations, but generally refers to calculation of overhead costs on an account-specific basis. In considering a customer's perceptions, needs and objectives, the landscape becomes very fuzzy. It may differ from job to job. Different individuals may interpret the data differently. But it is better to be just about right than precisely incorrect.

Much of this information about customer perceptions can be obtained through ongoing investment in surveys and analysis of data regarding current accounts. It's an ongoing challenge because the targets are constantly moving. This dynamic marketplace is as much an opportunity as it is a challenge.

Dick Gorelick is president of Gorelick & Associates and the Graphic Arts Sales Foundation. Barrage him with criticism at