Surviving the Price Wars

An overabundance of press capacity, a down economy, and ongoing shifts in demand in an industry characterized by high fixed costs and highly variable sales has many printing companies, if not all, engaged in brutal, vicious price wars.

In its most recent State of the Industry Report, the National Association for Printing Leadership notes that almost 62% of the printing companies participating in the survey identified price cutting as the most critical trend or issue facing the industry.

"Our biggest competitive threat is price cutting," says Janet Green, chief executive of Greens Inc., a commercial printing company in Long Beach, Calif. "A lot of our competitors are pricing below cost."

William K. Marrinan, president of Marrinan Associates Inc., Raleigh, N.C., which offers printers such services as strategic business planning, turnaround management, and mergers and acquisitions, adds, "I have clients whose breakeven point is a factor of 1.5 on their costs, and they say they actually are bidding at 1.0, 0.95, or 0.9."

"At the rate some of my customers' competitors are pricing their work, that can't pay for the paper," reports Mel Enger, a partner at Carlson, Lundquist & Company, Minneapolis, a CPA consulting firm that specializes in the graphic arts industry. Such companies, he thinks, intend to use paper in inventory that they've already paid for, wrongly believing that the paper is "free."

"They think that, since they've already incurred the cost, the cost is gone," explains Enger, "but of course from an accounting standpoint, it is not."

He adds, "I've been working in this industry for 20 years and I've never seen business this difficult. In some cases, buyers seem to be giving equal weight to price and the relationship with their current printer."

Price wars are not new to printers. Offering a lower introductory price is common strategy to get a competitor's client to sample a new vendor. Likewise, it's a tactic to thwart the pirating of existing accounts by others.

But today's price wars are different. An anemic economy and a tremendous slump in advertising have made many companies so desperate for work that they'll take any job just to pay the bills. Also, many financing deals recently negotiated with vendors for the purchase of machinery have included deferred payment schedules, which many printing companies leveraged to cut their prices.

Aggravating the pricing issue are productivity enhancements, most notably on press equipment, which, coupled with the migration of more efficient press features from large equipment to smaller-size formats, have created new competition between equipment segments.

"The universal implementation of technology is blurring lines that were previously well defined. Today more than ever, sheetfed presses can produce some web work, web presses can produce some sheetfed work, and smaller presses are competing for jobs that once went exclusively to larger machines," observes Dave Margiotta, president of Modern International Graphics, Cleveland, Ohio, a graphic arts communications service provider with 100 employees and $17 million in annual sales.

Last month, says Margiotta, his company produced a job on a sheetfed press that should have gone to a web. "Our shop was slow, so I looked at my pricing and decided to keep the job in house rather than send it out," he says. "We were able to produce the job efficiently because the press was fully automated and could print 12,000 sheets per hour. I wouldn't have been to do this job on older equipment."

Print buyers consolidating their vendor lists also have contributed to price pressures. "If a buyer cuts six of its print suppliers, and you multiply that by 10 million companies, that's a lot of competition to stay in the game," says Sid Chadwick, president of Chadwick Consulting, Lewisville, N.C.

Chadwick, a business development consultant, and sales team educator and trainer for the graphic arts industry, adds, "But buyers want suppliers who understand them and give them more for their money; they don't want to work with companies that only generate quotes."

Printers themselves share in the responsibility for creating and maintaining price wars.

Many industry sales and marketing consultants believe that when a print buyer objects to an offer based on price, it really means that they're looking for an easy way to reject an offer. However, once the lower bid has been offered, a buyer can use it as leverage to get current suppliers to reduce their price.

"Price is certainly an important factor, but customers need other reasons to do business with you," maintains Robert H. Rosen, president of R.H. Rosen Associates, Inc., a New York City-based graphic arts consulting firm.

To support his point, Rosen tells of two printing companies that experimented with prices. One company quietly raised prices by 3% with well-established customers and received no pushback. Another company lowered prices 10% to new prospects but saw no increase in the number of jobs it won.

Rosen explains, "In the first case, existing customers liked the printer well enough that they weren't completely price sensitive. The printer evidently was offering enough value that buyers weren't going to run away over 3%. But in the second case, new prospects hadn't been given enough reasons to begin doing business, so even a substantial price decrease wasn't sufficient incentive."

Also, observes Rosen, printers have to recognize that focusing solely on price as way to gain clients does not build meaningful long-term relationships. "Don't get me wrong," he says, "I'm the evangelist for not letting price get in the way if it's the last obstacle to winning a certain piece of business. I'm just saying that printers can't compete solely on price—at least not for very long."

What's the prescription for surviving the price wars? Based on a sampling of insights from printing company executives and business consultants, we offer up the following remedies.

1. Shift the focus from price to value.

In this strategy, printers are urged to demonstrate value to clients to defuse pricing pressure. Some popular methods of execution include differentiating from competitors, building strong client relationships, and expanding products and services.

"Our customers recognize price but they also recognize value," says Gary Garner, president of General Litho Services, Minneapolis. "Still, make no mistake, it's a competitive market." General Litho Services, which offers creative, prepress, printing, binding, distribution, and inventory management services, employs 170 people and generates $22 million in annual sales.

Adds consultant Chadwick, "It all comes down to printers offering clients value, not simply quoting the specs." Shifting the focus to value, he says, begins with company management guiding the sales staff to move from being order takers to serving as business partners who know and understand a client's unique and individual needs.

Moving from the passive role of sales order taker to active consultative selling requires a seismic shift in sales staff behavior.

"Most sales reps are uncomfortable asking buyers questions; they're afraid to be intrusive," says Rosen. But he says that, in a survey his firm conducted, print buyers revealed that they want suppliers to learn about them.

"In our survey, most buyers reported that printing company sales people don't spend enough time trying to find out what's important to the customer," says Rosen. "Buyers said sales people quickly ask if they can quote on anything, immediately indicating that they're ready to compete solely on price. In fact, many buyers pointed out that sales people begin discussing price long before they do."

Adds Chadwick, if printers don't really know their customers, how can they know what customers value.

Another way for printers to shift the customer's focus to value is to diversify their product lines to offer clients more, differentiate themselves from competitors, and forge stronger customer relationships.

"At General Litho Services, we offer a variety of services based on our customers' needs and on a solid evaluation of our competitors," reports Gary Garner. "We identify those competitors and compare our strengths and weaknesses with theirs."

He continues, "Our customers set the direction and we look for ways to help them with their businesses. If it makes sense for us to offer something new and different, we will. This approach has been a catalyst for our growth."

Garner believes that his company's focus on expanding services that clients want and need has differentiated his company, and is helping it survive in a harsh competitive environment.

2. Develop realistic yet flexible pricing models.

"Some companies are trying to survive the price wars by supplementing their profitable accounts with discounted work intended to cover their fixed costs," says consultant Marrinan. He labels this practice "incremental pricing" and says companies that practice it successfully have figured out the total margin their company needs to generate enough cash flow to pay their debt service.

Marrinan explains, "This pricing strategy must be preplanned, controlled, and monitored monthly because printers who overbook their shop with discounted work won't have capacity available when more profitable work comes in."

In every pricing decision, he adds, there's no room for cost estimates and averages. Rather, Marrinan says, "Companies need to develop realistic and accurate hourly rate costs for each of their functional areas, then use cost accounting systems that take advantage of that information to provide accurate and timely facts and figures."

Garner says General Litho Services practices flexible pricing. "We price our jobs thin where we need to, but we don't do that on a repetitive basis because we have to maintain profitability to stay in business."

Morrison Communications, Morristown, Tenn., uses a structured program to offer a variety of discounts to new customers during traditional slow periods; it sells subsequent orders at regular prices.

New clients can select from a combination of cash discounts or receive a variety of value-added services, which could amount to 3% or 5% more than the cash discount. Value-added items may include free shipping (usually in the company's truck), extra quantity, upgrades in paper, free ink-jetting, free scans, and free design services.

"Sure, we risk one-order business from buyers—and that's happened—but our goal is to convert them into regulars by dazzling them with our superior service, friendly accommodation, excellent quality, and painless experience," says Maudie Briggs, president and owner of the commercial printing company, which employs 109 people and bills $14 million a year.

Briggs says that, for this program to be effective, discounts must be significant and service and quality outstanding. "Otherwise, we give away our profits for no good reason," she notes.

Briggs surmises, "Companies that plan to survive this recession must have a philosophy for their discounting and must stick to it. At Morrison, we have a minimum level of required contribution that we won't go below. If a prospect comes along with a competitor's price that undercuts that minimum level, we let the job go. This means that we have to continually 'right size' our business for the sales volume we receive."

3. Upgrade sales support and strategies.

Sales strategies are a big cause of price competition because selling on price is the easiest sales approach.

"Many companies don't support or properly train their sales people," observes consultant Chadwick. "Company presidents complain that they can't find good sales people, yet when I ask what they've done to improve their current sales force, or even to describe their business development strategy or promotion plan, the answers are zip. Everybody wants a better sales force but no one is willing to invest in it in a committed way."

Rosen also has strong opinions about printing companies and their sales forces. He says successful companies treat their sales people like real employees, not like independent contractors, and hold them accountable for results. These successful companies work with sales people to create a sales plan, evaluate the results, and work together to improve the results."

Also, Rosen reports, companies that identify and share with their sales force what work best fits the company are more competitive. He explains, "The hardest work to compete for involves jobs that don't fit a company well. Yet many printing companies and sales people spend a huge amount of time aiming at the wrong kind of work."

Not so at Omaha Print, Omaha, Neb., a company with 98 employees and $14 million in annual sales that prints and distributes marketing materials for customers on a national basis.

Says Joe Sequenzia, vice president of sales for Omaha Print, "Sell what your company produces well and that will bring value to your customers. If you don't, you can't compete, and customers get the wrong perception about your company."

Another troubling observation, says Dennis Castiglione, president of Procom Management Group, Eastlake, Ohio, is that many companies sell on a project-to-project basis. He advocates program selling, saying, "If a printer gives a buyer a reasonable pricing structure for a variety of jobs, that buyer will be less apt to shop around."

4. Align sales with costs.

"Resize, resize, resize"—the mantra of this strategy—applies not only to surviving price wars but surviving, period. Marrinan advises clients to restructure their business so they can break even or come very close to it during slow periods.

"Every printing company can map a profile of its slow and busy times," he says. "The goal is to structure the business at the lowest level, accommodate busy periods by adding overtime and temporary workers."

Concludes Rosen, "Printers should align their costs with their lowest likely level of sales. If they get busy, I've never met a printer who had difficulty coping with too much business."