5 Important Considerations for Your Shop’s Pricing

Pricing is tricky for print shops since it requires balancing profitability and a competitive price point that keeps customers coming back. What often happens is that business owners don’t look at the broader impact of pricing. They raise or lower based on short-term factors instead of employing a long-term strategy that evolves over time. That short-sighted approach can often result in slashing prices to make a customer happy, then losing money in the long term.

To get a better glimpse into how you can build a long-term pricing strategy, here’s a look at five areas you should consider. The following features two industry experts, Nick Gawreluk, founder of Print Profit, and Joe Arenella, founder of SignTracker, who shed light on the critical aspects that print shops often overlook when approaching pricing.

1. Costs of doing business

Quite often, shops need to pay more attention to the basics of identifying and measuring costs. While most businesses are obviously striving to turn a profit, they often aren’t keeping track of what’s contributing to and taking away from profits over time.

Gawreluk emphasized the importance of understanding the difference between variable and fixed costs and how they impact pricing decisions.

“Without properly identifying and measuring costs, reaching profitability becomes a function of ‘hoping for the best’ versus intentional actions,” he said.

For most print shops, fixed costs could be things like insurance, building rent (or mortgage, depending on ownership status), utilities, and, in the instance of salaried employees, payroll.

Variable costs can differ depending on the print shop type since a screen-printing shop will have different materials than a wide-format business or a shop specializing in auto wraps. However, there are a few variable costs all categories of print shops should keep an eye on.

Costs of labor

While a salaried employee would technically be a fixed cost, there are other labor costs that shops need to account for that include the full range of expenses related to maintaining your workforce.

These costs include hourly employee pay, hiring staff, training, benefits, onboarding, and retaining your employees. Depending on your business’s size, space, and printing equipment, inventory can grow steadily depending on how quickly and sizably you’re physically growing each year.

For those still working out labor costs, Arenella suggests readers visit the Behind the Signs Facebook Community to try out their free labor rate calculator from the “files” section of their Facebook page. Eventually, hiring a professional accountant will also be beneficial, especially if you want to scale up your business and hire more people.

Material costs

When the world shut down in 2020, supply chain shortages and raw material cost spikes were something business owners in all industries dealt with. And in some ways, the ripple effect is still felt in places where business owners have had to reassess where and who they source their goods from. It was a hard lesson in why shops must track material cost fluctuations.

Arenella stresses that not factoring in material cost fluctuation can wipe out a job’s profitability if you’re not paying attention.

“It’s important to list the materials you need to complete the job accurately and the exact cost of those materials,” he notes, adding that material quality can impact printed goods’ final cost and durability.

2. Pricing

Gawreluk said printers often determine prices based on outdated cost formulas that they fail to understand when it comes to pricing. “In this process, print shops lose their sense of reality in the true cost and profit generated from the order,” he noted, adding that shop owners then also fail to consider their customers and the market.

Arenella also suggested that shop owners should negotiate supply pricing based on volume year-over-year. “For example, if you make 25% more sales from the previous year, then you should be negotiating better supply pricing based on your new supply purchase volume,” he explained.

According to Arenella, markup on supplies should be roughly 100%, excluding markups for waste. Printers typically encounter around 10% waste or more depending on the substrate and printing method. But how can shops come up with better pricing techniques? Enter contribution margin.

3. Contribution margin

“A prerequisite to achieving profit in businesses is covering your fixed overhead costs,” said Gawreluk, pointing to the contribution margin as a reliable formula. “In short, generating enough contribution dollars from each order until the total exceeds your fixed costs. That way, we calculate contribution by subtracting what you sold each job for by the variable costs.”

Arenella summed up a contribution margin as the profit on a job after all the fixed costs are met. “It allows a shop to adjust the profit of a job knowing that their base costs are covered,” he states.

Implementation & pitfalls of a contribution margin

Gawreluk said implementing a contribution margin at a shop starts by understanding the contribution generated from each job and how it connects to the greater business. “With this knowledge, you can start to see your business in a new light by connecting the dots on what is helping or hurting you on the path to profitability,” he added.

Arenella said a big part of having a solid contribution margin involves knowing those initial costs and sticking firm to markups. “The danger in lowering your margin on too many jobs is it could lock your reputation in as a low-cost provider,” he points out. “In custom sign fabrication, one small mistake can eat into profits.”

If the price of a job has already been lowered to meet a customer’s demands, then the job’s profitability is at a greater risk, Arenella stressed.

Successfully implementing a contribution margin requires that shop owners stay consistent with tracking the data, ensuring all departments understand the contribution margin, and that there is always room for error. While no shop wants to have a misprint or incorrect order on their hands, leaving space for those occasional flubs can help draw a more accurate picture.

4. Adjusting prices

Slashing prices isn’t a reliable, long-term solution for maintaining profits, but there are some instances where you can adjust prices. Often, meeting a customer on price will come down to your relationship with them and whether changing the price will benefit your shop in the long run.

“Shops with ample open capacity may be more willing to work with lower margin, contract customers,” said Gawreluk. “They can continue generating contribution dollars with their existing resources that help the business cover monthly fixed costs and reach profitability.”

Arenella cautioned about cutting prices too freely for more custom manufacturing and specialized jobs because of all the specific costs associated with that line of work.

“Once you break even, it might make sense to take on a few small filler jobs at a lower cost to keep the shop moving,” he noted. “But overall, it is best not to lower prices. Change scope maybe, but keep prices consistent.”

Regarding raising prices, Gawreluk said there are some situations where reevaluating lower-margin customers can warrant some change.

“The name of the game is curating a mix that drives as much impact to the bottom line as possible,” he suggested. “Another example could be passing along reasonable price increases as a response to the ever-growing list of increases faced throughout your business.”

Arenella pointed back to material costs. Simply put, if costs rise, then prices will have to follow suit, especially for smaller businesses that need every job to be valuable to their bottom line.

“I do think there is an intrinsic value to your services, and customers will pay extra for great service,” he said.

5. Internal and external economic factors

Whether it’s direct-to-film, direct-to-garment, banners, or any other major print market, this industry has its share of fluctuating factors that can also affect price.

“One of the things I enjoy most about the printing industry is that it never sits still and continues to evolve rapidly,” Gawreluk said.

He points to shifts in printing technology as a prime example of impacts on a shop’s changing cost structure, including what additional value it may bring to its customers and how they price accordingly.

Arenella urges business owners to monitor costs closely rather than simply base their prices on last month’s costs. That includes supply pricing.

“Focus on sales and relationships with customers that value your work,” he added. “Fabricate what you are really good at (cost efficiency) and expand your sales using outsourced fabrication and installation.”

In looking at the broader economy, Gawreluk said staying current with trends is helpful, regardless of business size, scope, and niche.

“We live in a VUCA (volatile, uncertain, complex, and ambiguous) world where I believe it’s never a bad idea to stay educated on what’s happening throughout the greater economy,” he said. “Knowing the challenges and opportunities your business and consumer customers are facing will allow you to make more strategic day-to-day decisions on how you serve them and, as a result, price the work.” GP