In Pursuit of Profitability
Obtaining profitability is the primary goal of virtually every entrepreneur or business. In 2010, we saw in excess of 2,000 printing companies close their doors, which should make almost anyone ask, What financially went wrong?
Within the selling process, I believe that the pricing theories used in the face of changing volume maybe one of the central issues behind these closings. Failure to keep a finger on the pulse of a company’s marketplaces also plays a crucial role in this situation.
What drove me to write this blog is my current RIT graduate-level course, titled “Estimating and Analyzing Graphic Arts Systems.” I am very fortunate to have Steve Whittaker, Monroe Litho’s vice president of Quality Control and Sustainability as my professor.
This class has opened my eyes to how important understanding the fundamentals of estimating is. Anyone can plug job information into an MIS system and obtain prices for the given quantities. But knowing “what’s in that number” and where it came from is far more important and useful.
When looking further into pricing for profitability, I believe what goes on between targeted selling price (TSP) vs. actual selling price (ASP) is extremely important. The TSP concept was developed by Spencer Tucker in the 1960s. It is based on the ROI concept that profit on what is produced should reflect the cost of the capital employed to produce it.
Not coming up with a successful pricing strategy and continuing to sell below TSP costs is what I surmise a majority of those 2,000 companies ran into. To achieve success, its crucial that the cost-oriented pricing philosophy be successfully adapted to each individual market-orientated pricing. If the marketplace consistently keeps a company from attaining its TSP, management needs to understand why.
Companies in this situation should take a hard look at how the market segment’s characteristics are affecting them.
- Why does this pattern of selling below the TSP continue?
- Why does it take so much labor for us to do the job?
- Why are we so expensive?
- Where are the differences between our ASP and TSP?
- Where did we beat TSP and where did we fail to achieve it?
Perhaps your company is less efficient than competitors in the same market segment. In this situation, the competitor is meeting its TSP prices while you are forced to sell below TSP to obtain the same work.