It looked like it was going to be a good month as the plant had been full, most jobs were running well, and sales was celebrating the win. My belief is that your financials should confirm what you already know – not surprise you. But when the month closed, the owner was staring at a margin number that didn’t reflect the effort everyone had just put in. What happened?
Nobody had really messed up a job. The estimate came back, the numbers went onto the quote, and everyone assumed the estimate was the price. In many shops, that practice is fair game for most jobs – particularly for existing clients and the type of work that you do day in and out. What I’ve seen is that for some companies, many of the estimates are done so that a price can be added to the purchase order – it’s already your job. But for these new jobs, new clients or new products, this can be a problem.
What Estimating Actually Does
When you estimate a job, you’re building a run plan and establishing the estimated hours by cost center. Once that is done, the estimate produces a target price based on your predetermined cost-plus margins. You feed inthe specs, and poof – the math comes out the other end. You need it, your production team needs it, and every job requires it. But estimating math doesn’t know who the customer is, what your capacity looks like next week or next month, or whether this is the kind of work you want more of.
That is where estimating ends and pricing begins.
What Pricing Actually Requires
Pricing is often a judgment call, and it requires information the estimate never sees. Start with gross profit on the specific job, not your shop average. A job can look great in the estimate and still be a bad job to run at thatmargin. Think about the equipment fit: a job that fits your sweet spot can be less expensive to run than the estimate suggests. Conversely, a job that fights your presses, your finishing department, and your people cancost much more than the hours may indicate.
Other considerations include whether the work will repeat. Is it a programmatic job or account, or is it a true one-off project? Twelve runs a year deserves a different look than a job you’ll never see again, even if the estimates look identical.
Is this a new customer for you? What could this relationship be worth if it all goes well? We sometimes lose sight of the lifetime value of a new account and how hard it to win that business.
Then there are the operational details. How organized are their files? Messy files can turn into rework that never appears on the cost sheet line item, but you certainly feel it on the floor. Finally, what is their track record on payment? A job that looks great at 30 days is entirely different at 90 or 120 days. Cash has a cost too.
Six things were mentioned here and none of them are in the estimate.
Why this Gap Costs Real Money
Shops that let the estimate stand in for the price tend to win the jobs that can quietly bleed margins and lose the ones they’ve should’ve taken at a different number. If you’re able, pull your gross profit by job type and by customer and you’ll see it fast. Growing revenue while your margin erodes isn’t really growth. It’s just a slow leak and one that you usually don’t notice it until the numbers jump off the page.
Where This Lives in The Print Tringle
From my experience, this is a sales, finance and operations problem, dressed up in an estimating issue. Estimating typically sits in operations. Pricing however, needs finances’ read on the margin and cash, and sales’ read on the relationship and where the volume is headed. Skip these conversations and the estimate becomes the price by default, decided by nobody, and on every quote that walks out the door.
The Fix is Smaller Than You Think
Stop – you don’t need to run out and buy new software. You need a five-minute conversation before the quote goes out: does this number make sense for this customer, in this shop, right now? Based on the type of work and clients that fit best for your operation, you can remove some of the judgement and ambiguity. Build a repeatable process, a scorecard, based on giving a score to the opportunity against the key factors that I’ve mentioned earlier. It’s a small habit that can lead to real money.
So, here’s the question that I would pose. In your shop, who decides the price, what is the frame of reference and does that person ever talk to whoever built the estimate? Tell me in the comments, I bet the gaps are bigger than you think.
Mike Philie helps owners and CEOs in the Graphic communications industry validate what’s working, identify what needs to change, and create a practical path forward.
0 Comments