When I was in Chicago last month, I started pondering on the equipment that was being sold and the reasons for the acquisition. I’m sure some purchases were made on a “build it and they will come” model, while some used the “we’re reducing costs” model. Although those forms of reasoning do create a bit of concern, what I’m really curious about is how the work produced on that equipment (wide format; digital variable data; diecutting; mailing, etc., etc.) will be priced.
Too often I have observed company after company making major investments and then rationalize how they could sell the product cheaper than they had before. Here are some of the reasons: Our makereadies are much faster; We can now perfect at 15,000 iph; Our new workflow software allows us to produce the work twice as fast; and, We’re now doing it inside and it costs us less to produce.
Now, some of these reasons may be hype from the sales rep selling the equipment, or they may be valid — that’s not the point of my argument. What concerns me is that companies make a significant investment in capital and then immediately find a way to reduce their pricing — “because the work now costs less.” WHOA. Let’s think this rationale through.
Yes, we can now produce more work in a shift (or two or three) because of a new piece of equipment or software, BUT WHY DO WE NEED TO REDUCE OUR PRICES? And don’t give me the argument of “if we reduce our prices, we’ll be able to sell more print.” That dawg don’t hunt.
If a customer is paying you $XXXX for a printed product — and now you’ve added equipment that can make you more efficient and provide more capacity, why should the price change? Your company has made a major investment in time and money to bring on this new “whatever.” The result to your operating statement is that you just increased expenses (debt, interest, more inventory, etc.) and reduced working capital and profits – immediately!
The only way to improve profit is 1.) reduce expenses to a lower point than they were BEFORE you made the expenditure or 2.) Sell more — but without lowering the gross margin of existing sales. There are no other ways. Let me close with one of my favorite stories (apologies to Cajun’s everywhere).
Boudreaux and Thibodeaux decided to get into the watermelon business. There’s was a spot near Baton Rouge and the Texas border that had a fair amount of traffic and they calculated it would be a great spot for a watermelon stand. So every weekend for a month, they would load up Thibodeaux ‘s Ford 150 with watermelons and head out for their stand and sell every last watermelon.
Now having gone to one of Louisiana’s university’s (no, I’m not saying which one) they knew how to use a spread sheet and apply cost accounting. Sadly, the spread sheet showed they were losing money. They then looked closely at their costs. They were buying the watermelons at $.45 per pound. And they were selling their watermelons, which averaged about 10 lbs, at $4.50.
“Well, Thibodeaux,” said Boudreaux, who had a marketing degree from the aforementioned university, “Our problem is that we don’t have a good brand and we’re not utilizing social media like we should.” “Boudreaux, I don’t totally disagree,” was Thibodeaux’s response, “but we need to find a way to increase our volume – and to do that, we need a bigger truck!”