Cost Rates vs Market Pricing


By John Roche, Haybrooke CEO

MarketPricing

Whatever industry you happen to be in, the price that customers are willing to pay for your goods and services is rarely the same as the cost of producing them.

Market pricing is an economic concept with commonplace familiarity in the printing industry. It is the price at which a printed product is offered, or will fetch, in the buyers market and may bear no relationship to what it actually costs to produce.

Market pricing strategies can invariably lead to some indifference and ignorance towards the real cost of manufacturing. It also means that the need for accurate cost rates can sometimes be overlooked.

Applying a perceived market price to your products is just one way of determining a selling price for a job. Others include the use of price lists, contract pricing, and, most commonly, estimating the cost of manufacturing the job and adding a margin – the final selling price being usually adjusted to fall in line with perceived market prices.

Many second order factors influence market prices in practise, not least the availability of market information to suppliers of print and their potential buyers. Classically, the market price of goods or services is established in relation to demand, and in inverse relation to supply:

  • Market prices decrease when supply is abundant (i.e. market prices are lower in a mature or saturated market).
  • Market prices increase when supply is short (i.e. market prices are higher in a developing or restricted market).
  • Market prices increase as demand increases (i.e. market prices are higher when supply chains are at capacity to satisfy demand).
  • Market prices decrease as demand decreases (i.e. market prices are lower when supply chains are below capacity to satisfy demand).

The worst of all scenarios is a market that is mature and in which supply chains are operating below capacity to satisfy the demand from customers. The consequences of this will be sorely familiar to a lot of printing organisations.

By obeying the rules of supply and demand the printing industry has established itself at a particular pricing point, perhaps valid for only a short period of time before it shifts again. It is the meshing of current market forces: there is an abundant availability of printing capacity in the United Kingdom and, as a result, this is felt as a drop in demand by the printer – in particular for traditional ink-on-paper printing services. The decline in market prices is therefore inevitable.

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

This is a good question. It is quite possible for a printing company to produce work at market prices and measure the effect of this at the end of each month or year and then determine the overall impact on their business. The problem with this approach is that it restricts a business from being reactive to market forces in the short term and underlying financial problems can be hidden from view.

A more sensible policy, then, is to calculate the cost of manufacturing and then measure these costs against comparable market prices – even if you cannot sell at them. Why? So that you know the difference!

Commercial Gap

Calculating the variance between where you are (in terms of cost) and where you need to be (in terms of market price) could be referred to as the ‘commercial gap’ between your current business model and that which the market demands.

As an example, if you supply a service that costs you £100 and the market is demanding it be sold for £70, there is a commercial gap of £30 between your business model and the marketplace. Ignoring this gap will diminish profits over time and potentially harm your business. Acknowledging this gap and then doing something about it, such as: improving or changing manufacturing techniques, changing business working practices, cutting costs and, where possible, winning more business, would seem the most commercially prudent things to do.

It is, nevertheless, clear why cost rates are sometimes ignored. First of all, they can be difficult to calculate. For a printing company it may mean measuring floor space, monitoring productive output and even ascertaining the kilowatt ratings of their manufacturing equipment – time consuming work, if nothing else. This is apart from the expertise required to allocate overheads in a meaningful way to cost centres and making judgement calls as to how and where costs should be charged.

Secondly, learning the real cost of manufacturing can be quite disconcerting to a printing company – for who wants to be in an industry where the cost of producing work is frequently more expensive than it can be sold for? This stark reality is quite often the primary reason for companies knowingly ignoring their cost rates and simply ‘hoping for the best’.

The upshot is, printers have a stark choice: manage the commercial gap that lies between their business model and the marketplace – or leave it in the hands of the Gods.

Printers: Now work out your manufacturing cost rates by downloading our free software here.