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Even with your best sales efforts, there are times when capacity goes unsold. Since print companies operate on thin margins, even a handful of unsold hours cause profitability to erode or evaporate. Printers are constantly seeking work to fill these production gaps when regular orders do not materialize.
To obtain work when it is needed, savvy printers offer extremely low pricing, provided that they can do so without establishing a precedent or expectation for future pricing. This strategy is called “contribution pricing” because when a printer bids work below normal rates, any income above out-of-pocket costs offsets fixed overhead and thereby “contributes” 100% to the bottom line.
Printers depend on us to obtain a consistent flow of projects outside of their primary markets and to increase their profitability through improved utilization of otherwise unused production capacity. The key is being able to locate the right opportunities, act quickly and effectively and capitalize before someone else does – that’s where we come in.
Contribution pricing example
To illustrate the benefit to a print supplier of deeply discounted contribution pricing, consider the following example. Here, a printer earns a 3% operating profit during a week when it sells 70% of its production capacity at “normal rates”. The following assumptions are used:
- Work week: 40 Hours
- Capacity utilization: 70% (or 28 hours)
- Hours reserved for maintenance: 5% (or 2 hours)
- Bonus hours available: 25% (or 10 hours)
- Normal selling rate: $2,000/hour (includes all equipment)
- Revenue for the week: $ 56,000 (28 hours x $ 2,000/hr)
- Out-of-pocket materials are charged separately and at cost
By selling its 25% available production capacity (10 hours) at a 50% discount from normal selling rate (50% x $2,000/hr or $ 1,000/hr), the printer “contributes” $10,000 (10 hours x $1,000/hr) directly to its bottom line and improves operating profit for the week from 3% to 17%.
This contribution occurs regardless of how much the selling price is discounted (25%, 50%, 75% or any other number). It just makes good business sense for the printer to perform work for a lower fee than to do no work at all, provided a precedent is not established for the pricing of future work. Wear and tear on equipment and additional usage of utilities is negligible. Printers that can serve the immediate needs of their customers while filling their downtime with lower priced work prosper.