Case of Price, Part 1

If you want to stir up a hornet’s nest; bring up the subject of price among printers. Well, I did that this year as I embarked on an expansive project to develop a pricing guide for digital printing. In this series of articles, I hope to present some of the interesting things that I have found as well as raise the awareness of the role price plays, as opposed to the role owners often thinks it plays.

Okay, what is price? It’s really more than one thing, you know. There’s the sticker price on an auto, also called list price on some things, and there’s the price you pay. Who doesn’t get 10% off last bracket from the paper merchant? Oops! I inadvertently found pockets of printers who, quite frankly, were paying much more than others, especially for cover and carbonless.

There’s also the asking price in real estate, for instance, as well as the bid price. When an agreement is reached, it’s rarely either of those numbers. Rather, it’s a transaction price, or traded price, or final, final price.

 

The Perfect Price

Some simply refer to price as the quantity of payment or compensation given from one party to another in return for goods or services. And that’s it, but that’s not what we printers mean when we talk about price. We printers, I believe, are asking about the clearing price when we discuss price and pricing, which is an economic term.

The clearing price (aka: market clearing price) is defined by me as being the price at which we sell every last bit of what we have to sell without having any capacity left over, and getting the maximum dollars (or cows, if bartering) so as not to leave any money on the table.

Now, in economics, the concept of market clearing (supply will always meet demand, and everything remains in balance over time) was an accepted truth for 150 years, through 1935 when we hit the Great Depression and questions arose about its validity. John Maynard Keynes asked, if this is true, how could unemployment last for so many years? That gave birth to more modern short-run focuses of economics. (Keynes reportedly was asked, “Yes, but what about the long run?” He was said to have responded, “In the long run, we’re all dead!”)

 

What You Don’t Know

Setting macro economics aside, when we printers talk about price, I believe that the clearing price is what we are really asking about. I hear the question as, “What price should I ask for that will allow me to sell all that I can at the highest possible value without having to do anything else—like talk with customers?”

The answer is there isn’t one. I don’t know if you saw that answer coming or not, but the clearing price or the final, final price is the result. And the result can never be predicted with accuracy since it will change from transaction to transaction, even within the same shop. (Can two people in the same shop give the exact same price for a complex project?). Not only that, but the role price plays is over emphasized by most because they took Economics 101 at some time in the past.

Huh? Everyone knows about Supply and Demand. Ask any business owner. You’ll get something like, “As the supply goes down, the price goes up,” or “As the supply goes up, the price comes down.” That’s common sense, isn’t it? And it’s taught in economics!

Actually it’s not.

The only thing most people remember from economics is Perfect Competition, or the concept of a market where there is no product differentiation (coal is coal or one share of IBM stock is the same as another share); there is perfect information (all buyers and all sellers know the final price on all transactions); and there’s no scarcity. That’s not printing, nor is it a condition that most small businesses operate under.

Even the concept of perfect competition is challenged. Coal is not coal—there’s metallurgical coal, high sulfur coal, and so on. Perfect information has been challenged because even in the stock market, the ticker tape information is delayed. And there is scarcity in products, even printing. Get 300 copies of a 400 page book printed and bound with process cover in the next two hours. (Yes, I know that some technology, under the right conditions, could do it, but commonly, it is not possible).

So the issue I have with most owners is that this is all they remember about economics, and many stake their whole business strategy on the search for the perfect (clearing) price. Economics teaches us that there are different laws of supply and demand, and perfect competition is but one. There are others.

Monopoly is where there is one source, such as the local electric company. Under monopoly, they have different constraints; primary among them is the fact they cannot charge what they want. That’s because even if you have the monopoly on dry cleaning in five states, charge too much and people will begin doing their own shirts, or they will just buy new ones when the old ones get dirty. In this regard, monopoly teaches us the most important lesson about pricing new products and services, and that is that substitution is the key to value.

The value of producing social media for a company, if effective, could rise to the price of reaching the same number of customers via other means such as direct mail, radio, or television. If it is more effective, it could be valued more. If less, it could be discounted from the rates they charge. So market pricing relies heavily on substitution to establish values. But, obviously, we don’t have a monopoly on printing.

Oligopoly is where the few major auto manufacturers (it used to be the Big 3) compete under even different conditions, which, quite frankly, are pretty favorable since the high entry barriers keep out the riff raff. Of course, over time, even they have to deal with global competition, as we have seen over the decades. Nevertheless, those in oligopoly have a different battleground than we do.

We compete in Monopolistic Competition, which is somewhat similar to oligopoly, except there are literally thousands of firms doing similar things. The entry barrier for competitors getting into our business is low compared to auto manufacturing, for instance, and there is no one price leader. Now, that’s us!

Understand that under monopolistic competition, price does not have a direct correlation to volume. If you don’t believe me, cut your price in half and see if your volume doubles. It should if the price/volume relationship exists as it does in perfect competition. It won’t. I’ve actually seen owners who tried this and it failed.

 

Strategy is King

So, there is no silver bullet, perfect price, or clearing price in printing or any other small business. There is, however, a price strategy. In our market it consists of three things at the same time to achieve volume: price, product, and sales activities (or promotion).

Yes, price is a factor. I didn’t say price had no impact. It does. It just does not have a direct impact on volume.

Similarly, printing is not just printing, and product differentiation has a big impact on total volume. Time and place value are also basic and, quite frankly, many printers can’t print. So having a deficient product will guarantee failure, regardless of whether you charge a high price or a low price.

So what role does price play? Price is one factor, but it is not the only factor. There is no perfect or clearing price, rather there is a price strategy which happens to be made up of price, product, and sales activities, all at the same time. So, if you are one of the many looking for the perfect price to solve your business woes; it’s not out there.

However, a price strategy does exist, and we will pick up with that next month.

 

Tom Crouser is author of “Crouser Estimating Guide to Small Press Printing” as well as the newly released “Digital Printing Price Guide.” He is principal of Crouser & Associates, Inc., 4710 Chimney Drive, Charleston, WV 25302, 304-965-7100. You may reach Tom at tom@crouser.com. Tom is now tweeting, friending, and linking in. Friend him on Facebook, link to him on LinkedIn, and follow his tweets at www.twitter.com/tomcrouser. Read his blog at www.quickprinting.com/interactive.

Loading