Industry Mark-up Rates & Practices

Occasionally, we receive inquiries from printers asking us about markup rates and practices in our industry. Some of the inquiries come from folks who have just gotten into the business, while others come from old-timers who entered the industry during the 1980’s and 90’s.

Here’s an email we received just the other day along with our partial response:

“Hello John, I received the new pricing guide and think it is great information, thank you. I do have a question that maybe you could point me in the right direction.  We’re going thru the process of updating my pricing ,  and I’m interested on how other printers handle outsourced costs & final price vs in house.

“I use PrintSmith and years back set up a mark-up % for cost to arrive at a selling price. However I’m struggling to have a consistent price point when generating an invoice to the end user when we decide to outsource vs in-house. I may be making it to complicated, but hoping someone could give me some pointers.”

I responded with the following:

Dear Bob (not his real name), the best I can offer is some observations based upon 35+ years of consulting plus more than 30 years of publishing various pricing studies.

My first observations is that most printers really don’t understand the purpose of mark-ups and consequently, they tend to use far lower markup rates than they should.

Markups on purchases of outside products and services should be used to establish a selling price that recovers all direct and indirect costs as well as the anticipated risks, as well as produce a reasonable profit. Unfortunately, many, many printers in this country aren’t doing that. In fact, the more they broker the lower their profits tend to be.

Low Costs, Thus Low Markups?

A couple of weeks before receiving the inquiry from Bob, I received a similar inquiry from a graphic designer who told me he was just starting off in business. He said he already had a couple of customers but was totally confused about what types of markups he should use when purchasing brokered services.

He emphasized the fact that his business was very small but he wanted to grow. He noted that right now he was working out of his house and thus he had little or no overhead to account for, so in his mind that justified much lower markups. In fact, by not having to markup jobs as much he figured he has a competitive advantage.

Of course the flaw in that argument is that if he truly wants to grow his business, acquire an office, hire staff or a secretary to field calls and inquiries, he needs to be taking that into account now when he sets his markup rates. “How do you ever expect to grow and prosper if you are not charging enough now to produce profits sufficient to finance and support that growth,” I asked.

Many printers intentionally ignore a fundamental business principle that states that when it comes to pricing, every effort must be taken to recover all direct and indirect expenses involved in the production or brokering of a job. Just because a job is brokered doesn’t mean it is exempt from contributing to the general overhead expenses of the business.

The facts are it is highly unlikely you would fielding calls regarding those brokered products if it was not for the physical structure being supported by those fixed overhead expenses. If you fail to account for these types of expenses and fail to assign a portion of these costs to every brokered job you are making a serious mistake.

Markup Rates & Practices

If you bring up the topic of markups in a gathering of printers you will likely hear two common responses:

  • ” We generally double our costs, unless it is a big job and then we might lower that a bit.”
  • “We markup all outside purchases by 50%, unless they are really big jobs and might drop that down to 40% or so.”

The problem with the practice of “doubling the costs” is that it is rarely applied as a “flat” across-the-board markup. Far more common, is the practice of lowering markup rates as the costs increase. While this practice holds up well for brokered products and services costing $100 or less, many printers feel compelled to dramatically lower the markup percentages they use when dealing with brokered jobs costing them $500, $1,000 and more.

So while a 100% markup (doubling the costs) might be considered adequate for jobs costing $100 or less,  many printers seem to be terribly reluctant to use similar markups as their internal cost of the jobs starts to approach $250, $1,000 and $2,500. The irony of this type of attitude is that the financial risk increases as the cost of the job increases. If a job that costs $50 and is sold for $100 has to be “eaten” by the average printer, he or she can afford the costs of the rerun. However, what about the brokered job costing $2,500 that must be rerun at the printer’s expense? Was it marked up sufficiently to cover the risks that might be involved if the job has to be rerun at the printer’s expense? Generally, the answer is “No.”

Gross Profits* Too Low

What about marking everything up by 50% or so? Does that work? Not if you want to survive in this industry and remain profitable.  Marking something up by only 50% produces a gross profit of 33%, far too low a gross profit to sustain, let alone grow a business. Even doubling the price (a markup of 100%) produces a gross profit of 50%, and that is still too low.

*Gross Profit is defined as selling price less cost of goods. Labor costs are not included in cost of goods.

A Markup of 100%

Selling Price $ 200
Cost $ 100
Gross Profit $ 100 (50%)

A Markup of 50%

Selling Price $ 150
Cost $ 100
Gross Profit $ 50 (33%)

It is important to note that in the printing industry, as a general rule, the average gross profit ranges between 68-70% on all jobs. However, if it is a brokered job and you’ve marked it up 100% you are producing a gross profits substantially lower than if that job or a similar job had been produced internally.  Ironically, the risks involved in brokered jobs is significantly higher than those jobs produced internally. When you broker a job, you lose control of the production process. When a job is produced internally, you can spot, correct and fix mistakes far quicker than when a job is brokered.

For the record, firms that tend to broker 25% or more of their sales to outside vendors typically report significantly lower gross profits and lower net owner’s compensation. Although brokering can be profitable, it is rarely as profitable as work produced internally. The bottom line, the more a firm brokers, the less profits it tends to produce.  (Data extracted from page 33, of the 2017-18 Financial Benchmarking Study.)

All too often it seems that printers are more concerned with pleasing customers and making them happy than they are producing a profit. I suspect, that there are some printers out there who would gladly markup something up as little as 10-15% just to keep a customer happy. Worse, are the printers who totally ignore their labor and overhead costs and thus fail to take these costs into account when calculating the types and percentages of of costs that need to be recovered by every single job processed through the printing firm – produced internally or by a broker.

Don’t ever apologize – A printer who knows a brokered job will cost him $1,000 and marks it by 70% and consequently sells it for $1,700 has nothing whatsoever to apologize for or feel guilty about! Remember too, that graphic design charges and shipping charges also need to be added to that $1,700 job.

Many of the pricing studies produced by NPRC report on markup practices. Some studies only cover paper markup practices, while other studies have addressed markup practices involving outside products. The 2018-19 Signs & Wide Format Pricing Study is a good example of the latter.

Markup Rates for Outsourced Products & Services – 2018-19 Signs & Wide Format Pricing Study

As I told Bob in my email to him, “Most printers tend to use a sliding scale based upon their costs, whether they are dealing with cost of paper or the cost of the brokered product or services. Whether the markups they are using are sufficient remains to be seen.”

I offered Bob some examples of current markups in use in our industry. The data I sent him appears below:

MARKUP PRACTICES

Brokered Cost $50 $100 $250 $1,000
Mark-up % 120% 99% 86% 71%
Aver. Selling Price $110 $199 $465 $1,715

The data above is taken from page 54 of the 2018-2019 Signs & Wide Format Pricing Study. I know many printers that would  use far more aggressive markup rates.

There is one very successful printer in the Northeast who would scoff at using any markup less than 100%, regardless of the projected selling price. In fact, this printer tends to prefer using markups of 125-150%. She knows full well that some of her more timid competitors just down the street would never consider using markup rates anywhere near that large.  Does she worry about losing a job because a competitor is offering the same job for far less? Not a chance.

For those printers (and I know some of you will react this way) who will respond by claiming there is no way they could get away with markups like we are talking about I will tell you that you are wrong. Yes indeed, there are printers within a couple of blocks of your operation that are indeed marking up 100% or more and getting the jobs – the same jobs that you will timidly markup 30-40%!

Many readers claim to know their markets when nothing could be further from the truth. They know nothing more about their markets that what an occasional customer has remarked about their pricing. Oh, you conducted a pricing survey a couple of years ago and you know what your market will accept in terms of markups. Hogwash!

I’ll bet the survey wasn’t worth the paper it was written on, and I wouldn’t put a lot of faith in the individual conducting that survey either! Who was it? Your lead CSR, your delivery guy or possibly your cousin? Wolw, before you rationalize and give us all the reasons why you can’t do this and why you can’t do that, read the article titled “Shopping Your Competitors” in the NPRC Blog.

Less successful printers, those who make marginal profits and struggle to make payroll including their own, tend to shy away from markups of 100% and more, believing instead that markups of 50% are good enough, which of course they never are!

 

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