[This is the second in a series of four articles on price. The previous articles was the Case of Perfect Price. Links to all 4 articles are at the end of this post.]
Some conclude that price relates directly to profits, but it doesn’t. A company can have high prices and high profits; but it can also have low or no profits with high prices. Conversely, just because a printer has a low price doesn’t mean he or she is a sleaze-ball dumb-asset printer. One of the most profitable printers I have ever visited had low prices. So, if price doesn’t relate directly to profits; what does? It is the relationship of total price (total sales) to total cost that determines profit. Not only that, but low or high prices do not relate directly to total sales. That is determined by the triumvirate of price, product and sales activities.
If you have high prices and sell $1 million of printing but it costs $1.2 million to produce it; then price does not relate directly to profitability. If you have low prices and sell $1 million of printing but it costs $800,000 to produce it; then price still does not relate directly to profitability. A company can be profitable and thrive at either a low price or a high price.
There are three elements that go into determining a company’s total sales and those are the specific price (didn’t say price didn’t relate; just said there’s not a direct relationship between price and sales); product; and sales activities.
Those that took Marketing 101 may recognize these three as price, product and promotion. Here’s the choice of selling strategies:
High Price; Best Product; Lots of Sales Activities: now everyone agrees this is a winning strategy as it is the best of all worlds.
LOW Price; Best Product; Lots of Sales Activities: few printers will tell me that this is a good strategy because they get tripped up on the low price hokey they’ve been fed for years. You can’t have low prices and make money they say.
Hooey. Don’t tell Sam Walton that. Wal-mart has low prices and makes tons of money. Don’t tell Ray Kroc that. McDonald’s has low prices (relative to full service restaurants) and makes lots of money. Don’t tell Lowe’s or Home Depot or any of the big box retailers that low price isn’t one of the factors for their success. It is.
You can come at low price in one of two ways: vast diversity or narrow focus. Wal-mart and Lowe’s create a big box and filled it with tons of stuff priced low. However, both removed costs from their system by removing costs from the distribution system as they are more distributors than retailers. In the old days, manufacturers sold to distributors who sold to retailers who sold to you. These stores essentially are both distributors and retailers and have grown so large that they not only eliminate the middle distributor’s profit but often dictate price and terms to the manufacturer. But we printers, on the other hand, aren’t distributor/retailers so we really can’t use that model.
McDonald’s or any of the other fast food restaurants are actually more similar to us in that a restaurant is a job shop. You place an order and someone builds it. When fast food came on the scene, they were competing with full-service restaurants. Even the small hole-in-the-wall places served a wide variety of food types. So the McDonald’s of the world narrowed their focus by limiting their menu and that removed cost from their system.
Finally the same thing is happening in printing. Automation of the printing process and narrowing of the product line enables those who invested the capital to sell with low prices. The Internet printers are an example. Don’t expect hand-holding as it’s said that many spend less than 60 seconds actually touching a job processing through their system. So, a printer CAN have a low price as well as be profitable.
But, it’s not as likely that we be profitable with a low price as a high price. Huh? It is more likely that we printers have not driven costs out of our system. It is more likely that we have our own Taj Mahal office, more likely that we suffer through unwise equipment choices and more likely that we have unproductive workers whom we tolerate on the payroll. In short, it is more likely that we are far less efficient than a big corporation counterpart.
After spending the past twenty-five years working with printers in removing costs from their system; I have to believe we will remain this way for the most part. And that brings me back to agreeing with the industry conventional wisdom that we, on average, need higher prices rather than lower ones. But, it doesn’t have to be that way.
High or Low Price; Bad Product; Lots of Sales Activities: most business strategists would say a company with this profile is blocked and doomed to fail. No amount of pricing or sales activities will compensate for a bad product. Sooner or later, the system will fail. By the way, for my friends who insist McDonald’s has a bad product, quality may only be judged by the customer. And since the company has been going strong since 1948, I think their customers are currently okay with their quality.
High Price; Great Product; No Sales Activities: this is where a lot of printing companies reside. They maintain a fairly high price and have a great product (gotta have the Heidelberg presses in order to compete) and then have little to no sales activities.
Even those companies with salespeople have little to no sales activities. I define a sales call as being in front of a new customer asking for new business. Or it is being in front of an old customer asking for new business. It’s not about visiting, developing a relationship, networking (close to not working) or dropping off a delivery or a proof. It’s about creating demand for the shop’s existing capacity, mainly through direct interaction with customers. Anyway, few really do it.
Low Price; Great Product; No Sales Activities: and this is where most of the industry resides after having tried the high price approach. They simply cut prices because, “That’ll bring them in.” What’s missing, of course, is the fact that there is still no one creating demand for existing capacity. In short, having a low price or a high price makes no difference because the broad breath of customers knows nothing about whether we have a high price or low price.
We have proven again and again, since the 1980s, that most printing companies obtain 50-75% of their total sales from 25 or fewer customers. And most companies sit in a sea of 1,000 to 20,000 prospective customers. What most have to do is to simply attract 5 or 10 better customers and their business is much better.
But that’s not the point of this article. The point of this article is to explore the role price plays in our business. What is it?
From last month and this we learned 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.
Tom Crouser
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
