The Blueprint

The Dangers of Price per Copy Programs (Part 2)

Somebody said recently, "We have run our internal costs and we know the price quoted for the price per copy program is lower than what we are paying today."  The key word here is "today".  The analysis may be true based on your current cost structure and your current volume, but these may change at any time in the future. The following items are fixed with a price per copy program:

1. The cost structure
2. A minimum commitment of volume
3. Specific hardware devices
4. A specific level of service from the hardware manufacture

These restrictions are fixed over five to six years depending on the contract.  Below are some specific examples of how these restrictions can impair your business. 

The Cost Structure

• Toner and inks are high margin components for printer manufactures.  If a manufacture wants to be price competitive this is one of the best places to lower prices.
• Third party toner manufactures, creates high quality toner at a significantly lower price.
• Reprographers performing self service can perform service at a lower unit cost than the price per copy program.
• Reprographers performing self service can operate on extended hours and effectively lower their unit cost through economies of scale.
• Ink-jet technology evolves to the point where it can do production color and black and white at a lower cost and similar speed at LED technology.

Minimum Volume Commitment

• The AEC industry does less printing because printing is done on-demand instead of distributing multiple bid sets.
• The AEC industry moves towards more 1/2 size printing as the manufacturing industry did .  This effectively lowers volume for the same amount of documents printed.
• Customers want to print more on-demand when they need it in the office or on the construction site.
• Success with your FM program causes customers to print on your FM devices (which by the way may be very profitable)
• Downturn in the economy caused by a recession or an act of terrorism.
• They cyclical feast or famine nature of the construction industry.
• A large competitor decides to squeeze you by lowering the price and out spending you.

Specific Hardware Devices

• The use of color increases in production sets.  This takes volume off the committed machines.
• 600DPI (or higher) becomes the standard and volume must be moved onto 600 DPI machines and taken off equipment on the cost per copy program.
• Volume moves to FM's or new offices that are closer to the clients.  This equipment must be added to the program or it will detract from the monthly commitments.

Specific Level of Service

• The market moves to extended hours (multiple shifts) to lower costs and take advantage of economies of scale.  A company in a price per copy program will find this difficult due to lack of service options.
• The option of self servicing equipment is restricted for the duration of the contract.

These examples are to get you thinking of those things that could happen over the life of a contract.  Those offering price per copy programs may have creative ideas to minimize the risk of such events.  That would be great, but make sure that is in writing and doesn't contradict any contracts you will sign.  Once you sign a five to six year contract you have lost all negotiating power.

The Dangers of Price per Copy Programs

Many people have been asking about the viability of price per copy programs being promoted in the market today.  I believe strongly that they are bad for  individual companies, and they are bad for the whole industry.  The vendors promoting these programs are using the Reference Price Effect against you.  They are encouraging you to look at a proposed cost and compare it to an "actual" cost.  The proposed cost looks better than "actual" cost.  This is deceiving and very dangerous.  This is not a small one-time purchase.  It is a long term commitment that can have a dramatic affect on your business.  The reason that comparing only these two numbers is dangerous is in summary:

• The numbers are not the same under different scenarios, one must look at multiple scenarios to truly analyze the costs.

• There are very broad assumptions made about the current situation and the future situation used to calculate those numbers.

There are situations where a price per copy program is good.  If your core business is NOT reprographics then this type of program may make sense.  For a reprographer to offer this to an architect or an engineer is great for the reprographer and it is good for the customer.  The reprographer has a recurring revenue stream and the customer has predictability and a lower cost.  Since reprographics is such a small component of their cost structure (direct or indirect) this risk of such a commitment is small.  The architect is in sense outsourcing their reprographics services.  Outsourcing a non-core component of your business makes sense.  Outsourcing a core component of your business offering is dangerous.  Would an architect outsource the design of buildings?  I don't think so.  If your core business is reprographics this type of program will work against you.  The predictability that is provided to the hardware vendor offering the program will introduce a restraint on the reprographer’s business.  Since the percentage of the reprographers business that is being locked down is significant, the risks are also significant.  In some cases the cost structure for 70% of a reprographers business will be locked in for five to six years.  Who knows what will happen even in next two years?  How can one predict what will happen to the cost of goods or the volume of business in the next five to six years.  Just think what would have happened if five years ago travel agents committed to reservation systems a certain amount of transactions to be paid to travel booking systems like Sabre?  The advent of online booking has changed the dynamics.  I know travel agents who are quite successful, but they have become successful by changing their business model.  They make money in different ways.

The technology in commercial reprographics is accelerating and the business environment is hyper-competitive.  I believe these factors will cause several paradigm shifts over the next six years.  Those companies that have flexibility to adopt will thrive, but those customers who have restraints on their core business will find adapting to change difficult.

I will create several posts over the next couple days to demonstrate the dangers of these programs.  I encourage anyone who disagrees or has additional insights to comment.

Case Study: Escaping Commoditization

Seth Godin, marketer extraordinaire, has an interesting case study on an entrepreneur that escaped commoditization.

The Reference Price Effect

A buyer needs to have a method to compare alternatives. If it is a strategic purchase (a “consultative” sale) there will be a fairly complex method of comparing alternatives and choosing the right solution. If it is a commodity purchase (a “transactional” sale) the buyer looks at two things: price and convenience.

What is price? Price can be misleading. A buyer of a commodity uses price to compare alternatives. The buyer is not always taking into consideration the total cost of his purchase. He wants to believe he is making a smart decision. In pricing strategy there is phenomenon called “The Reference Price Effect”. This states that buyer will be more price sensitive the higher the product's price relative the the to the prices of the buyers' perceived alternatives.  In other words, if the buyer believes that there are many others who can deliver the same service he will focus much more on price.  Another key point is it is the buyers "perceived alternatives".  It doesn't matter what the reality is, it matters what the perception is.  If it is a transactional purchase the buyer will make a relatively quick decision and will go with what he perceives is the best price.  He assumes that all suppliers provide the same product and service and price is the only differentiating factor. This is frustrating for those who don’t want to see their business reduced to a cut throat price, but if that is your market you must accept it. You can work on moving to a consultative model with customers who appreciate more value added services, but in the mean time you have to compete.

The perceived prices the buyer is comparing are not always the actual price. Some of the reference prices include pickup and delivery charges and others don’t. Some prices require a separate split delivery charge and others don’t. Buyers or reprographics services focus on price per square foot because that is the means by which they compare providers of that service. At least if they perceive the service as a commodity. 

If you include everything in your price and charge a higher than market price you will exclude certain customers. Those customers are not necessarily cheap.  They believe they are making an economical decision. They may also be accustomed to paying additional fees for additional services. If your market makes decisions based on price you need to make sure your pricing model fits your market, not the converse.

We all deal with this as consumers. I deal with this phenomenon when I travel. I will often go to Expedia to book a flight. I will enter WAS, for all Washington airports and my arrival city and Expedia will return a list of flights sorted by price. Every so often I will book a flight because it was a couple hundred dollars cheaper only to find myself stuck in traffic and paying expensive parking fees to park at Dulles Airport or BWI Airport.

I live 10 miles from Washington National airport. It is a $15 cab ride to the $2 metro which takes me right to the terminal. I am over 40 miles away from both Dulles and BWI.  Washington National is not always the cheapest, but when you add up the costs (including my time) I don’t away make the smartest decision. It feels right at the time I book it, when I am comparing prices side by side.

Most airlines are charging additional fees for meal in coach class. If I am hungry I will buy a meal, but I can’t honestly tell you if the meals are more expensive on US Airways or Delta. I will choose the most reasonable flight based on the price of the ticket on Expedia. The price of the flight is the “reference price”. That is the price that I will use to choose my flight. The airlines and airports have plenty of opportunities to make money off me traveling to the airport and when I’m on that flight.

You may say "I don't want to have to deal with getting into that level of detail with the pricing".  If your business is moving quickly to a consultative model then you will not have to pay that much attention to those details.  If you are still primarily in a transactional model you must pay attention to these details.

Are Relationships a Competitive Advantage?

There are many reprographers who are convinced that they get business because of “their relationships”.  For a transactional business model this is becoming less important.  I don’t want to trivialize the value of relationships. They are important in all aspects of businss, but in a transactional business or a commodity business they are becoming less important.  In a consultative model a relationship is more important. In transactional business models price and convenience are ultimately more important than relationships.  Do you buy gas at a gas station because you have a good relationship with the attendant? Do you shop at WalMart because you have a great relationship with the Walton family? Have you ever heard a customer say “I really value our relationship, but we had to give this work to XYZ company because…, we will still give you some other work.” This is a nice way of saying I like you, but for whatever reason (price is better, other services are offered) we are moving away from your company.

This dynamic is changing. If you do have good relationships with your customers you should use that as an opportunity to start building a business consultative model within your business before you get pidgen holed into a 100% transactional business.

Which Opportunities to Pursue?

Several people at the IRgA show asked “with all of these opportunities presented to us” where should we start. That is an excellent question. Even though there are non-traditional opportunities you can’t wake up tomorrow and ignore your core business. Most of your revenue and profit is derived from printing project-critical construction documents. Even if you decided to pursue these opportunities, you may not have the internal core competencies necessary to deliver these products or services. I was exposed to an interesting tool in a marketing class I took. It is called the stoplight model.   I believe that General Electric used this tool to determine which new businesses opportunities they would pursue and which they would decline. The model has two factors “market presence” and “core competency”. Are you currently in the market segments where this opportunity could be marketed? Do you have the internal knowledge and skills necessary to credibly bring this product to market and support it?

For example, if you do not have the core competency to outsource reprographics equipment (FM’s), then you should not be exploring outsourcing video conferencing or CAVE’s. If your market niche is contractors and very few of your customers are architects then delivering CAVE’s would be a difficult endeavor. 

The stoplight model can help an organization more quickly determine whether they should quickly adopt an opportunity, stop spending time on it, or further explore that opportunity.

Why Outsourcing is Good

I'm not talking about outsourcing call centers to India.  One of the themes I picked up on at the IRgA this year is the desire for stakeholders in the AEC industry to outsource certain business processes and also to rent equipment and services.  There were several architects, including David Watkins the key note speaker, who identified things that they were doing but we would rather outsource or rent.  This included 3-D Printing equipment, CAVEs, Video Conferencing, and administering BIM data.

Note none of these services include putting toner on paper, but are very valuable to the construction industry.  These presenters believed that reprographers (as service providers) could offer these services.

Thank You IRgA Staff

I've returned from the IRgA show in Orlando and I've almost recovered. Somebody was joking that you have to get in shape for the show every year. I thought the show was a success. There were a lot of people that worked very hard to pull it off. I have to give credit to Steve Bova, IRgA Executive Director, and his dedicated staff. I have had the pleasure of working with this team over the last year as I served on the board. They take their role, the success of the association, and the success of the industry very seriously. They have worked very hard over the last several years to turn the trends surrounding IRgA from a “viscous cycle” to a “virtuous cycle”. They have dealt with many adverse situations. They have convinced the board of directors to make difficult decisions that were not popular, but were ultimately the right decisions. They have channeled the energy of the board and the membership to focus on high priority activities that bring value to its members rather than supporting “sacred cows”. They have helped to increase our focus on continual education and developing a level of professionalism both in the association and within the industry. In this fast changing business climate, the industry and the association need this type of guidance and focus. For those who attended the keynote presentations and the educational sessions you know what I’m talking about. For those who did not attend the convention, or take the time to get the full experience, I believe you missed out on a great opportunity to learn. I encourage you to take the time next year.

Thank you IRgA Staff!

Moving from Transactional to Consultative

When engaged in a conversation with a reprographer about consultative versus transactional business models, most agree that they are mostly transactional, but want to move towards a consultative model. This is a very hard thing to accomplish. It is important to note that the world needs transactional models and those models can be very profitable. Everybody purchases commodity goods. There are many purchases, where as consumers, we don’t want to be consulted with.  There is demand and there are many companies that are very successful in this model. Exxon for example (not just because of gouging). If I buy gas, I don’t want a gas station attendant to tell me how he can help me improve my gas mileage. I want to buy the gas and move on. There is money to be made in transactional selling, but it is a much more cut throat and price sensitive business. Consultative models if executed correctly are more predictable and thus more sustainable.

The key to moving out of a transactional model into a consultative model is to execute both models concurrently. If your business is transactional today you can’t change it into a consultative model over night. It is your transactional business that pays the bills. But per Neil Rackham’s conclusions you can’t have the same people working in both models. This means there will have to be an investment to move towards a consultative model. You need different people. You need different ways of measuring the business. It will take time to grow! Where do you get the money to invest in this? From a more profitable and cash flow positive transactional model!!!

Different Strokes for Different Folks

One of the most profound concepts aligned with the previous post it is very difficult if not impossible to have the same people working in both models. The reason for this is each model requires different skill sets and more importantly different mindsets. This could be proven with some sort of personality tests like Myers-Briggs or Kolbe. A sales representative who excels at making many phone calls and sending out many quotes and has been successful working this model will have a very difficult time if he must walk customers through a sales process that may take 3 or 4 months. Conversely a sales person who has been successful closing large sales by consulting with customers on their business processes will not be successful in a job where he must make 100 phone calls a day and visit 10 customers a day.

A sales manager who must manage a sales force will similarly have problems. A transactional sales manager will manage the activity of his sales reps, where a consultative sales manager will focus more on managing the qualifying the opportunities, and executing an effective process.  

I was at a Neil Rackham seminar where he gave an example of company that sold high-end telecommunications switching equipment. These are very expensive, very complex and highly customizable. The average sales price was over $200,000. These sales arguably required a consultative sales process. Management was not happy with the sales results so they sacked the current sales manager and brought in a very successful sales manager from another division of the company. The division he worked in previously sold cellular phones. After interviewing his new staff and looking at the results he proclaimed to his new bosses, “the problem here is simple – these sales reps are not making enough calls”. He developed a system of measuring phone calls and customer visits. He feverishly held his sales reps accountable to goals measuring their activity.

The result was a sudden increase in sales productivity…followed by a dramatic decrease. Within a few months most of the sales reps were either fired or left the company looking for a job where their consultative selling skills could be used. New hires would most likely be unsuccessful. The manager would hire sales reps that have been successful maximizing their activity and thus feel comfortable being measured this way. The type of product and the type of customer this division sold require a sales representative who can help them analyze their complex needs and consult with them to devise a solution – not push a product in a short period of time. The change in sales manager may have been justified, but without understanding the difference between transactional and consultative models the results were disastrous.

Do you have any sales reps who have been successful selling traditional reprographics services who are having a difficult time selling document management solutions?  How are your sales representatives managed?