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Cost Justification

Making a Case for Color in Large Format Digital Print

By Steve Aranoff & Robert FitzPatrick

We’ve been in the printing industry for many years, and it still amazes us that there is no standard methodology for generating return on investment (ROI), or a value justification for the capital equipment, which becomes the lifeblood of the industry.

We are particularly concerned because digital print shops are different from traditional offset shops. Many are relatively new companies, not familiar with deriving value from expensive assets. These providers represent the two- to three-man shops purchasing larger roll-fed and/or sheet-fed, flatbed digital devices and associated finishing equipment. More than ever, buying the right equipment can mean the difference between success and financial failure.

A Vendor’s View
The sales force for a prominent digital printer company recently stumbled through an ROI definition. This team included brand new members to those with 30 years of experience. With all of their collective academic and industry knowledge, getting them to agree on how to measure ROI for one of the products didn’t come easily. It’s no wonder, then, why digital print providers have a hard time determining how to value a new addition to their equipment base.

A newcomer volunteered to develop a cost justification/ROI plan as part of his entry into the sales of the wide format oriented digital printing workflow component. From the group, he solicited details on the system regarding performance, as well as information about the volume of jobs that might be produced. He also spoke with customers about productivity enhancements through their new purchase.

The result was a very comprehensive, yet almost meaningless spreadsheet that the faint of heart or the typical customer would never understand or utilize. The company’s CEO indicated tactfully that the model looked comprehensive, but needed to be simplified.

Input from the more experienced members of the team was quite interesting. One of the senior sales people suggested, "I have typically built ROI models based on the cost of doing the task today versus what it would cost using the system that I was selling."

A second senior employee responded, "This stuff seems a bit complicated for me. Here’s what I would do. Produce an ROI spreadsheet designed for the first time buyer, as they are the vast majority of the sales we close. I’d make it simple enough so the prospect can take it home, run the numbers in the comfort of his office, and come to his own conclusions." This employee added that they would, "build it around five things—elimination of the cost of the prior method of accomplishing the same results; elimination of the uncertainty of having differing labor styles affect the results and their cost; gaining back the floor space taken by the prior methodology; reduction of lead time to get a job finished and delivered; and the ability to profitably take very short run orders."

These ideas were more comprehensive than the first comment, but they really didn’t change the idea of the first suggestion. They both took the easy way out. Yes, it should be very easy to justify a product that has real value as suggested. Their ideas make sense and most prospects are probably happy with such suggestions. Most sales people do it a similar way; this simplicity promotes sales. But, is that really all that should be in a cost justification?

The neophyte sales person had the right basic idea, but the wrong method of presentation. He was concerned with understanding all of the issues that might affect the decision to buy, based upon customer needs and product strengths. He covered what the more seasoned salespeople suggested, but also covered specific product competitive advantages that added to the product’s value and decreased its true costs.

He missed some important issues that go beyond simple product and process comparisons. We refer to such methodology as lifetime cost modeling, requiring us to look at a myriad of other issues such as competitive products, life cycle times, workflow, productivity, and more. The neophyte missed another facet—unique issues that affect how one buyer should look at ROI, including alternate uses for money and other business models for the company.

Sales vs. Cost
Naturally, an experienced sales person will try to do the simplest job. Not because he is trying to be deceptive, but because he believes the customer will understand it better. We can also look at this as a kind of sales justification vs. cost justification. Sales justification uses data to show that spending money saves money. A cost justification recognizes that the money could be used in other ways, and does not just compare buying with not buying.

Cost justification can hardly be based on history. In many cases, the sale of a new digital printer is to a company that has never used the equipment before. True justification for those moving into uncharted territory should be based on comparing the product to competitive alternatives. Other factors include speed in relation to volume, service, training, reliability, and connectivity. The product should match the customer’s real life usage, the market it will sell to, anticipated volume, and the capabilities of the customer.

Items to Consider
The issues to consider when determining ROI and a purchase are vast. We’ve outlined a handful to think about.

Business: Is this product the best use of your money? Would it be more important to buy something else that might have an even higher payback?

Product: How does the product fit into the current/projected workload?

Product Performance: What about reliability? The wait for service outside of a major city may be excessive, and purchasing more reliable equipment can be justified, even at a higher cost.

Lifetime Cost: What is the life expectancy for the unit, as well as the cost to maintain the unit over time?

Competitive Product Cycle: Some products get significant changes every few years, while others change less rapidly, or can be updated. An older product may also be obsolete sooner.

Product Breadth: Consider added features that give you more products to offer and ways to make money.

Business Performance: What about connectivity? Does the product stand alone or fit within current workflow?

Vendor: What is the particular vendor’s financial position, size, experience, scope of technical support, as compared to the competition?

Geographic: Can the business model hold up with competition? Does it give you a competitive advantage?

In Conclusion
There’s a lot to this so-called simple matter of cost justification. No matter how we’d like it, it may not be as simple as showing that alternative costs are reduced.

 May2006, Digital Output

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