[This is the first in a series of four articles on price. Links to all 4 articles are at the end of this post.]
If you want to stir up a hornet’s nest; bring up the subject of price among printers. I did last year as I develop a pricing guide for digital printing. What did I learn? First thing I learned was that there was no such thing as the Perfect Price, yet we printers think there is.
Okay, what is price? It’s really more than one thing you know. There’s the sticker price on an auto, also called list price on some things, and there’s the price you pay. Who doesn’t get 10% off last bracket from the paper merchant?
[There’s also the asking price in real estate, for instance, as well as the bid price. And when an agreement is reached, it’s rarely either of those two numbers, rather it’s a transaction price or traded price or final, final price.
Some simply refer to price as the amount of payment or compensation given from one to another in return for goods or services. And that’s what it is but that’s not what we printers mean when we talk about price.
We printers want to know the CLEARING PRICE when we discuss price and pricing, which is an economic term.
The clearing price (aka market clearing price) is defined as being the price at which we sell every last bit of what we have to sell without having any capacity left over and getting the maximum dollars (or cows if bartering) so as not to leave any money on the table.
Now, in economics, the concept of market clearing (supply will always meet demand and everything remains in balance over time) was an accepted truth for 150 years. But that was only through 1935 when we hit the Great Depression and questions arose to its validity. John Maynard Keynes asked if this is true how unemployment could last for so many years. His work gave birth to the more modern short-run focuses of economics. (Keynes reportedly was asked, “Yes, but what about the long run.” He was said to respond, “In the long run, we’re all dead!”)
Setting macro economics aside, when we printers talk about price, I believe that the clearing price is what we are really asking about. I hear the question as, “What is the price that I should ask for that will allow me to sell all that I can do at the highest possible value without having to do anything else like talk with customers?”
The answer is you can’t. Don’t know if you saw that answer coming or not but the clearing price or the final, final price is the RESULT and the result can never be predicted with accuracy since it will change from transaction to transaction even within the same shop (can two people in the same shop give the exact same price for a complex project?).
Not only that, but the role price plays is over emphasized by most because they took Economics 101 somewhere in the past.
Huh? Everyone knows about Supply and Demand. Ask any business owner. You’ll get something like as the supply goes down, the price goes up. Or ask the supply goes up, the price comes down. That’s only common sense isn’t it? Besides, it’s taught in economics, right?
No.
The only thing most remember from economics is Perfect Competition or the concept of a market where there is no product differentiation (coal is coal or a share of IBM stock is the same as another share); there is perfect information (all buyers and all sellers know the final price on all transactions); and there’s no scarcity. That’s not printing nor is it a condition that most small businesses operate within.
Even the concept of perfect competition is challenged. Coal is not coal for there’s metallurgical coal, thermal coal, high-sulfur and low-sulfur and so on. Perfect information has been challenged because even in the stock market; the ticker tape information is delayed and some can have better access to information than others. And there is scarcity in products, even printing. Get 300 copies of a 400 page book printed and bound with process cover in the next two hours (yes, I know that some technology under the right conditions could do it but can you do it sitting where you are in the next two hours and how much competition will there be to do that job?).
So the issue I have with most printers is that this is all they remember about economics and many stake their whole business strategy on the search for the elusive perfect (clearing) price.
Economics teaches us that there are different LAWS of supply and demand and perfect competition is but one.
There are others.
Monopoly is where there is one source like the local electric company. Under monopoly, they have different constraints; primarily among them is the fact they cannot charge what they want. That’s because even if you have the monopoly on dry cleaning in five states; charge too much and people will begin doing their own shirts or they will just buy new ones when the old ones get dirty. In this regard, monopoly teaches us the most important lesson about pricing new products and services and that is SUBSTITUTION is the key to value.
The value of producing social media for a company, if effective, could rise to the price of reaching the same number of customers via other means such as direct mail, radio or television. If it is more effective, it could be valued more. If less, than it could be discounted from the rates they charge. So market pricing relies heavily on substitution to establish values. But, obviously, we don’t have a monopoly on printing.
Oligopoly is where the few major auto manufacturers (use to be the Big 3) compete under even different conditions, which, quite frankly, are pretty favorable since the high entry barriers keeps out the riff raff. Of course, over time, even they have to deal with global competition as we have seen over the decades. Nevertheless, those in oligopoly have a different battleground than we do.
We compete in Monopolistic Competition which is somewhat similar to Oligopoly except there are literally thousands of firms doing similar things. The entry barrier for competitors getting into our business is low as compared to auto manufacturing for instance and there is no one price leader. Now that’s us.
Understand that under monopolistic competition, price does not have a direct correlation to volume. If you don’t believe me, cut your price and half and see if your volume doubles. It should if the price/volume relationship exists as it does in perfect competition. It won’t because I’ve actually seen owners who tried this and it failed.
So, there is no silver bullet, perfect or clearing price in printing or any other small business. There is, however, a price strategy. In our market it consists of three things at the same time to achieve volume: price, product and sales activities (or promotion).
Yes, price is a factor. I didn’t say price had no impact. It does. It just does not have a direct impact on volume.
Similarly printing is not just printing and product differentiation has a big impact on total volume. Time and place value would also be basic and, quite frankly, many printers can’t print. So having a deficient product will guarantee failure regardless of a high or low price.
So what role does price play? Price is one factor but it is not the only factor. There is no perfect or clearing price, rather there is a price strategy which happens to be made up of price; product and sales activities all at the same time. So, if you are one of the many looking for the perfect price to solve your business woes; it’s not out there.
However, a price strategy does exist and we will pick up with that next post ….
Other articles in this 4 part series
Part I, Case of the Perfect Price Click Here
Part II, Price Level Not Directly Related to Profits Click Here
Part III, Price: Cost or Market? Click Here
Part IV, Pricing What We’ve Never Done Before Click Here
