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Here are some of the lessons I have observed in pricing:

1. There is not a single best way to price.
2. It is safest to price like everyone else.
3. "Everyone else" doesn't price the same way.
4. "Everyone else" doesn't always know why she/he prices like she/he does.
5. It costs to price accurately. Being precise is expensive (though automation can lower these costs). Accuracy should be measured relative to the size of the order.

As you can see in Figure 1, the common approach varies by segment, though almost every segment has multiple "common" approaches.

The difference in the method you use should depend on (in their order of significance):

1. The amount of competition you have.
2. The system you have in place for pricing (manual vs. automated).
3. The average size (in dollars) of your orders.
4. The skill level of the person pricing (or the person that should be doing the pricing. In some shops the owner should not be doing the majority of the daily pricing).
5. The industry standards.

Rather than tackle these items textbook style, what follows are the most common questions shop owners ask about pricing. Since you probably have or have had these same questions, let's get straight to it.

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Question: How accurate should I try to be in my pricing?

Answer: To answer that, you need to know how much it costs you to get the price and approximately what the size of the order will be. Using those numbers, you can determine the relative cost of estimating. Let's look at an example.

Example: Let's say it takes you 15 minutes for a salesperson to estimate the price for a $300 job. Assuming the salesperson makes $50,000 per year (conservatively $25/hour for calculations), that quote cost you about $25/4 or $6.25 to calculate. On a $300 job, this equates to 2.1% of the price. A 2% built in cost may not seem too bad, but remember the true number is a lot higher when you consider the ratio of jobs won and the opportunity costs involved.

The difference between automated pricing and manual pricing is primarily a function of technology and process. There are also many levels of semi-automated companies with values that fall in between these.

Question: What approach should I use to arrive at the best price?

Answer: That's a loaded question. My view is that the only way anyone could answer that would be to know your operations, strategy, and goals intimately. Barring that, here is my advice boiled down:

Focus on the areas you are better than average at. One of the biggest problems we see is with companies that want to compete in every arena. It is great to sell in every arena if you feel you have to, but you should try to price to win work in your core areas. This is where you should really compete and make your money. In areas that you are only average or worse, make sure you have lots of extra margin in the job. That way, if you win it you will still be profitable.

In the next few articles we'll discuss different approaches for different industry segments. These will answer this question more directly.

Question: Should I try and automate my pricing?

Answer: Often this question is asked by someone who really wants to ask the last question and is looking for pricing control and consistency rather than efficiency. While automation can impose a disciplined system, it is most effective when it is used in shops with pricing disciplines already in place. You can't automate what you don't know. So if your pricing is still out of your head (and your head only), it is unlikely that someone else can bring order to your shop. The owner has to be willing to work with the vendor to put the pricing expertise into the system.

Here are some common reasons to automate, but you must personally assess whether you are ready to automate.

• Reduce the stress from current and future growth.
• Reduce the cost of estimating.
• Allow me to respond more rapidly with more accurate quotes.
• Reduce the training to estimate so it is easy to add new salespeople.
• Reduce errors caused by and time lost to redundant data entry.
• Reduce the dependency on one or two key people with everything "in their head".
• Improve the completeness an accuracy of the information that sales collects for production (integration of sales and operations).
• Improve operations.

Here are some of the signs you are ready to automate:

• You have a good manual system that is reaching or has reached its limit.
• Things are stable now, but you are expecting 20% or greater growth in the future.
• You have good systems, but they are "islands of automation" for production and sales.
• You want even greater growth in the future.
• You want to reduce the time spent on quotes and paperwork.
• You are planning to sell or retire in the next 3 years.

Expecting automation to be the disciplinarian where there is no discipline is usually not a good idea. In fact, it is likely that any automation project will be abandoned or circumvented if installed in an undisciplined company.

Question: Why does the "size of the order" matter when I'm looking at my pricing?

Answer: In the questions above, I identify the cost of estimating as a percentage of the order size. It is fine to be within 5% of the price for $300 order. But would you want to be 5% short on a $50,000 order? The accuracy you need to build into your system depends a lot on the cost of being wrong. You won't loose too many valued customers if you price a $300 order $15 (5%) too high, but you can bet you'll loose a lot of the $50,000 orders with the same 5% hike ($2,500).

You should design your pricing so that 60-70% of your orders have the acceptable accuracy level (80-95% for automated systems). Then, anything outside this range should be checked a second time. For manual systems, we used the rule:

For automated systems, this rule can be extended so that you are only double-checking when the order is 10 times greater, but the idea is the same. At some point, the accuracy you have designed into the system needs to be checked. Though "the burned hand teaches best," try to learn this lesson before getting burned!

So, what is the best way to price? As I tried to layout, my experience is that there is no single best way to price. There are many factors to how you should price, and those factors may be different for your competitor up the road. There is also a cost associated with pricing that you should keep in mind, because accuracy and precision in pricing are not free, though the costs will vary based on the level of automation in your shop.

In the next few articles I'll explorer more deeply the "norms" of pricing in various segments of the sign and graphics industry, with specific articles on pricing in Vinyl, Digital, Screen Printing, and Electric Signage. And if one of the articles doesn't directly apply to you, hopefully you'll still glean some knowledge from the approach that others use.

About the Author: Scott St.Cyr is the C.E.O. of Cyrious Software, Inc., a software company that specializes in pricing and business management software for the sign and graphics industries. He formerly owned 5 sign companies with Vinyl, Electric, Screen Printing, and Digital Printing departments. He holds a BS in Electrical Engineering from the University of Louisiana and an MBA from Harvard University.