## How Prices Are Developed “Pricing is not a function of cost. Cost is only a floor which you should not go below. Pricing is a function of market values.” – Tom Crouser Step One - Calculating Costs Our calculations follow the traditional industry practice of: marking up direct materials (mainly paper); adding the total cost of production (see next paragraph); then marking up the total cost (including paper markup) to derive the final value. Individual markups on paper run from 150% of cost down to 133%. Markups on total production costs range from 150% down to 120%. An additional factor is allowed for waste/spoilage which typically runs from 60% down to 3% depending upon run length. Generally, the longer the run and/or the higher the total production cost, the lower the markup will be. This follows established industry practices. As a general rule, calculated total production costs including fully absorbed overhead factors will represent a maximum of 80% of the selling value. Total cost of production is derived by multiplying a fully absorbed budget hour rate by the estimating standard. The fully absorbed budget hour rate accounts for all overhead factors and is a cost rate, not a retail rate. A cost rate should be marked up in order to derive a retail selling rate. The estimating standard is developed from published and unpublished works, experience gained through working with job cost systems which feed back total times for jobs, and judgment of the author. Estimating standards are disclosed for the base run for all printing functions in the guide. Additional standards are disclosed where deemed appropriate. The estimating standard includes press set-up and running times. Some competitive priced 8.5x11/14 press runs do not include a set-up as it is assumed the normal set-up for the press is 8.5x11, 20lb bond or equivalent. To determine the machine speed used in the estimating standard, divided the additional 1,000 estimating standard into 1,000 (1000/.179 = 5587 impressions per hour). Once the budget hour rate is multiplied by the estimating standard, then the direct material costs are added to give us total production costs. Direct material costs include a photo direct plate (acetate master plus time for making the plate), paper (including waste/spoilage allowance), and an allowance for supply costs. After total production costs are calculated, a markup is applied based on the total. Generally, the higher the total production cost, the lower the markup which follows industry practices. Markups generally range from 150% of total production costs down to 120%. Please note this markup, following industry practices, is on top of a separate markup on paper only. So, the total markup included in the calculations is greater than the 150% to 125% total production markup. Step Two - Compare with Market Once the cost plus markup values are determined, the resulting values are compared with market information. The market information for various printing items are developed and cross checked three ways. First is the information gathered by us from a data base of printers located throughout the country. A second cross check is by comparing values to other published values for printing. A third cross check was by comparing values to prices developed by us in our work with specific clients. Step Three - Choose the Higher Value The higher market values (prices) are taken when deemed possible. Essentially, the cost plus markup approach is used as a floor for price values and we allow the price to rise to market when possible.