Market planning in the printing industry is getting more attention in this era of hotter competition, consolidation, and leveling revenues. In the past, marketing was just another term for selling, but yesteryears marketing executives are beginning to appreciate the difference between a comprehensive marketing strategy and the next big sales opportunity. These changes are occurring among print providers and equipment vendors alike.
Although the emphasis traditionally has been on selling, the sales plan is one of the last things to be developed in a structured marketing strategy. A good marketing plan addresses six key issues in a step-by-step manner: market segmentation, targeting, product development, positioning, pricing, and promotion. We covered the first four in previous articles in this series, which can be accessed at www.dpsmagazine.com. These four elements of the marketing plan converge in the pricing of the product, which is the subject of this article.
Cost and Value
Strategic pricing is a marketing action that directly affects the bottom line. But profitable pricing is more than a matter of estimating costs or matching the competition.
Many print providers simply equate price with their cost plus a required margin. Unfortunately, this practice gives no consideration to value. Cost-plus pricing can leave money on the table, and it can tie up the printers resources with marginal business, to the exclusion of higher-value opportunities. In digital printing, profitable pricing is linked not only to the cost of the manufactured goods, but to the value the customer acquires from the services accompanying those goods.
The value of digital printing depends greatly upon the market segment. For example, the manufacturing price of a 256-page 6-3/8" x 9-1/4", perfect-bound, soft-cover book is influenced not only by the cost but also by the value associated with the product lifetime, order quantity, turnaround time, and related services. In the adult trade book category, the manufacturing price of the book may be only $1.50, while in the professional book category, the price of the same product could be twice as much.
The Cost Floor
The first step in pricing is to quantify the actual costs of the digital printing and related services. Accurate costing is especially important in digital printing, where the pricing can eventually extend over a long-term service relationship.
The best cost accounting is activity-based, where all direct and indirect costs of each operation are tracked for each customer and job. Unfortunately, the popular production management systems in the conventional printing industry do not support this type of accounting. Instead, costs are commonly estimated using budgeted hourly rates (BHRs). The time required in each operation is multiplied by the BHR for that operation, and the resulting costs are totaled.
The BHR method provides only an approximation of the cost for a conventional print job, since it is based on a number of arbitrary assumptions and allocations of fixed costs in the business. In the case of digital printing, BHRs must be used with even greater caution, because some of these assumptions totally break down in the short-run regime.
One problem arises from the assumption that the productivity of the operation is fixed at some average value, typically set at 75 or 85 percent. In reality, capacity utilization and productivity vary with the average run length in the facility and decline dramatically with shorter runs. Consequently, BHRs can significantly understate the actual cost of digital print jobs.
Another problem in the BHR approach arises from the assumption that the indirect costs associated with selling, order entry, material and component inventory, production scheduling and tracking, and general administration are absorbed in direct proportion to the job time. This assumption would hold that these indirect costs for a ten-unit order are only a few percent of the corresponding costs for a 1,000-unit run, which is clearly not the case.
In spite of the shortcomings of the BHR method, it is still possible to estimate costs with reasonable accuracy if certain mathematical formulas are used to compensate for the BHR errors in the short-run regime.
Value-Based Pricing
Good cost accounting can help to keep a business from losing money, but it will not necessarily help to maximize profit. Profit is enhanced by value-based pricing.
The cost side of pricing requires an introspective view of the requirements of the print providers business. By contrast, the value side of pricing requires an external perspective on the economics of the deal from the customers vantage point.
Value is the economic difference between two alternatives. When determining the value of digital printing, the other alternative is generally conventional printing. In this case, the value is the difference between the customers income (revenue minus costs) using a digital printing solution and the customers income using the conventional solution.
Normally the customers income for each alternative must be estimated, based upon some reasonable homework and fact-finding. Value-based pricing involves more work than simple cost-plus pricing, but it can prove to be well worth the effort. Armed with a good understanding of the dollars-and-cents value of the services, a print provider can qualify opportunities and prospects in order to focus on those with higher profit potential; determine how much money is on the table prior to setting a price; support a value-based price that is fair to both the printer and the customer; and establish the basis for a real partnership with the customer, rather than an arms-length buying relationship.
In the end, value-based pricing will be successful only if the customer actually understands the value. These considerations make it clear why the leading digital print providers invest more heavily in consultative selling.
Dimensions
The value of digital printing can be expressed along two dimensionstime and targeting. In simplest terms, the time value of digital printing refers to its ability to provide up-to-date information without delay. The time value in a particular digital printing opportunity can be assessed in terms of the currency of the information and the speed at which it must reach the consumer.
The currency of the information is related to the practical lifetime or the revision interval of the product. For example, the lifetime of an electronic component datasheet is short, since the information may be revised or the electronic component itself may be superseded after just a few months. On the other hand, Charles Dickens?A Tale of Two Cities is likely to live forever. The currency of information in the datasheet is high, while in the novel it is low.
The value associated with the speed of delivery depends upon the industry and product. The important measure is the speed of delivery to the consumer, not merely to the print buyer. For example, investment management firms place high value on speedy delivery of marketing materials and research reports to prospective customers, because the propensity to buy a particular investment has been shown to have a half-life of only a few days. On the other hand, for many years the book publishing industry placed little value on speed of delivery to the consumer. Delivery times for books not carried in retail stock averaged three weeks. Today, Internet retailing has raised consumers?expectations for immediate fulfillment of a vast selection of titles and has also raised the value of digital printing in the distribution channel.
The targeting value of digital printing refers to its ability to reach a selected market segment with information that is most appropriate to that segment. The segment may range in size from several thousand consumers down to just one. Like time value, the targeting value of digital printing can be expressed in terms of two componentsaccessibility and relevance.
Digital printing has provided access to market segments that were once not easily reached by conventional printing. For example, training firms have extended their reach into smaller European markets with products printed digitally on demand. Moreover, the relevance of these products is enhanced by localization or translation to meet the specific cultural needs of each geographic market. Likewise, digital monochrome printing has provided direct-mail marketing access to individual consumers for over three decades, but anecdotal evidence suggests that color adds value in conveying relevant information to these selected consumers.
Setting the Price
If the digital print sales opportunity is a good one, then the print provider has a chance to set a value-based price at a level that yields a greater margin over conventional cost-plus pricing, while still providing the customer with higher value in comparison with a conventional print solution. In this case, the challenge is to divide up the value-based premium between the printer and the customer. Exactly how the pie is sliced depends upon several factors.
Pricing Structure
The tradition in the industry has been to charge a fixed makeready price plus a run price per unitfor example, $350 plus $150 per thousand. This method ensures that the higher makeready costs of conventional printing are covered, regardless of the quantity that is actually run.
The lower fixed costs of digital printing open the opportunity to provide the customer with an entirely variable price, not only for printing but also for each of the other services provided with it. In this case, the per-unit price for an order of one unit is the same as the per-unit price for an order of 1,000. Many customers prefer this pricing scheme, since it gives them a predictable, constant unit cost. The value of this benefit can be bundled into the fixed unit price.
Competition
These days, customers may be presented with several competitive proposals for their digital printing needs. The competition is heightened by the fact that digital printing technology is now so widely available that it is no longer a basis for differentiation, in spite of some leading vendors?assertions to the contrary.
The hard reality is that price is generally the most significant factor driving volume in a competitive market dominated by a low-priced alternative, such as offset. In fact, cost and volume data on digital and conventional printing analyzed by Strategies on Demand over the past sixteen years have shown that the elasticity of demand for digital printing is 2.8. In other words, a one-percent reduction in average direct printing costs across the market will stimulate a 2.8 percent increase in volume. A similar relationship holds for average digital print selling prices.
Overall Objectives
In light of growing competition, the options for digital print pricing depend upon the fundamental goals for the business. Print providers who want to maximize their share in certain market segments may set prices in the lower end of the value-based premium range, in order to build volume. Others who already have established a large footprint in a market segment may want to price somewhat higher, in order to maximize their profit.
Although the vendors?technology is not a basis for competitive advantage, the bundle of services offered by the print providerand the operational expertise required to deliver those services efficientlycan separate the leaders from the rest of the pack. The segment specialists who provide end-to-end solutions to their customers?production and distribution problems are in a far better position to extract higher pricing in return for the higher value of their product offerings.
Of course, some customers simply will not pay for full-service digital printing, but prefer instead to buy the print only as a commodity. Fortunately, in this era of consolidation, outsourcing, and return to core competencies, there remains a higher stratum of customers who appreciate added value and excellent service. This is the segment of the market where value-based pricing can increase profits.
In conclusion, strategic pricing looks at the bigger picturenot only at cost but also at the value of the product and an assessment of the customers alternatives. In todays competitive environment, such a strategy is essential to convert the value of digital printing into the greatest possible profit.