Brokering - Hey, It’s All in the Numbers!

Let the topic of brokering come up and someone will say, "John, I know you are against brokering, but what would you do in this situation, just turn the work away?" Let me clarify something—I have never advised against brokering. However, statistical data points out the pitfalls of brokering if it is not done correctly.

Let me define brokering as it applies to this column. I am talking about the practice of purchasing a printed product from an outside vendor, marking it up, and reselling it.

It is also important to note that the practice of purchasing products for resale has existed in this industry from its earliest days. The focus may have shifted from carbonless forms and thermographed business cards to large quantities of full-color brochures and postcards, but the basic practice of relying on other vendors to produce these types of products for resale remains the same.

My greatest concern about brokering stems from more than 20 years of consulting and gathering industry statistics, and that is the observation that while heavy reliance on brokering can indeed be an asset, it can also prove to be an even greater liability if it is not properly managed.
Now let's discuss three sets of statistics as they apply to our industry, and more specifically to brokering.

First, we know the average firm in this industry, after paying all the bills (cost of goods, payroll, and overhead expenses), produces a profit in the 12-13% range. Report a profit of less than 7% and you fall into the "profit laggard" category. Produce more than 18% and you are considered a "profit leader."

Second, we also know that the average firm in this country tends to broker approximately 12-13% of total annual sales. Smaller firms—those with annual sales less than $1 million—tend to broker 14-16% of their sales. Larger firms—those with sales in excess of $2 million—tend to broker significantly less, at only 8-9% of sales. This fact isn't surprising since the larger the firm, the more likely it is to have greater in-house capabilities.

Third, we also need to recognize that the average companies in this industry (those reporting owner's compensation of 12-13%), rely on three basic components to calculate profits on their P&L statements. Below is a summary of these ratios for all companies, as well as ratios for companies that broker only modestly and those that broker a large percentage of sales.

ALL COMPANIES
Average Low Profit High Profit
Cost of Goods 29% 32% 27%
Payroll Costs 31% 34% 27%
Overhead Costs 27% 31% 23%
Profit 13% 3% 23%

COMPANIES BROKERING LESS THAN 8%*
Average Low Profit High Profit
Cost of Goods 28% 31% 27%
Payroll Costs 31% 35% 27%
Overhead Costs 27% 30% 22%
Profit 14% 4% 24%

COMPANIES BROKERING MORE THAN 24%*
Average Low Profit High Profit
Cost of Goods 35% 34% 30%
Payroll Costs 29% 32% 27%
Overhead Costs 24% 28% 21%
Profit 12% 6% 22%
*Fiscal year 2005 data. Not reported in 2007.

These tables illustrate that you can be profitable in this industry, even with relatively high percentages of brokered work, but you can only achieve high profitability by concentrating on reducing costs in other areas. Compare the Low Profit vs. the High Profit categories in all three breakouts above and you will see vast differences in how owners control and operate their companies.

By the way, one interesting statistic about our industry that might surprise many readers is that gross profit, which is defined as selling price less cost of goods (not cost of production), has remained rock solid at 71% for more than 26 years. This ratio, despite the ups and downs in our economy, has varied by less than +/-0.5% throughout the history of the quick printing industry. That key ratio means that selling prices average approximately 3.4 times the costs involved to produce these products.

Obviously, some jobs, like those involving finishing, have a gross profit approaching 100% because there is no cost of goods involved. Many mailing operations often fall into this category. At the other end of the spectrum, we find jobs where the gross profit is as low as 35-50%. When gross profits reach these levels, there is little money left over to cover fixed expenses such as overhead.

In the middle, of course, are thousands of typical in-house printing jobs involving DTP services, printing, paper, plates, ink, and some finishing tossed in at the end. Since these jobs represent the majority of work processed through our operations, they often have a cost of goods in the 20-35% range and produce a gross profit of 80-65%.

When gross profit starts to decline as the percent of brokered work increases, you need to be cognizant of its potential to negatively impact the bottom line.

Based upon various studies published by NAQP, we can easily find out precisely what mark-up percentages are being used by printers when they price brokered work. As an example, the average printer tends to mark up jobs costing $250 or less, between 75-85%. That means the gross profit on these smaller jobs is in the 43-45% range. As noted earlier, the industry-wide gross profit for all jobs averages 71%.

How does the average printer handle larger jobs that are brokered? According to NAQP's Printing Industry Pricing Study, the average printer, when faced with a brokered job costing between $2,500 and $5,000, will tend to mark up his costs by approximately 50%, or use a multiplier of 1.5; producing a gross profit of 33%.

However, that 50% mark-up on large brokered jobs is an average. Some printers will mark up a $2,500 job by 75-100%, but there are many others who would hesitate to mark up a job by more than 30-35%. A printer who falls into the latter category and marks up a job by 30% must realize that his gross profit (from which all other ordinary expenses must be funded) is only 23%!
Gross profit tends to decrease for three reasons:

• Pricing practices fall behind increases in material costs.
• Owners use low mark-up rates on certain work.
• The ratio of brokered work to in-house work increases.

Note that two of the three reasons are due to brokering practices. Please note I did not say brokering, but brokering practices. I am not suggesting you lease a half-size, 5C press with a UV coater just because you are attracting more of this work. Nor am I suggesting you turn this work away.

What I am suggesting is that with improved mark-up practices, you can stem the decline in gross profits. You can increase your mark-up percentages. You can prepare a mark-up table for employees (and in your computer) that provides specific mark-ups for brokered jobs. Instead of 50% mark-ups, which yield incredibly low gross profits, why not try 75% or even 100%?

Leaders vs. Laggards

I know many successful printers (some of whom are profit leaders) who wouldn't consider using a mark-up of less than 100%, and that is for large dollar jobs. On smaller jobs, they often mark up brokered jobs by 200% or more.

The cost of full-color business cards, produced by outside suppliers, are often marked up by 300-400%. I know printers who, as a matter of practice, take a job that costs them $1,500 and sell it for $3,000-$3,500 or more.

By the way, I can already hear some printers using words "gouging" or "obscene." I do not consider these types of markups obscene at all. I see nothing wrong, whatsoever, in setting personal income goals for a print shop owner at the same level as any attorney, physician, or CPA in that same market area. If you sell yourself short, don't expect others to pick you up.

On the other hand, I know far too many printers, many of whom are profit laggards, who price timidly, especially when it comes to brokered work. They tend to shy away from large mark-ups saying, "Wow, there is no way I could sell a job for that much in my market area." Funny thing, I am often in those very same markets and I know competitors who are doing exactly that on a daily basis.

You've seen this chart a thousand times, but it is worth repeating here. Why not copy it and put it up on your bulletin board as a reminder for the next brokered job that crosses your desk:

Mark-up % Gross Profit %
25% 20%
50% 33%
75%* 43%
100% 50%
150% 60%
200% 67%
250%** 71%
300% 75%

Mark-up definition: a percent of costs, added to that cost to arrive at selling price.
*Average industry mark-up for brokered work yielding corresponding gross profit
** Average industry mark-up for all jobs yield corresponding gross profit.