The printing industry is beset by discounting and unrealistic pricing practices. But have you ever stopped to wonder what effect giving a discount is having on your bottom line? And what happens if you do the opposite for a change and put up your prices – what effect does that have? Keen to find out, Harry Brelsford sat down to do the calculations – and was shocked by the results.
As business owners and managers we are constantly striving to increase, or even just make, a profit. And mostly we believe that growth, increased sales, is the path to prosperity. But achieving growth in a tight economy whilst our industry is simultaneously under fire is a tough call. We have cut expenses to the bone, increased efficiency, done just about everything in the book which leaves little room to move, so perhaps it is now time to think differently. What if we figured out a way to do less work and still make the same money?
Have you ever wondered exactly what effect discounting your sales has on your business? Or what about the effects of raising your prices? I recently did an exercise in order to establish just how much discount we could give and still remain profitable. The result shocked me so I did an exercise to see what the effect of raising prices would be and was totally amazed.
Here is a typical scenario that many of us go through daily. A new high-profile prospect who you know regularly purchases large amounts of printing calls for a quote. They want to consolidate their printing with a sole supplier, a printer who can meet all of their needs. They email a spreadsheet detailing their requirements; you can see that they know what they are doing, specifying paper weights, spot varnish and more. You know that price is going to be a major consideration. They are obviously shopping and your competition are just as hungry for the account as you are. Then there are the online printers who sell at ridiculously low prices. You want this new account because sales are down, another one of your regular customers recently went into receivership owing you money and you need more work to keep the wheels turning.
You know you can meet this new prospect’s needs which includes both short-run digital as well as long-run offset printing, even large format which you recently got into. You have contacts who will assist with any overload. You have a great team, your service is the best, you know it all comes down to price. So the big question is, by how much do you reduce your prices: 5 per cent, 10 per cent, 20, maybe more?
But what exactly are the implications when we bow to customer pricing pressure? When we do the numbers we may realise that we don’t really want the client. Then again what would happen if just once we stood our ground and raised our prices?
Facts on pricing
This may be a contrarian idea during these tough economic times but we were recently faced with the exact scenario as outlined above. As hard as it may seem, the key, I believe, is to step back and approach the pricing issue with a clear head and look at the facts when both lowering or raising prices.
My question was, when we reduce our prices, how much additional work do we then have to take on in order to make the same dollar return to compensate for the discount given? The second calculation went in the other direction. I asked, how many customers could we afford to lose and still make the same dollar return should we increase our prices? The results will surprise you.
I conducted a simple calculation (see box) to illustrate the effects and I am sure that when you see my figures and then work them out for yourself you will think twice before giving a discount when you are being pressured to lower your prices. It is scary how much extra work you have to take on in order to make up for any discounts you may give.
I have seen all kinds of fuzzy logic used to justify discounting: “I can make it up on volume” or “I have achieved break-even so anything over that is a bonus” or “I had to discount that job in order to keep the customer’s other work” and “We would not have achieved the order had we not cut the price”. But I believe the real measure of how much you can afford to reduce your prices is based on the amount of profit that you show at the end of the year, your before-tax profitability. The reality is that every time you cut your prices, you have to increase your sales by a certain amount in order to maintain the same level of profitability.
My first example is based on a printing business showing a profit of 10 per cent before tax. The industry average is much less, more often between 0 to 3 per cent profit but let’s go with 10 per cent for illustrative purposes. While my example refers to discounts across the board, I do realise that we only give discounts on a percentage of sales which I estimate at one quarter of all sales. My percentages are therefore based on one quarter of sales being discounted, and the amount by which the profit is reduced is likewise divided by four to show an across the board figure. This means that, say, a 10 per cent discount on one quarter of sales equates to 2.5 per cent across the board.
The shocking truth.
If you are showing a 10 per cent before tax profit and discount one quarter of your sales by just 10 per cent, then you need to increase your sales by 25 per cent in order to make up for the discount shortfall. Yes, you would need to do 25 per cent more work in order to make the same dollar return as before.
Take it a step further: if you give a 20 per cent discount on a quarter of your sales (5 per cent across the board) then, based on my example, you would need to increase sales by 50 per cent in order to make the same dollar return. I want to clarify that my example is used to illustrate the principle that you have to sell a lot more printing when you discount, and that it does not take into account gross profit and fixed costs which have to be met. For an accurate calculation you would need to include all factors.
Now if you want to see something really scary, let’s say your profitability is only 5 per cent before tax and you are regularly handing out 20 per cent or higher discounts. Do the maths and then I suggest you talk to your accountant as well as your lawyer sooner rather than later. If your profitability is in the 2 to 3 per cent range, which most printers are, then you don’t need a calculator to realise that you just can’t cut your prices, you need to raise them.
The other side.
But let’s look at the other side of this coin. You will see that the effects compound quite dramatically to the good. When you increase your prices by even a small percentage you can afford to lose some sales and still achieve the same dollar return. This means that when you raise your prices you can afford to lose a percentage of your customers, do less work and still make the same return.
Again, if your before tax profitability is 10 per cent and you increase prices across the board by only 1 per cent, you can theoretically afford to lose 9 per cent of your customers and still make the same profit in actual dollar terms. Increase your prices across the board by just 2.5 per cent and, theoretically, your sales could decline by as much as 20 per cent and you can still achieve the same amount of profit dollars. Again my figures are to illustrate the principle and do not take into account gross profit margins and minimum fixed costs which still have to be met.
The purpose of my illustration is to indicate that if you do raise prices by, say, just 2.5 per cent you could afford to lose around 20 per cent of your customers, but I believe it very unlikely that you would lose anywhere near this amount. This means your profitability would rise plus you would be doing less work because of the few customers that you do lose. If your before tax profitability is only 5 per cent then the same percentage increases as above are dramatically better.
So why would you cut your prices? So that you can work harder for less money? That strategy is for your competition down the road.
Start with the worst
If you find my claims hard to believe then talk to your accountant and if you still lack the courage to stand your ground the next time a customer starts to pressure you on price then why not start with your worst customer. Start with the serial discount customer, the one who always uses your valuable time to dissect your quote to use against you, the one who changes their mind as you are about to go to print, who finds something wrong with the job after it has been printed but it will be just fine if you give them a discount, the one who upsets your staff after they have gone out of their way to help, the same one you have to call every week for the next three months just to get paid.
Not only should you not give a discount, you should raise your prices to that customer. Raise them to a level where they either go elsewhere or if they stay because every other printer in town has shown them the door, then you do their work at a price where you have a smile on your face.
If the discount customer moves on, well you were losing money on them at the lower price anyway which means that now you and your staff have more time to concentrate on your good customers, those who are appreciative of your good service, who are objective in what they want and prepared to pay a fair price for your time, quality and expertise, and who thank you and your staff for a job well done.
Firing a discount or troublesome customer can be one of the best things a small business owner can do. It can do wonders for morale, you are no longer being kicked around and you are standing up for your staff. Remember, you reserve the right of admission to your business and you can set your prices to make a reasonable living on every job. I am not saying be rude or aggressive but you have the right to charge a reasonable fee for your services plus a difficulty fee for those more time-consuming jobs. Some call this a PIA fee.
Raising prices for difficult work or difficult time-sapping customers will allow your business to run smoother and more profitably. Raise your prices, increase your profits and do less work. Duh!
Bio: Harry Brelsford runs Varsity Graphics on the Gold Coast with his daughter and a young team enthusiastic about printing and design.
Basis for discount calculation
This is a basic calculation used to illustrate a point. It is used to indicate the effects of small changes to pricing and should not be extrapolated for larger discount or price increase percentages without including all factors. These figures should not be used to run your business.
For ease of understanding I started with a sales figure of $100,000 showing 10 per cent pre-tax profit which equates to $10,000 in profit.
If you discount one quarter of your $100,000 in sales by 10 per cent ($25,000 x 10 per cent) it is equivalent to a 2.5 per cent discount across the board. This comes off your bottom line so it is $2,500 in lost profit that you need to make up for giving the discount.
At 10 per cent profitability, you would therefore need to produce another $25,000 in printing to make up for the $2,500 profit you gave away by discounting.
If you are showing 5 per cent profitability on the $100,000 sales, you make a pre-tax profit of $5,000. If you discount one quarter of your $100,000 sales by 10 per cent ($25,000 x 10 per cent), it is equivalent to a 2.5 per cent discount across the board so you still need to make up $2,500 in lost profit for giving the discount.
Because your profitability is only 5 per cent, you would need to produce another $50,000 in printing in order to make up for the $2,500 profit you gave away by discounting ($50,000 x 5 per cent = $2,500). This is obviously unrealistic but is an example to illustrate that you have to do a lot more work when you discount.
If you are showing 3 per cent profitability on the $100,000 sales, you make a pre-tax profit of just $3,000. If you discount one quarter of your $100,000 sales by 10 per cent, you don’t need a calculator to realise that you are working for almost nothing.
Again, remember that my simplified example is used to illustrate the principle and does not take into account gross profit and minimum fixed costs which have to be met. For an accurate calculation you would need to include all factors.
Basis for price increase calculation
Again, if you are showing 10 per cent profitability on sales of $100,000 it equates to $10,000 in profit. If you increase prices across the board by 1 per cent you are now making 11 per cent profit.
To achieve the same $10,000 dollar return, you now only need sales of approximately $91,000. ($91,000 x 11 per cent = $10,010.)
If you are showing 5 per cent profitability on sales of $100,000, it equates to $5,000 in profit. If you increase prices across the board by 1 per cent you are now making 6 per cent profit. To achieve the same $5,000 dollar return you now only need sales of approximately $84,000 ($84,000 x 6 per cent = $5,040).
Again, my example is used to illustrate the principle that raising prices allows you to do less work for the same money. A complete calculation taking all factors into account will be required for an accurate result.