PRICING VARIABLE PRINTING — CASHING IN ON VDP
Little information is being shared on these hardships due to the top-line growth of digital printing. What is the problem? Where are all the great margins and huge profits? What is missing?
The issues are many, including sales and production familiarization. These are obvious. But take a look at a less obvious issue: unprofitable pricing.
It’s curious in this rush to expand services and replace core revenues that many providers are falling into the same trap that has plagued their legacy industries for years—commoditizing their offerings. Based on years of managing their legacy businesses, it is almost second nature to establish pricing based on commodity models.
Many people claim that pricing issues are because of predatory practices or competitive situations. This is not normally the case, yet with variable data printing (VDP), there just aren’t enough providers offering the same services to the extent that bidding is prevalent.
Then why is pricing for VDP being commoditized? Most providers do not start out with the idea of commoditizing their services. They can’t help it. They are using the methods that have been ingrained in their legacy businesses for years.
Pricing issues are due to little experience and lack of exposure to other pricing models that fit this emerging industry better. In fact, if most current providers understood their real exposure and the meager value they have placed on it, they would be even more disappointed in their results.
Many of new entrants have no experience in pricing their services based on the value they provide within the marketplace and the risk they are assuming by providing these services. In many cases, providers are under-pricing their offerings by at least 50 percent. Owners and managers of these businesses have little or no experience in establishing value for the most important element of VDP—the “V” (variable content).
Every successful VDP shop has to adhere to one simple edict: Variable targeted content leads to better results. Note that there is no designation about color versus black-and-white, about size and shape, about mailing—even nothing stated about the content being printed. The edict is the basis for all direct marketing, not just VDP. Variable targeted content leads to better results. Once the edict rules your strategy, everything else, including pricing, becomes execution of the strategy.
Successful variable digital print providers have several core philosophies in common. Some of them include:
The more you invest in data services the more your printing output grows.
The successful VDP providers use the printed output to amortize the cost of the high-end data work. They realize that the real value of VDP is in the intelligence of the variable content.
The easiest step in executing VDP solutions is the production.
Why all the emphasis on data and its impact on pricing? Data is the single most important aspect to direct marketing success. The high-end data mining and development industry has consolidated and changed. Many of their functions are showing up again in the VDP realm. End users invested huge dollars in CRM software to provide extensive data internally for marketing purposes and the outside data management industry changed drastically. At the same time this change was occurring, the end users—with their fancy new CRM software—reduced internal staff extensively, including their data services people. Now they have all the data with no people and no budgets to execute.
However, they do have budgets for printing and direct mail. Savvy ad agencies and production/purchasing personnel have quickly realized that to execute successful direct marketing programs, they need high-end data services. They also realize that they must figure out how to pay for these additional services using their existing production budgets.
By combining the data mining activities with some type of printed output, you give clients the ability to execute comprehensive direct marketing programs that give great results within their production budgets. Suddenly our industry finds itself being asked to pull double-duty. Knowing that you are providing double-duty, VDP providers should be pricing this value accordingly.
The printing and lettershop industries have had a stable pricing model for years. The problem is that it is the wrong model for variable digital output. Most providers’ pricing is a factor of equipment capacity, equipment speed, labor, overhead and materials. These factors are used to establish throughput costs, which are then marked up to present final pricing. Lettershop work often brings in the postal and data services elements, but most of those prices are still based on manpower and time to complete.
Little emphasis or costs are associated with the data services based on the risk of the requirements (minimal risk for such activities as postal sorting, name/address personalization, etc.). In almost all cases, provider pricing is based on throughput, even for data services. Competitive pricing advantages usually hinge on the operation with the most efficient processes and newest equipment. This processing model leads to commoditization.
That pricing model is tried-and-true and will continue to dominate these commodity-based markets. However, this is the absolutely wrong model when dealing with any element of variable digital imaging. With new equipment and a new market, new pricing strategies should change to match.
It’s obvious that there are differences in traditional printing and VDP. These differences should be reflected in the pricing for these new services. “Value provided/risk” pricing models have been around for years. Insurance, data services, personal protection and many other industries use some sort of value provided/risk model. The key to this pricing model is to understand the potential outcome value to the end user, along with the risk of failure and associating a cost and mark-up.
“Value provided” estimates can be challenging to determine. It usually starts with the expected return-on-investment (ROI) of the program. If the client is looking for a $100 return on $1 invested, the value to the client is $99. The provider should be able to establish some value (and thus price) based on the intended result. The higher the expected ROI, the more expectations placed on the provider. The higher expected ROI will translate into higher costs, such as higher level personnel, more dedicated resources, outside reviews, etc. These costs must be accounted for to sustain the business.
How do you know what your client’s expected ROI is? Ask them. When dealing with involved VDP projects, providers should be in total lock-step with the customer on expectations. It’s easy to explain to the client that, based on the target ROI, the execution will be impacted and you as the provider need to understand this. If the client is unwilling to share these goals, you are not in a true partnership. That’s probably the first sign that the program will not be successful.
The more comprehensive the data services, the more risk the provider assumes. Variable content has the ability to strengthen the bonds of customer relationships like no other medium. Just as easily, it can ruin your best relationships. Send the wrong loyalty statement or misspell the name of a top tier/high-value customer and suffer the impact. Add an extra 0 to a $10 coupon (making it $100 versus $10) sent to 100,000 high-cost customers and get ready for the lawsuits from your client. Great potential comes with great risk, so VDP providers must understand these risks and price accordingly.
Risk pricing starts with basic costs for associated activities such as security measures, QC processes, auditing, ISO, etc. Similar to overhead valuation, the baseline can be established easily. What gets more difficult is when individual project risk is evaluated. These can include the value of the offer ($100 coupons versus 25 cent coupons), the sensitivity and handling of the data (health information versus name/address only), value of the recipients (top tier/high-value customers versus churners), etc.
A good baseline to establish this value is the impact of a catastrophic project failure on the business, either through direct reimbursement to the client or impact to error and omissions coverage.
There is one remaining element to consider when pricing VDP projects. This element is more in line with that of any growing business—cost of overcapacity/underutilization. Most VDP businesses are started based on a single client project/program. Thus there must be enough capacity to meet delivery requirements of that core client work, usually in a very short time frame. This means excess capacity and its accompanying overhead. This underutilization is more prevalent in the VDP business based on several factors, including:
Speed and actual output of the VDP output devices.
Inability to outsource. Outsourcing is almost non-existent due to the nature of the programs and control required to maintain data integrity and security.
VDP shops will never be able to reach the 85 to 95 percent capacity requirements of traditional production models due to the nature of the technology. Many VDP providers are still operating at less than 40 percent of capacity, even when using traditional (read low) pricing models.
The fact is that capacity may never reach much over 70 percent before additional equipment is needed due to the nature and requirements of the work. This low capacity is heresy in the printer’s mind, but very typical for other industries that understand the value in providing services during peak times (and price accordingly).
Providers need to review their pricing strategies and realize that great results for clients should translate into higher margins for the providers. Helping them attain results also gives you the best chance for a continued relationship.
Pricing changes will be critical to long-term success for anyone now venturing into VDP. Printed materials are a small portion of overall variable content market. As with static printing, it will decline over time as technology improves.
As VDP evolves and eventually succumbs to electronic digital marketing, the value provided/risk model will become even more important, since the printed piece will go away. All that’s left will be variable content. Consequently, now is the time to transition and establish your company for long-term success.
About the Author
Jim Liszewski has been president and COO of Dallas-based WMSG since its inception in 2003. He has been involved in the startup of several companies, including PrimeCo Personal Communications and Alamosa PCS, in developing and managing marketing, billing and informational technology departments. Liszewski also considers himself a data nerd.