Cost Rates That Lead to Extinction


By John Roche, Haybrooke CEO

Extinct

Hardly anyone in printing really understands just how important cost rates are.

Most printers, when they think or talk about costs, tend to think about the overall cost of running their businesses – and not its unit or hourly cost rates. They unconsciously expand the definition of cost to umbrella all of their overheads; but seem vague about where many of these costs begin and, more importantly, where they end.

The whole system of cost analysis and cost recovery is full of animate and inanimate parts:

  • fixed costs
  • variable costs
  • direct costs
  • indirect costs
  • marginal costs
  • activity based costs

But when it comes to deciding which costs are important and which are not, it is sometimes useful to think about printing in evolutionary terms.

Charles Darwin showed that all species evolved from less complex forms of life. This happened because every now and again, one of these species, in the midst of all the competition, would find a better way to survive. This inevitably forced the other forms of life – its direct competitors – to either react, or become extinct. The whole of the planet, as a result, evolved.

The printing industry is evolving, too, and its participants are changing. And, just like any other system undergoing evolution, there are winners; and there arelosers.

In the printing industry, the winners are those companies who adapt quickly to change and stay abreast of the competition. The losers are the companies who do not change quickly.

And the losers become extinct.

Are you a dinosaur?

Printing companies need to change their minds about the significance of cost rates. They need to accept that knowing and understanding the cost of running their business is more important than almost anything else they can know. But unless printers can be persuaded of this; or at least be persuaded to consider the possibility, then printing companies will not change.

Ignorance will be your greatest enemy.

So just how important are cost rates?

  • Hourly cost rates can influence the winning of new business which, in turn, can influence sales revenues and profitability.
  • Hourly cost rates play a vital role in your management information system.
  • Hourly cost rates can help you to identify commercial strengths and weaknesses.
  • Many key commercial decisions, especially those made in estimating, almost completely rely on hourly cost rates.

Regardless of the importance of your hourly cost rates, it is nevertheless true that whatever industry you happen to be in, the price that customers are willing topay for your goods and services are often not the same as the cost of producing them.

But let’s dispel a myth. There is no such thing as a ‘market’ hourly cost rate.

Cost is cost.

There are, of course, market prices and sometimes ‘cost’ rates are adjusted to obtain these market prices in estimating, but this merely hides the underlying cost and blinkers you from the truth about your business.

So what is the point of calculating manufacturing cost rates when market prices dictate so much commercially within the industry?

If you can’t work out the answer to that all by yourself – then you, too, might beteetering on the edge of extinction…

Printers: Now work out your manufacturing cost rates to help you from becoming extinct, by downloading our free software here.