The Benefits of Contribution Pricing for Printers

Doc has written about the woes of commercial printers these days as many printing markets are in decline, and a big shift is taking place from traditional printing methods to digital ones (which often take place in house). So an article by Deborah Snider of e-LYNXX recently caught my eye. It deals with the idea of "contribution pricing" in the print industry.

The concept of contribution pricing was introduced in "Profitable Applications of the Break-Even System" by college professor and accountant, Carl L. Moore. That was back in the 1970's when Professor Moore realized that costly downtime could be greatly lessened, even eliminated, if a source of work could be found that would minimize sporadic periods of equipment and personnel inactivity. In the print industry, this break-even point is normally reached when around 70% of equipment capacity is sold at normal prices. Then, every dollar generated past break-even becomes bottom-line profit. This means 30% of a printer's production can be made profitable with discount pricing, provided, of course, that the discounted work does not replace higher priced work.

Short-turnaround projects are perfect candidates for filling production gaps and for offering deep discount pricing. With about a third of an average printer's schedule being uncommitted at any given time, contribution pricing is a strategy worth pursuing, because even a handful of hours sold at lower prices can contribute and thus change a breakeven month to a profitable one.

Overall profitability is obtained not by charging one stagnant rate on every project. Instead, profitability is a blending of rates charged to different customers in order to obtain as many orders as possible. Primary and secondary markets are served differently with higher prices for primary market printing and lower discounted pricing for secondary market work. When the work is produced is one important factor that can drive pricing. Of course, quality and on-time delivery must not be compromised regardless of the price charged for each project.

Even if you are not a commercial printer, the information in this article is valuable as it could help with justifying various internal budgets and helping in-house operations determine how best to charge-back departments for services.