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Pricing: Art or Science?

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We recently discussed one effective strategy with Paul Rei I Iy of New Direction Partners during a recent "A Cup O' [Joe Becker]" (*) teleconference with printers nationwide. During our conversation, Paul shared the following "Pricing Whale Chart":

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money talk
By Joe Becker, CPA
and Stuart W. Margolis, CPA, MS                                                  Pricing:
                                                          Art or Science?
D
     o you remember “the good ole’ days”        In this example, a pricing model for a          makes it easy for us to see (literally) how
     of pricing in the printing industry? The   customer-centric printing firm is depicted      the pricing might affect profits gained
     pricing process used to be a formu-        using a Pricing Whale Chart.                    from a single client and where that cli-
lated and direct science. In the past, you                                                      ent sits on the level of importance to our
calculated BHR’s (Budgeted Hourly Rates),       For this company, the overall objective is      printing company.
put your customers specs into your esti-        to increase the profitability of customer
mating system, marked up paper and              accounts first and foremost.                    Actual Sales are the most important mea-
outside cost 5 to 10 percent for handling,                                                      surement to consider when making deci-
and then added an additional percentage         Here’s the strategy. On the chart, the blue     sions for price flexibility.
mark up for PROFIT, and voila! You had          line - squares represents Actual Sales
your pricing for the job. You then sent it to   made to the printer’s top 30 key accounts.      Across the top of the grid are three (3) cat-
the customer, who usually accepted it.          In this case, the top 30 customers com-         egories of customers, identified as:
                                                prise about 85 percent of the company’s
In today’s economy, however, pricing deci-      total sales.                                    Defend, Improve (and Maintain), Play Fiddle
sions are more complex. Costs have con-
tinued to rise, yet even loyal customers        The red line – diamonds, represents the         Defend Accounts are those where you
concerned about their own bottom lines          Actual Sales incurred by the printer for        make the most money. As Mr. Reilly stated
aren’t afraid to push for lower prices -- or    each of the 30 key accounts. The chart is       in the teleconference, “Whatever you do,
worse yet, would consider a move to your        indexed on the red line, Actual Sales, and      your pricing strategy should be to keep
competition. As a result, price flexibility     descends as it moves from the Customer          these customers. Do not let these cus-
becomes a necessary evil. In today’s            Number 1, the most profitable, to the least     tomers go to someone else…You’ve got to
environment a subjective nature has             profitable account, Customer Number 30.         defend these customers.”
been added to pricing making it more            The Profit for each account was calculated
“art” than science.                             as follows:                                     Improve and Maintain Accounts are good
                                                                                                customers -- not your best, but possibili-
So how do you determine when to be              Profit = Value Added minus Direct Labor         ties exist for improvement. They are the
flexible and when to hold the line? Under       minus Commission paid on the account            status quo. You want these customers.
the pressure and stress of everyday life,
it is easy to make emotional decisions.         Profit includes most, but not all, direct       Play the Fiddle Accounts are often price-
So, how can you interject logic? How can        costs in our example. It is important to        driven, and hence, will come and go. They
you justify flexibility in one instance and     establish a system to measure profit-           can sometimes be very big accounts– but
not another?                                    ability by job and by customer in your          not very profitable. As Mr. Reilly advises,




                                                                                                                                                 www.printingnews.com PRINTING NEWS, MONDAY, June 7, 2010
                                                company. How the Profit is calculated is        “You work with these customers when
We recently discussed one effec-                not as important as making sure that            you need the volume. You do not work
tive strategy with Paul Reilly of New           the profit calculation used makes sense         with them when you don’t need the vol-
Direction Partners during a recent “A           to your management team and can be              ume. One thing I would say about these
Cup O’ Joe” (*) teleconference with             applied consistently.                           customers is we should not add capacity
printers nationwide. During our con-                                                            for them…[and to the contrary] we may
versation, Paul shared the following            The green line – triangle (arc shape)           even think about shutting down capacity
“Pricing Whale Chart”:                          shows the Actual Sales of the printing          in our plants (to save costs) and actually
                                                company for all of its accounts. On the         letting them (the customer) go. In many
PRICING WHALE CHART                             green arc, profit incurred from the printer’s   cases, we may be a whole lot better off.”
                                                most profitable account is represented          Well said, Paul!
                                                                          at Point 1. Point
                                                                          2 on the green        Once you have assessed each of your
                                                                          arc is the Actual 
								
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