Dickeson--The Age-old Problems Of Cost and PriceDecember 1998
Well, good buddies, them's the rules by which we play the game and we're not gonna change 'em. So we work around them.
One of the steps we can take immediately that will assist our effectiveness is abandonment of either manufacturing or full absorption job cost accounting rates in favor of direct costing rates. Direct costs are those costs that would not be incurred but for the incidence of a job: materials, buyouts and direct labor.
Forget the other general ledger costs—they're either "sunk" costs or the "costs of being in business." "If we do this job, what immediate application of our liquidity is involved? What goes out of our pocket in the next few days to do that work?" We prefer not to sell at a price below direct cost. That's a kind of rejection threshold. What should we ask as the price, knowing the level below which we don't want to go?
The difference between direct cost and selling price we call "contribution." Do we have a target contribution as a pricing benchmark? Is it the same for all print products? How could it possibly be? Is it the same for all customers? Of course not, since it depends on "perceived" value-added. Is it identical for different jobs for the same customer? Most unlikely. Do we have varying contribution strategies in our marketing plan? We certainly should.
Setting price is where we lack statistical tools. Case in point: Printer-publisher with a specialty is doing well. Now wants to sell idle time available on his press. How to price it? George Accountant says use a manufacturing or full absorption cost and mark it up. Ugh.
"Hey, George, price is an external measure of the customer's perception of value-added, limited by competition. What is the customer's value perception? How do we find that out? What would competitors charge? How do we discover that?"
Now, standing with tenuous assurance at best on that direct cost base, how high dare we reach for a price? What is the price elasticity of the customer's value perception? Upward? Downward? Where will our competitor come down on price? Will we get a 'second look?' At least we're asking the right questions, aren't we? That's half the solution. We're not simply marking up some figment of manufacturing or full absorption rate! Oh, for some magic box! Dear Peter Drucker, where are you now when we need you?
Ah yes, Drucker, we read you in Forbes, August 24, 1998, on page 46: Our accounting/cost accounting computerized systems have had "…near-zero impact on the management of business itself."
We must redefine the information we need. We need economic chain accounting, you say. We must approach our printing business as a creator of value for a customer and not as simply a creator of internal costs. Therefore in setting our contribution reach we must concentrate on factors outside the business, not on cost events inside the business.
Okay, let's "just do it", as Nike says. Let us cease and desist with all our cost accountancy as a measure of PRICE. Let's re-engineer the information that guides our basic business decisions. Starting as of NOW—if not sooner.
—Roger V. Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 419-8213 or e-mail at email@example.com.