INKISH.NEWS -

By Business Development Manager Henrik Klem Lassen

What is the price of your product? How do you capture customer value? It's complicated to talk about a general profit margin in the printing industry because most printers are into several segments like commercial print, wide format, signage, textile print, labels etc. and have different production set-ups. However, if we took a starting point in the Danish printing industry (Grakom), our investigations show that the general profit margin for a printer with a turnover between 2-10 mill. Euro is varying between 8-12% (2015-2018) and on average is about 10%. The biggest worry among printers before the Corona crisis was the competitors pricing.

Traditionally a lot of companies in the printing industry calculate their prices based on a cost-plus a mark-up basis. This is an easy way to calculate your prices because you basically take your average costs and add a mark-up which will "guarantee" a profit on each order. However, this is a pricing model with a very internal focus, because very few companies have the same facility lay-out, machinery, location and human resources. In a competitive situation, price is very often a parameter used to close the deal. But the fact that customers are not buying your product is not by itself a reason to cut the price. It could as well be a reason to change your marketing to justify the price.

But how damaging are discounts for your profits? Let us consider with a small numeric example of why discounts are destroying value. Rebates/discounts are one way. Discounts destroy value because their impact on the bottom line is significant.

If we are selling 1.000 leaflets at $1 per piece with a cost of overhead at 60 cents and ink, paper, and other consumables of 30 cents, then the profit will be 10 cents per leaflet or 10%. The profit will be $100. So, what will happen if we give our customer a 2% discount?

Well, our new sales price would then be 98 cents. Our cost would still be 90 cents, so if we sell 1.000 pieces, our profit will be $80. If we want to get back to the previous revenue of $100, we will have to sell 1.250 pieces or 25% more to get to the profit of $100.

The learning from this example is that even a small discount of 2% can have a significant impact on our company's financial situation. If it is possible to instead increase the price with 2%, it will increase the profit by 20%.

The first problem with discounts is that you should be sure to make the customer understand that it is a value that you are giving.

If that message does not get across, you will only make the customer used to the new price level, and the customer will be expecting a reduced price in the future.

The bottom line is that even a modest discount price means that volume would have to increase substantially to make it worthwhile covering the lower profit.

If discounts are given, your advantage of doing so should give you a higher volume, more extended contract or faster payment. Then a discount is an investment in a customer relationship.

But let's look into three scenarios where you easily can see the effect of even modest changes:

1) Increase the volume by 10%

2) Decrease the ink, paper and other consumables by 10% (cost price)

3) Increase the sales price by 10%

If we increase the volume from 1.000 to 1.100, we will make $ 110 and hence a 10% higher profit.

A decrease in cost price (ink, paper and other consumables), would result in a saving of 3 cents and hence an increase in the profit of 30%.

But what if we increased the price? Well, if we increase the sales price by 10%, this will result in a profit of 20 cents, which means that it would increase profit by 100%!

So, is there a magic bullet that will enable us to increase the prices? Well, first you need to consider the competition. Because your customer will most likely compare.

And there is. The silver bullet is what makes your company unique. It can be your products, your service, your terms, your delivery time, etc.

When you invest in more efficient equipment, you will also be able to lower your cost price. Be aware not to give the increased profitability away to your customer if you can avoid this. Often you can obtain lower prices on consumables, paper, and ink, if you commit, and are more loyal to a supplier.

The most important thing is, however, to understand the metrics shown above!

Learn With Us: Henrik Klem Lassen works as Business Development Manager with INKISH, and have an extensive background as a teacher in economics - so join him Monday, May 25th for further information.

May 19, 2020

Author: Henrik Klem Lassen