Pricing and cost considerations for the new year
A thoughtful reader challenged a comment made in my May/June column, “Paper supply: Crisis or Opportunity?” We discussed price increases, with the comment that certain cost increases cannot be passed on to customers. The reader firmly believes printers shouldn’t absorb cost increases, as it would hurt the business. However, there are costs (e.g. corrugate for cartons, ink, plates, skids, transport, etc.) that are typically not recovered when a job is invoiced. Even with a paper price escalation clause, many of these costs are not passed on.
I believe all costs must be recovered from customers, but the timing and process is different. Direct cost increases like paper can be recovered per job, but indirect expenses like rent hikes may be recovered in time.
Budget estimates are based on two types of expenses. Historical costs refer to allocation of labour, overheads, utilities, equipment depreciation, maintenance, training, IT and software, misc. items, etc. These are identified in accounting records, and usually recovered through using budgeted hourly rates, (BHR). Future costs, such as paper, ink, and distribution, are as calculated, and often purchased and calculated for the specific job. BHRs are adjusted on an annual basis.
In recent times, printers were able to justify and collect paper cost increases because with the supply shortage, the paper could be used for other customers who were willing to pay. Other costs were also increasing.
However, it’s not practical to identify and recover the impact of a 25 per cent increase in rent from one job. If the company temporarily absorbs the cost increases, then they should plan on future recovery or offset the increase by reducing other expenses, such as staff training.
Typically, a department manager is responsible for balancing the budget, as there are ongoing changes during a fiscal year. Failure to recover costs or offset with spend reduction will result in reduced margins or profits. Repeated failure will create a loss and jeopardize the company’s financial stability.
New fiscal year
With a new year approaching, it is time to review the budgeted hourly rates and adjust as appropriate. However, this is not an opening to make adjustments without due considerations. You must plan to recover all costs related to the business. However, if the new rates are above market rates, you will risk losing business to competitors over time. If this is the case, then review budgets to see what discretionary costs can be reduced. Typically, the first to be reduced are training, marketing, and customer expenses. This would be a short-term corrective action because a healthy business needs to make these investments to be a successful operation.
Another method to reduce cost is to increase efficiency through improved workflow or automation. If your MIS is integrated and operating effectively, you may be able to process more orders with fewer staff and without staff burnout. Intentionally understanding without providing your team the tools to be effective will only increase errors and turnover.
Don’t forget utilization
In addition to cost, utilization impacts BHR. If your utilization has dropped from 80 to 70 per cent and is expected to stay at that level for the next year, then that will increase your BHR calculation.
- $100/hour BHR cost/80 per cent = $125/hour sell rate;
- $100/hour BHR cost/70 per cent = $143/hour sell rate.
The market will determine the price. Therefore, if your utilization dropped, the corrective action may not be to change the calculations, but to increase utilization through sales.
These are a few suggestions to help you plan as you move forward in 2023.
By Bob Dale
This article originally appeared in the November/December 2022 issue of PrintAction.