Case Study: Case of Price Differences

It would seem like printing prices should be different in different parts of the country. After all, some places have high costs where others have lower ones. Well, I agree that prices are different among different shops, but I’ve seen it not so much as a regional variation as a local one. Prices, statistically speaking, are equally screwed up throughout the country and vary as much, if not more, within a region as they do between regions. But I really didn’t expect to find surprises when I tried to find facts on how much costs really did vary regionally. Let me explain.How big a difference is there between costs in regions? I thought that should be easy to determine. The term “cost of living” pops into one’s mind first. According to a recent Kiplinger study, Fort Smith, AR, is the city with the lowest cost of living, with an index of 85.2. New York City/Northern New Jersey/Long Island was the highest, with an index of 400.

Yet, when we take a closer look, the top three super-high cost areas (New York metro with 19.1 million people, Honolulu with about one million, and San Jose with about two million), represent about 7% or 22 million of us, while the great bulk of us (93%, or 286 million) have a Cost of Living Index which ranges from 85 to 140.

 

Index Basics

So there is a cost variance, using this study as a basis, but using it for comparing prices has significant drawbacks. Cost of living essentially means the amount a consumer needs to spend (in dollars) to reach a certain standard of living. It doesn’t indicate that prices in one area are higher or lower (surprise number one), although we might think that it would. Basically, it’s like surveying the minimum amount required to live in an area. Experts say it’s really the change in the index that’s most accurate, not necessarily the relationship between areas.

So, what about the Consumer Price Index? It measures prices, which have more bearing on our subject. However, the problem in relating this index to printing prices is that the Consumer Price Index covers a market basket of consumer goods and services, which don’t necessarily apply to a small manufacturer like a printer. Our expenses have less to do with the cost of groceries, for instance, than with the price of electric and rent. So, although this is an indication, it’s not spot on.

So we turn to the Producer Price Index (PPI), one of the oldest continuous systems of statistical data published by the Bureau of Labor Statistics (BLS), as well as one of the oldest economic series compiled by the federal government. Origins of the index date back to 1891.

 

The Producers

The PPI measures the average change over time in the selling prices received by domestic producers for their output. OK, now we’re talking. That’s us—domestic producers—and that’s dead on what we want to measure (prices). Only problem with this scenario is that the BLS does not track the PPI by regions, so we can’t compare the Northeast with the West, or whatever (as of April 2011, anyway). And that is super surprise number two. The PPI, like many of the BLS indexes, is a single national index focused on month-to-month change.

Now, according to my sources in BLS, they used to regionalize the PPI. But that service fell to the budget ax years ago and it’s not likely to be resurrected soon, although they get a lot of requests for it.

Hmm. Now how can we measure relative overall prices between areas? According to one researcher in the BLS’s Price and Index Number Research area, the best comparison of costs and pricing available would be the relative cost of wages between regions. For wages are both costs (to the business) as well as prices (to the worker).

Now, there is a variance in wages between larger and smaller markets. According to the BLS, in a release dated July 2010, that overall wage ranged from 120% in the in the San Francisco area to a low of 79% in the Brownsville, TX, area. So, focused on wages, a $10 an hour worker in the low cost (79%) area would normally equate to a $15 an hour worker in the high cost (120%) area.

This 79-120% variance in the wage data is in the same ballpark as the 85-140% range of the meaningful cost of living range. The numbers aren’t exact, but my point is that costs and prices fall into a relative range, as opposed to printing prices, which I commonly see falling into a much wider variance of 50-250%.

 

Real World Applications

Now let’s get down to you and your competitor in your market. How big a variance in cost is there between the two of you in equipment? Of course, you are a better negotiator and get a better deal, but you’re not getting your equipment for half price and he’s not paying twice as much as you.

What about paper? Yes, paper cost varies mainly because of the transportation factor. However, since one brand of paper is almost a perfect substitute for another, the price of paper doesn’t include excess profit. Fact is, I priced a $10 per thousand paper from an early 1960s paper catalog and saw the price was about $5 then, or a jump of 100%. Then I went to the CPI Inflation Calculator at the Bureau of Labor Statistics site and found that $5 in 1961 equates to about $37 today, or a jump of 740%. (Surprise number three.) So, we can’t blame our paper merchant for our increased costs over the years. Fact is, paper is a real bargain!

My point is all printers located in that same area are faced with similar costs for paper and equipment.

Now, what about overhead? I doubt if the electric company or other utilities are giving you a break compared to your competitor. What about building rent? The price per square foot is typically similar in an area for similar space. And although that varies regionally, it doesn’t vary that much. The Moody’s/REAL commercial property index (CPPI) is a periodic same-property, round-trip investment price change index of U.S. commercial investment property. It was created for our friends the derivative traders to help them put a value on their investments.

This report compares regions which showed the West’s Industrial Properties Index at about 1.65 (most representative of our costs), the East at about 1.4, the South at 1.2. So, yes, there is variance in the cost of real estate which, in turn, translates into our cost of occupancy. But, again, it’s not double. Rather, this scale shows a 1.2 to a 1.65, or a range of 80-110%, when the middle is a 1.5.

Again, in printing it is not uncommon to see prices vary from 50-250% when all of the cost indicators would lead us to expect more like 85% to 120-140%. Hmm.

 

Practical Solutions

What’s a poor printer to do? Adopt a price strategy, stick with it and go sell something to someone. I have prepared an 18 minute video on the subject of “The Role Price Plays in Our Success” that explains price strategy more thoroughly. It is available at www.crouser.com or at www.MyPrintResource.com/media-center. In short, price isn’t a strategy by itself. Price has to be coupled with product differentiation and sales activities. In short, price, product, and sales activities make up your strategy; not just price.

As for the price part of the strategy, think of it this way. Line up all possible prices in the U.S. on a particular price point from lowest to highest. The first or lowest price would be zero and the absolute highest would be 100. Now, where do you put your price? If you are in a high price area, would you put it above the highest price? Probably not. So, if you’re in a low cost area, would you put it below the lowest price? Probably not there either.

What I shoot for in the Crouser Guides, which is a practice you may wish to adopt, is that a low price strategy should be about the 25th percentile, or where you could expect about 24 prices below and 75 above. A middle price then would about the 50th percentile, or 50 above us and 49 below. The high price would then be targeted at the 75th percentile, or 74 below and 25 above.

That’s a low, middle, or high price strategy. Your list price is like the sticker price at a car dealer. It’s a starting place and it can be low, middle, or high. Usually it corresponds to the amount of costs you have.

Yes, prices vary from region to region. However, there is as much, if not more, price variance within Georgia than there is between the Northeast region and the South. Take the Buckhead section of Atlanta and compare it with Charlton County, GA. A similar comparison may be made throughout the country.

So, what is my conclusion?

Prices, statistically speaking, are equally screwed up throughout the country. I see printing prices ranging from 50-250%. Yet, from all other perspectives, the variance should be in the 80% to 120-140% range. So I conclude that not all printers use a rational price structure.

What should printers do? They should use a low, middle, or high price strategy and then compete on the other two legs: product and sales activities. For more on these legs, see “The Role Price Plays in Our Success” at www.crouser.com.

 

Tom Crouser is author of the newly released “Digital Printing Price Guide” as well as the “Crouser Guide to Small Press Printing,” available at www.crouser.com. He is principal of Crouser & Associates, Inc., 4710 Chimney Drive, Charleston, WV 25302, 304-965-7100. You may reach him at tom@crouser.com. Tom is now tweeting, friending, and linking in. Follow his Small Business, Schmizness column on Facebook at http://tinyurl.com/smallbusinesss, friend him on Facebook, link to him on LinkedIn, and follow his tweets at www.twitter.com/tomcrouser.

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