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Dismiss Full-Cost Models


Great to be with the great friends from Canada, and also the customers and other people that are interested in this very exciting topic. I chose, when I spoke to Julie (Watson) about this, because I thought that, when I visit printing companies, I’ve see that many printing companies have difficulties to maximize their revenue and profit. The reason I want to talk about this is because one of the things that is totally evident for me is that every time we get more efficient, basically we lower the revenu a little bit because we get most of the efficiency gains from the people that we sell to. That is of course nice but also a bit of a shame because basically this industry needs to make more money so we can invest more in hardware and software to bring you more fantastic products and services to all customers.

Who I am

So once again I want to thank the team from Ultimate TechnoGraphics for inviting me for this. I’m very flattered and proud to be here. Before I go into the topic, I also want to present myself a little bit just so you know a little bit about my background. I used to be a marketing manager in the music industry until 2000. From 200 I started working in a printing company where I was employed to make a turn-around, which was enormous fun. Fortunately it turned out in a good way. I tried to do a lot of things that were quite interesting to me personally. I’m married to Nina and I have 3 kids. Casper is 15, Maes is 17 and my daughter Christine is 28. So this is really great.

The reason why this is important today is because “How can we actually make more money?”
I think by dismissing the full-cost model, I think we have a very good understanding of Why it is important, but maybe even more important How difficult it will actually be.

Price is what you pay. Value is what you get

I found a little quote by Warren Buffett. I think most people recognize him as a guy that knows about money and basically what he is saying is: “Price is what you pay. Value is what you get”.
The big question of course is: Do we make enough money compared to the value we deliver? Because if we do, then just close the safe and we’re done.

In my opinion we can do a lot more to make money and be better at telling our customers what kind of value we bring to the market.

Just before we continue on How we dismiss the full-cost model, I just want to give you a little inside, just so we are on the same page.

What is a full-cost model?

Basically the way many printing companies price their products today, is based on that you take the intrest on your investments, you take the direct labor costs, the depreciation of your investments, and you take the share of your operation and simply by adding this total cost, you basicly divide it by the capacity that you have and that will give you an hourly rate.

Typically you have an hourly rate depending on where you are in the world and what equipment you have and that is used to say: This print job takes three hours to print you basically take the variable cost and multiply it with the hourly rate for the number of hours it takes to print.
I am sure that a lot of you know this and I am sure that a lot of you will basically have a much better understanding about this than I have.

But, that is the very simple mathematic that is behind it. It’s not always that simple of course because you have equipment that is utilized differently.
You could have digital printer that is click based you can have a offset printer that is hourly based you can have binding equipment that is only used in one shift and you have printing machines that are used in 3 shift and so on.
So therefore the pricing of these kind of things make it a little bit more difficult. It’s easy to do when you have one machine.

The problem with the full-cost model

The problem with the full-cost model when you use it like I just described it is basically that the data you have for a full-cost model, changes all the time.

Let me give you an example; If you have invested in a new printing press and when you bought it, you maybe have a dpreciation time of 5-8 years, which is not unnormal, sometimes it’s 10 years. And then basically you look at the market 10 years ago, I am sure that we can all agree that the market 10 years ago was entirely different then it is today. So the utilization of the machine needs to address the real life of how you operate the machine. So if you calculate it with a utilisation of 70% or 80% and today it’s only 50%, basically if you haven’t changed those parameters in your print calculation software, you will come up with totally wrong numbers and basically you will always be selling too cheap or too expensive unless you hit exactly the precalculation and the terms of the parameters you set up for the full-cost model.
This is one of the reasons why it is very difficult to use this not only for selling prices but also for costing prices.

When I talk to people in the industry for costing it’s ok, because basically you pre-calculate you post calculate and you get an idea on how much time you utilized the machine. But the real smart printing companies they will monitor the utilization because that is one of the biggest thing that can change your entire price setting.

So, with the full-cost model it’s basically, the cost models plus whatever margin you have decided, that is for many printing companies the selling price.

I have of course like so many other persons in the printing company. This is of course not how it always works. Because you can say that every time you come to a printing company it’s basically the sales people that say… ah that is too expensive, we need to lower the price. Basically the margin is then the parameter you change in order to get a selling price that your sales people believe is more competitive in the market.

Are you cheating yourself?

When you do these kind of things you might end up cheating yourself. Because it you don’t have the right full-cost pricing and you set a margin that is a guess then of course the selling price can be seen as inaccurate as anything else. The reason you can be quite certain this is true what I’m saying, is that when you look at most printing companies in the world, they are not stupid, they definitely know how to do full-cost calculations. They definitely also know which margins they need in order to cover the entire operation of the company.

The problem is that a lot of printing companies, especially the mid-size printing companies, continue to have problems making enough money which is either, and that is definitely a parameter,  because the market is too competitive that you can’t get the margins that you need. But from my experience working in 3 or 4 printing companies it is whether they are using the right model for calculating the prices and right incentives for sales people to sell at the right price.

So Chapter One so to speak.

The story

I would like to tell you a story and I am sorry that I will have to show you a not so pleasant picture. This is a plastic sorting facility in India where you see women sitting with their children in the middle of all the rubbish and sort it manually. The reason why I want to tell you this story is because when we talk about changing the way we do the things today, we also need to understand how people react to price differences.
I was in India, visiting a tradeshow in New Delhi, and for those who haven’t been to India before, India is an incredible place in many ways, but it’s also an incredible dirty place in many different areas. I met a guy that invited me to come and see his factory who was doing plastic moulding. When I got there, I don’t have any pictures from that factory, there were terrible labour conditions. There were mainly women sitting on the floor they used oil heated moulding that was done manually with a swing arm and in my opinion very dangerous to be there. There was no security. It was a tall building without an escape plan. I mean everything was asterrible as you can probably see from films when you see these on the TV.
When I was there the company was producing tens of thousands of packages for a blister display for chewing gum for an Itaian retailer. I asked the boss, why are you doing it this way? Why are you not trying to improve the labour conditions? He said, It’s not that I don’t want to change the labour conditions. The problem is that it costs money to change. So I asked, What if you changed the price just a little bit? Would you then be able to accomodate a little better conditions for your workers? and he was like; No I can’t because basically if I raise my prices by just a little bit, then the Italian customer will probably move all his production to another site.

Because 1 thing that is totally sure in many developing countries in the world is basically that labour is an endless resource. In many African and Asian countries you can have as many labourers as you want, there is no shortage as you see in the US and Europe.

The competitive situation is that if you can’t get the price down to a level that you would like it to be at you can just move your production to the next door neighbour and that is of course a terrible situation but it also shows a little bit about that the changes in the 3rd World is that are probably not going to take place because of the owners and laborers in those developing countries but it’s probably more about the demand that we create in 1st World countries because we want an endless numbers of cheap products. This was an example of chewing gum but we know all of us that we buy a lot of products that we could probably a little more about How these were made and how they were manufactured in order to give us lower prices.
I am not trying to point a finger and be the moralist here, I am just sharing a fact and there is a story to this.

The example

This car, a Volkswagen Up!, I don’t know if it’s available around the World, but because of high taxes, it’s a very popular car in my country (Denmark). Since we don’t have 2-way communication on here, I want you to think about how much a car like this, it doesn’t have to be this particular car, but any small car. I can tell you that in Scandinavia, where I come from, it will cost probably about 12 to 13 thousand USD and then you can start driving. One of the things that is really interesting to think about is how much do you think that it costs to produce? I am not talking about the inventions, engineering and all those kinds of things that goes in to and the investments of the robots, assembly lines, factory etc. I am not talking about that. But the costs of the raw material of the product is really low. It’s about $2000USD. So you can basically build a car like this for $2000.00USD and then, in my country, it sells for about 12 to $13,000USD. Of course the price world wide will fluctuate because the price of a car is not so much about producing the car, but more about what can you get in the market. That is based on average salaries, how much you can spend possibility to lend money, and all those kind of things the prices can be different from country to country in order to hit the right price for the right market.

This is interesting to understand because I mean as we are working in the printing industry, you don’t get a lot of magazines for $2000USD to be honest. So it’s amazing you can build a good quality car for that kind of money.

Vogue Magazine

So let me ask you the same question on this Korean version of Vogue Magazine. How much does it cost to produce a magazine like this?

Well, if the printing company that produces it, I don’t know who they are, but basically if they use the same metrix as we have just been talking about, there will be paper, ink, plates, time, binding, packaging, delivery and a mark-up on this product. So this is how we normally do it in the printing industry. We basically take a product, we calculate, because we know all the parameters, and the biggest unknown here is basically the full-cost hourly rate, bacause it depends on our utilization of the equipment we have.

Do you believe that the selling price is related to the production cost?

So let me ask you another question; Do you believe that the selling price is related to the production cost?

I am pretty sure, without knowing the price of Vogue in Korea, I am pretty sure it has nothing to do with how much it costs to produce.
So here is an example where you produce something that you have a selling price that is completely different that we do in the printing industry.
In the printing industry we typically take the measure that we talked before, and then we sell it with a 20%, 30%, 40% markup depending on how good we are in selling it and how and competitive we are in the market for that type of product. And then it will come up to something that is probably a fraction of what the selling price of Vogue is.
On top of that Vogue has different types of revenu sources. They have advertising, subscribers, kiosk sales probably some advertorials, inserts, product placement etc. There are so many things in a magazine like this that basically everything is entirely different in the pricing of this magazine compared to the price of actually producing the magazine.

Why are we not doing it?

So I think this is a great example on how you can consider that if you can sell value rather than selling based on cost, then you can probably make more money. And then, basically you can think about ‘Why are we not doing it?’

First of all there is a historical reason. If you look just 30 years ago there was no internet at least we were limited, so print was the only mass communication you could afford because you could have a 1000 copies or 5000 copies or 500,000 copies, the printing machine were perfectly capable of that already back in the time before the internet. Also, that was the main channel for having these kinds of mass distribution. At that time I think that it was pretty obvious that a lot of printing companies made a lot of money of something that was relatively simple because it was simple to calculate the cost base price plus whatever marging you wanted it to have.
So that is an example of why it is we now have way more competition from the internet. That can be from websites, from webinars like this, movies on INKISH, it can be mass media…

Is it posible to change?

The interesting thing of course: Is it posible to change? I would say it is quite difficult to change. The reason why I showed you the thing from India was basically that that owner he might have had general interest in sharing his reality, to basically see if he could find higher price. But the competitive siuation made that suggestion almost impossible because he was basically under such a pressure that if he did it, he would lose the customer.
That is the same in the printing industry. If we continue, all of us, to price our products based on a cost-plus model, then it is very difficult to change customers’ opinion to what the price should be.

Wired Magazine

When I was working in the printing industry I got inspired by a very interesting article I read in the American edition of Wired Magazine, because that was at the time where people started to talk about data-mining. There was actually a guy that wrote an article that HP at the time wanted to test whether the ‘analysis predictive pricing’ was more accurate with people that had been buying Ram blocks for computers for ages. They came to the conclusion that the computers where not that much better than people , when it was about predicting people buying Ram.

I asked our MIS in the printing company I was working at : Please, when we enter the details coming up with the calculation, before it comes up with a suggested selling price, can you please make an input field where the people that calculate, could be estimators, project managers or sales people, they had to put in a guess of the cost price becfoe they got the actual price from the MIS system. The funny thing is that the first couple of days, most of the project managers were actually quite accurate in their guesstimation. A few of them were really way off, but the really interesting thing was that even the sales people after just a few weeks with this system they basically could sit down with the customer and negociate a price without even making a calculation and it was still relatively accurate. Because now it wasn’t about it the margin was 20, 25 or 30 percent, which by a sales person could be seen as too high to close a sale, but now it was like, okay we close the deal right away with the customers without having a complex system that basically calculates everything in advance. This is just one example that the cost-plus model doesn’t necessarily need to be the only thing that is important in order to do this.

Sell on value rather than cost-base

If you look at it from that perspective, selling in the future, if you want to sell on value rather than cost-base, you may need to have new skills. The sales people you have and you think of selling books on demand or Books of One, you cannot have a process where you quote each book and then hope you get the orders. Basically you’ll need to sell something differently, you need to sell a contract, sell a service where you basically sell an entrance between the publisher and you.

If you want to sell, like some of the online printing companies do, then you’ll need a website to automate the processes which requires new skills in both production and sales. And all the way around the important roles in the printing company that is definitely changing in my mind. You may think ‘Why is this important to think about?’, well if you think about the products that you sell, for a commercial printer, let me just give you an example. If you are a commercial printer and for example produce business cards, where you calculate 250 business cards, and you calculate them the ‘normal’ way where you just say: 1 person 250 business cards, your MIS system will come up with a price that is so high that a lot of people will not pay for it. If you go to some of the online printers you can see that they sell it for a fraction of what you would offer if you’d calculate it this way. Should you not sell it or should think I don’t have to do this? If you think of it, one business card, let’s say that you can sell it for 25 cents or whatever, then you basically end up in a situation that you need to produce more efficiently. The way that the online printers are doing it is by gang-printing.


They take a B2 format sheet or B1 format sheet and then they gang all the sales that they has and then basically now, if it’s a B1 format you have 192 business cards of 25 cents on a sheet, that is about 50 dollars per sheet, which is now a good business and still very competitive. So again an example that you cannot use the cost-plus model unless you basically think about how can you create value for the customer.
If you think of a book, what is the value of a book? Well, it depends very much. Is it that you need 1 book, you need it now? Then of course it has a higher value then if you produce 1000 books that are not sold ever. So all these kind of things are important parameters to think of when you have these kind of things.

As I said before, all of these things may require a new way of thinking. Robots are coming in ATV’s are being used, software like Ultimate Impostrip and software for automation like from Enfocus, all the software that helps you automating and enabling your business on a higher level. Automation is not just about selling it and producing it but also how understanding to automate your own sections within you company to make sure that you learn things on how your customers think.
I know it’s a little bit difficult to actually see what I mean but just to give you another example of how this could work.

If you and your printing company are working with a number of customers, how can you make sure that you understand their needs? Because the moment you understand their needs, I am pretty sure you’ll have a way better understanding of what kind of products and services you can offer them.

In short

Just to get back to my statement in the beginning: If you price based on the cost-plus model, every time you get more vision and you use the same cost-plus model you’ve been using always or for a long time, the efficiency gain you get from investing in software and hardware would basically just leave everything to the customer rather than giving it to yourself and investing in the future.
That is the reason why I think it’s really important to think out of the box and try to understand how to make more money by using some of the things we’ve been talking about today.. Which I hope was helpful.

I know that a lot of you know more than I do about these kind of things, but I still hope it’s been an inspiration.

Thank you very much.

Morten B. Reitoft
Editor in Chief


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