This was David Alan Stockman´s comment on the U.S. Budget. He was our country´s Budget Director in 1981, when he made his comment, and his words gave me hope that, despite my marker´s approach to business ("If it feels right, do it.") I could still survive in the commercial world.
Don´t be daunted
Pricing is one-quarter of the marketing mix (Remember? Product, Promotion, Place and Price.) so I am forced to address it. Fortunately, Once you overcome the monumental task of establishing Your pricing structure, the rest can be a matter of fine tuning. It is much like setting up a fourcolor-process job on a press, where the real labor is getting the images where they should be and then micro-adjusting to bring life into the print. And, much like that process job, there are few absolute answers, the way there are to quadratic equations in algebra class. There are only shades of right answers; you Pick the ones that work best in your eyes.
Joe Clarke wrote a wonderful pair of articles on costing and pricing in this magazine´s March and April issues. If you have the inclination to follow his formulae, you will understand pricing very well and, I am sure, prosper. However, if you, like myself and Mr. Stockman, find yourself unable to understand what´s going on with "all these numbers," you can still run an ethical and profitable company. I know.
Pricing comes in two flavors: "market pricing" and "cost-plus pricing."
The former is what everyone dreams of. We all remember Shakespeare´s Richard III exclaiming, "A horse, a horse. My kingdom for a horse." In a market-pricing situation, the item for sale is so desired that the customer will purchase it at any cost. From the story of Faust, to Joe in Damn Yankees, to Ariel in Disney´s The Little Mermaid, we see market pricing at work. Dream on.
In the real world, very few screen printers produce Cabbage Patch dolls. Of course, to nudge our products out of the generic (which defines pure cost-plus pricing) toward the name brand (which makes market pricing more viable), we rely on another "P": Promotion. That, however, is another column.
This is exactly what it sounds like, and what was described so well by Joe Clark. You figure out what your variable and fixed costs are, you divide (or you multipjy or ... something) and you determine what the price of each shirt should be. You then sell it for exactly that price.
In reality, though, the cost-plus and market-pricing strategies converge. In the classroom model of a mature market, all manufacturers produce identical products and have identical costs. All potential customers have complete and instant knowledge of the marketplace. Cost-plus pricing prevails.
The student is then challenged to develop strategies to increase margins. Since COST + MARGIN = PRICE, you can either reduce costs or increase price to meet your objective. Reducing costs is the safer route, but is obviously limited. Price increases are theoretically unlimited, but require a lot of fancy footwork (and, again, are the topic of a future column).
That is in a classroom world which assumes you have a crystal ball and can predict exactly how much business you will find. It also assumes the mills, distributors and Father Nature himself will not throw you any curve balls. It assumes your employees will be creative when they should be, and not when they should not be, and that they will not disappear on unauthorized sabbaticals and the Yellow Pages will not decide to misprint your telephone number and, and, and ...
Fortunately, for us macromanagers, there is another way. Before God created modern accounting, she created keystone and triple keystone. Keystone, a term invented by the jewelry industry, refers to selling an item at double its acquisition cost; triple keystone refers to a price of three times cost.
Unless you´re in the same league as Tiffany and Co., forget about triple keystone. Keystone, though, has evolved as the standard in almost all mature manufacturing industries. It is what most of the world works on, so why not us?
And frankly, if we make a little more profit on one order, and a little less on another, as long as our bottom line is healthy, our company is growing, and we are "doing the right thing" for our employees, our customers and our communities, why complain?
So start at keystone, and watch your bottom line. If everything is working and you are making a profit, that´s great. If not, the first place to look is into cutting costs rather than raising prices. Why? Only because evolution has allowed keystoning to develop, and proven it viable, and the chances are, one, that if you keystone your prices, you´ll be competitive in the market-place and, two, if you contain your costs, there will be profit margin to be had.
If you are a custom printer, defining keystone is easy: double the cost of your blanks. (You may want to KISS-keep it simple stupid-by having the same price for a given style, rather than separate prices for whites, lights, darks and premiums.)
Those with a preprint line keystone by looking at the cost of the blank, plus their largest single expense: sales commissions. Double that, for a starting point, when looking for optimum pricing.
Contract printers have a tougher time in picking a point to begin swinging their pendulum, because their low per-piece price offers much less room for error. A contract printer also has less opportunity to differentiate his product than either the custom or preprint printer so, again, there is less tolerance for pricing error. Double your direct labor and disposable costs. But do serious reality testing by comparing your price list to others in the market before etching it in stone.
Micro vs. macro
Not that such a laid-back approach might not make swimming with sharks look safe by comparrison. Whereas micromanagement for many of us produces anxiety attacks and a loss of the big picture, excessive macromanagement can lead to losing the whole company.
If you are a macromanager, and are not concentrating on each nut and bolt of your business, you are vulnerable to incompetence or even dishonesty on the part of the employees on whom you must rely. A good friend of mine lost his business shortly after his bookkeeper mentioned to him that she liked his new accountant. Why? He didn´t require her to arrange the checks coming back from the bank and laboriously tick off each one on the statement. When my friend personally checked the statements for the last few months, he discovered many checks that he hadn´t signed. This led him on a general search which unearthed cut-off notices from unpaid vendors. And a ruined credit rating. And other factors he could not repair fast enough to save his business.
The key is to find the comfortable balance between micro- and macromanaging. Chasing the last decimal on every number gives you complete control of the details, but you may miss the larger focus which you need in order to understand your whole business. This bigger picture provides the blueprint for growth and development. Still, pure macromanagement opens you up to becoming literature´s tragic hero, as you miss the fatal flaw that can bring your company down.
So, in setting prices, as well as in generally managing your company, let your personal pendulum swing until you find your own balance between detail orientation and overview. As with everything, either extreme is dangerous.
If you swing more toward the micromanagement side, you must periodically step back to figure out how all the details fit together, what story they tell and what it means. And for those of us who like to think big, we must work to be certain the components we perceive as building the big picture are accurate and true. The whole picture is the sum of its parts, and can never be in better focus than the accuracy of the components from which it is formed.
And that, my friend, is how you make money.