Chapter
7: The Print Run decision
In chapter 5 we studied various methods of analysing investment decisions. These included Return on Capital and Cashflow pricing. We shall now apply these concepts to one element of the investment decision – how many copies to print.
They do not have to be charged against the first printing but most publishers in young economies live on a survival basis and will find it difficult to develop large projects unless they receive a grant, or advance payments from foreign publishers who are buying coeditions. The concept of charging all new title costs against the first printing implies that the publisher is not confident of future printings or that the book market is not very competitive. Perhaps the majority of publi-shers however do charge all first edition costs into the selling price. This is not the case in textbook, dictionary and reference book publishing where long reprint life is required to justify the investment.
The attitude of charging all first edition costs against the first printing is contrary to our invest-ment theory as it implies short-termism and leads to the publication of more and more titles, which never reprint. Publishers spend little on promotional efforts, which might boost a title’s sales. Typically publishers may spend approx. 5% of turnover on promotion costs.
However Copyright Laws in young economies in part justify the decision of publishers who charge out all first edition costs in this way. If the author grants the licence for a single printing, then the publisher is being prudent in acting in this way. However the author may earn higher royalties if the publisher builds a sound reputation for the book by affordable pricing.
Paperback publishers (in developed economies) hold stocks of standard sized paper reels and know that they can obtain reprints within 7 days by rescheduling the forward printing programme. For them the key decision is to give each title a wide exposure in bookshops. Therefore they will not always price a title on the basis of the first printing.
By comparison the entrepreneur invests in creating an asset – unique information, illustrations, text, electronic analysis, unique customer list – which he will then develop and exploit. The product from this asset may be a paper product, digital or licensed. The emphasis will be on creating a small number of assets with large and growing potential over a number of years. In these circumstances the decision on how many copies to print will be based on maximising the product’s sales over a period, say 6 months, and thereafter reprinting in an upgraded improved form or alternative format or formats.
The following issues have to be taken into account:
The following issues have to be taken into account:
We shall now apply cashflow analysis, Payback and the Discounted Cashflow Method to analyse optimal print decisions. In chapter 5 we calculated the cashflows of our typical title and then calculated the Return on Investment using the Discounted Cashflow technique. We can analyse alternative print run strategies by comparing the impact on the Net Present Value and on the IRR (Internal Rate of Return)
It is important to repeat again that the discount factor, here 24% must be chosen carefully. This is not the ROI (Return on Investment) of the organisation as it simply studies the incremental cashflows which result from proceeding with the title. For example taxation is not taken into account, Long term Assets and administration costs are not included, as only the incremental costs have been included. However once the appropriate discount rate has been selected, the technique allows a quick review of alternative print run strategies. The table below repeats the example used in chapter
5. The Net Present Value of 234, being positive, indicates that the project
make a return of greater than 24% (the discount rate. By using the spreadsheet
function, we calculated that the project made a return of 35.6%.
Using the above table we can see that:
In the case of the cost items and royalties, these improvements in cashflow can take place as a result of:
In the case of the sales items, these improvements in cashflow can take place as a result of:
Using the above publishers can assess the likely financial outcomes of promotion costs in improving turnover and rates of sale, the use of payment incentives to customers.
Our purpose here is to analyse the advantages and disadvantages of different print run policies. We shall thus assume that delays in cash payments result from the deliberate and negotiated delay of contractual commitments and hence future liabilities. We shall assume that the printer will maintain the same terms of trade and credit but will reprint part of the quantity required rather than print the total requirement as a single print run. Before we carry out the analysis it must be added
that publishers will frequently enter into contracts with printers on the
following bases. In each case the cashflow is improved but the publisher’s
risk and liability will vary.
In our analysis of title investment decision we assumed a print run of 2,000 copies for a total cost of US$ 3,880. The cashflow forecast showed that the paper cost within that figure was USD 1,880. The unit cost was US$ 1.94. As the run-on cost was US$1.78 we can see that the fixed cost for montage, plates and make-ready costs was US$320 (US$ 320 + (2,000 x 1.78) = US$ 3,880).
We will now analyse whether it would increase the return on the title if we print as two print runs of 1,250 copies and 750 copies. We will assume that the start-up costs for the second printing will be lower at USD 200 rather than 320, and that there is no inflation. The table below shows the revised cashflows in the Net Present model. Months 7 and 9 have been repeated
on 2 lines in order to illustrate the separate transactions in those months.
You will note that the discount factors for those 2 transactions are the
same. Under a spreadsheet model and using the spreadsheet NPV or IRR functions
this would give a wrong result if costs and revenues for the same year
were shown in separate lines.
The Net Present Value has fallen
from 234 to 139 showing that it is better to print as a single print run.
However if sales were projected over a longer period, then two printings
might have been worthwhile.
However, if the publisher is able to persuade the printer to invoice paper at the same cost when the books are delivered, the return increases as the Net Present Value is now 247, 13 higher than the original scenario. The IRR is now 38.1% against the original IRR of 35.6%. However it is likely that the printer will make a higher charge for delaying the invoicing of the paper (or the paper merchant delaying invoicing).
The technique does illustrate how easy it is to analyse optimal solutions on print runs. It illus-trates also why printers and other suppliers are so anxious to demand advance payments or prompt payment. In most young economies the workloads of many printers have fallen because they have not reacted to economic changes, rivals have invested in new machinery, or because foreign printers have claimed market share as foreign investors have demanded higher quality and service.
The Net Present Value Method can be used also for analysing the following:
In developed countries the culture is that suppliers are paid when work is completed. The power starts to move away from producers to the buyer. This is both to act as an incentive to deliver as well as because of the impact on the return on investment.
A spreadsheet model is available with this book which will allow readers to make these assessments themselves. A copy is shown in Appendix 1d. Readers should take care when making amendments to the model except in changing the data. In particular readers should take expert local advice e.g. from their bank on the discount rate to use. EXAMPLE A customer is ready to sign a deal to purchase some new books for 4,000. He is prepared to pay in either of the following 2 ways. You believe that he will keep to the conditions.
Deal A: 1,000 on
signature, thereafter 3 instalments of 1,000 at 3-month intervals Workings
Deal B generates the higher Net Present value and is therefore preferred. This is equivalent to receiving 3,739 today. However after 3 months the cashflow in Deal A is better by 500. Risk and cumulative cashflows must also be taken into account.
Publisher A
Publisher A is a publisher of children’s books selling through toyshops and retail stores. He sells to limited number of customers. His customers are toy buyers and see his products as additional “toys” for children. Most of the books are sold in the 3 months leading up to Christmas. The stores place their orders in January. Commission sales agents service other stores.
Publishers A places all his printing with a large local printer and confirms the orders in January. Most rival s use overseas printers. The printer invoices the publisher on delivery. The publisher confirms the numbers to bind each month. In most cases copies are therefore invoiced to the customer in the same month as the printer submits his invoice (plus credit). Working Capital is therefore kept to a minimum
The publisher’s ROI was constantly high but the problem was the difficulty of expanding the market using commission agents only. The printer knew that a percentage of his capacity would be filled and could therefore sell more confidently to other publishers. The arrangement worked successfully for a long period of years. Publisher B Publisher B had started as a distributor and later became a publisher. Noticing deals like Publisher A above, he applied the same concept to adult books and added a number of foreign customers. His logic was similar but he noted also that the contribution in USD per adult book sold was almost double that for children’s books.
In many countries up to 80% of books are sold in the pre-Christmas period. Retailer A
Retailer A contracts with a small number of publishers on a firm sale basis for delivery just before the pre-Christmas period. The return on Investment is high for both retailer and publisher despite the low % margins. However publishers with sales staff and distribution depots are not making maximum use of such resources on such deals. Publisher C
Publisher C prints its own books to a standard format and number of pages. Books are sold to toy stores, retail stores and to bookshops. Books are sold in packs of multiple copies ready for merchandising in the customers’ store.
Each book represents a sheet or half sheet on the printing presses. The case binding is standard to all titles.
Thus while the publisher has the cost of the printing plant, inventory of printed books is kept to a minimum although it was necessary to hold an inventory of paper. Customers were happy to stock the titles because, as “impulse buys” they sold out quickly.
(Many jealous competitors tried to compete by finding cheaper printing sources but with no major success as the publisher had an established “brand”) Publisher D
Publisher D noticed a gap in the market for out-of-print books for professional workers. Companies and other organisations were the purchasers and these customers were able to offset the cost of such books against tax. He installed a small offset printing machine and 2 photocopiers. Books were hand-bound. Copies were sold by direct marketing. Customers paid with order or on short-term credit. Publisher E Publisher E is part of a non-profit-making foundation. The foundation has some printing presses but most worked is printed with outside printers. Their products provide essential or semi-essential information to companies. The focus of the publisher division is totally towards creating unique information databases, which are produced and sold in printed and digital and Internet form. In most cases books are printed “on-demand” when orders are received.
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