Brokering - Hey, It’s All in the Numbers!

Let the topic of brokering come up and someone will say, "John, I know you are against brokering, but what would you do in this situation, just turn the work away?" Let me clarify something—I have never advised against brokering. However, statistical data points out the pitfalls of brokering if it is not done correctly.

Let me define brokering as it applies to this column. I am talking about the practice of purchasing a printed product from an outside vendor, marking it up, and reselling it.

It is also important to note that the practice of purchasing products for resale has existed in this industry from its earliest days. The focus may have shifted from carbonless forms and thermographed business cards to large quantities of full-color brochures and postcards, but the basic practice of relying on other vendors to produce these types of products for resale remains the same.

My greatest concern about brokering stems from more than 20 years of consulting and gathering industry statistics, and that is the observation that while heavy reliance on brokering can indeed be an asset, it can also prove to be an even greater liability if it is not properly managed.
Now let's discuss three sets of statistics as they apply to our industry, and more specifically to brokering.

First, we know the average firm in this industry, after paying all the bills (cost of goods, payroll, and overhead expenses), produces a profit in the 12-13% range. Report a profit of less than 7% and you fall into the "profit laggard" category. Produce more than 18% and you are considered a "profit leader."

Second, we also know that the average firm in this country tends to broker approximately 12-13% of total annual sales. Smaller firms—those with annual sales less than $1 million—tend to broker 14-16% of their sales. Larger firms—those with sales in excess of $2 million—tend to broker significantly less, at only 8-9% of sales. This fact isn't surprising since the larger the firm, the more likely it is to have greater in-house capabilities.

Third, we also need to recognize that the average companies in this industry (those reporting owner's compensation of 12-13%), rely on three basic components to calculate profits on their P&L statements. Below is a summary of these ratios for all companies, as well as ratios for companies that broker only modestly and those that broker a large percentage of sales.

ALL COMPANIES
Average Low Profit High Profit
Cost of Goods 29% 32% 27%
Payroll Costs 31% 34% 27%
Overhead Costs 27% 31% 23%
Profit 13% 3% 23%

COMPANIES BROKERING LESS THAN 8%*
Average Low Profit High Profit
Cost of Goods 28% 31% 27%
Payroll Costs 31% 35% 27%
Overhead Costs 27% 30% 22%
Profit 14% 4% 24%

COMPANIES BROKERING MORE THAN 24%*
Average Low Profit High Profit
Cost of Goods 35% 34% 30%
Payroll Costs 29% 32% 27%
Overhead Costs 24% 28% 21%
Profit 12% 6% 22%
*Fiscal year 2005 data. Not reported in 2007.

These tables illustrate that you can be profitable in this industry, even with relatively high percentages of brokered work, but you can only achieve high profitability by concentrating on reducing costs in other areas. Compare the Low Profit vs. the High Profit categories in all three breakouts above and you will see vast differences in how owners control and operate their companies.

By the way, one interesting statistic about our industry that might surprise many readers is that gross profit, which is defined as selling price less cost of goods (not cost of production), has remained rock solid at 71% for more than 26 years. This ratio, despite the ups and downs in our economy, has varied by less than +/-0.5% throughout the history of the quick printing industry. That key ratio means that selling prices average approximately 3.4 times the costs involved to produce these products.