“Complexity is free” and “the cost is flat” are two of the biggest lies in 3D printing. Neither is true, and I’m going to prove it. Right now.
MARKETING AND SALES
Say you open a 3D printing service bureau. You want to fill it with work, so you hire sales and marketing people to build name recognition, drive traffic to your website, generate leads, and close deals. If you take an eCommerce approach you probably spend more on marketing. If you go old school, maybe you spend more on sales, but either way you make an investment.
A customer is thinking of doing business with you. If you have an online quoting system, maybe they use it. But if their job has any kind of complexity, you’ll most likely price it offline. Someone has to do the math. If you’re receiving hundreds of quote requests per month, you might even have a team of estimators banging out quotes.
Ideally, you want to win about 40% of the jobs you quote. If you’re winning too many, your price is too low. If you’re not winning enough, either your price is too high, or something else is wrong.
Either way, whether you kill it with labor or kill it with technology, every quote has a cost. Less than half of those lead to revenue.
Once an order comes in, you’ve got to manage it. If you use an eCommerce model, the customer does a lot of the heavy lifting. They enter all their information and upload their file. Assuming your systems are connected, everything should flow right in. If you’re old school, maybe the customer emails you an order. All of his or her information has to be entered into your system.
Then as the job moves through your facility and is touched by different people, updates are made. A job’s status might go from pending, through production, to finishing, packing and fulfillment. If you’ve got a lot of work, you might even have a project or production manager overseeing those jobs to make sure everything is done correctly and on time.
Often times, files that come in aren’t “print-ready.” They need to be fixed. Whether you charge separately, or build it into your price, file inspection and repair is an unavoidable reality.
Beyond that, there’s machine make-ready. Even though digital workflows reduce the amount, there is still some time involved in setting up any piece of equipment. If your 3D printer uses multiple different materials, you might need to swap them out. You might also have to optimize your build area for maximum output.
Once a product is 3D printed, it typically needs to be finished. Again, whether you charge separately for it or not, there’s still significant time and cost involved in getting those people, processes, and technology spooled up to complete the job.
Once a job is completed, it needs to be packed and prepared for shipment. There’s cost in materials (bags, boxes, labels, etc.) as well as the time it takes to enter and confirm shipping information. Even if your production management software is connected to something like UPS Worldship, there is still a significant amount of time spent implementing and managing the integration.
Transaction cost can be defined simply as “the amount of money it takes to complete an order.” All of the costs above happen whether you’re printing one part or a million. Once they are understood, you can even do some simple math:
Total Ancillary Cost ÷ Number of Monthly Jobs = Transaction Cost
In general, it is not uncommon for most shops to initially see a transaction cost of $75 – $150 per job. Once they see the light, smart companies start looking for ways to reduce this cost. With a heavy dose of automation (which has its own switching costs), they can sometimes reduce it down to $10 or less.
So let’s look at two scenarios. Company A has a transaction cost of $75 and they’re selling a part for $10 each.
|RUN COST PER PART||$7||$7||$7||$7|
|LOSS / PROFIT||-$72||-$45||$225||$2,925|
In the second scenario, Company B has a transaction cost of $10:
|RUN COST PER PART||$7||$7||$7||$7|
|LOSS / PROFIT||-$7||$20||$290||$2,990|
Company A needs a minimum of 25 units to outrun their transaction cost. Company B outruns it with orders of 3 units or more.
Lately I’ve seen a few presentations out there where people show graphs like this:
The examples above prove that’s not the case. But, rarely does anyone call bullshit. The reality looks a lot more like this:
Until you reach the breakeven, digital remains less expensive than analog. But it’s nowhere near flat. If your customer’s average order size is 100 units, can pretty easily absorb transaction cost. If they’re only ordering one, or even 10, and you don’t account for it, transaction cost can easily sink your ship.
When people in the industry talk about complexity, they’re usually referring to customization and personalization. Customization can be defined as being able to select from a range of offerings. Small, medium or large; red, white or blue; shoe size 6, 8 or 10, etc. Personalization assumes the end product will be unique to the buyer (your name, a scan of your foot, etc.).
In either case, customers must do significant work to communicate their preferences. If it’s handled offline, there’s often a lot of back and forth before a job gets produced. If it’s handled online, through software, conversion ratios tend to go way down. The user experience is just so much more painful. You can almost smell the abandonment.
Whether it’s a customer service rep spending time on the phone with a client, or an investment in software and marketing to eliminate the labor and combat friction, more cost gets piled on.
Here’s the hidden problem. By encouraging customization and/or personalization all you’re really doing is driving order size downward. You’re catering to an audience of one. In a lot of cases, they only want one or a few of what you are selling.
As mentioned above, when order size decreases, transaction cost plays a bigger role.
Let’s say you wanted to order a personalized bobblehead. Would you rather pay $20 or $85? Company A has to charge $85, or they will eventually go out of business. Company B can provide you with the same product, at a better price. They both use the same machines. Company B is just more efficient, and efficiency translates into savings.
It’s pretty straightforward really. If you’re going to push short runs and/or complexity, you have to fully understand your current transaction cost and make every effort to reduce it. You need to automate your workflow, and you also need high volume to spread fixed costs over as many transactions as possible.
So if you would, please do me a favor. The next time someone tells you that “complexity is free” or “the unit price is flat,” ask them about transaction cost…or just call bullshit.
John Hauer is the Founder and CEO of Get3DSmart, a consulting practice which helps large companies understand and capitalize on opportunities with 3D printing. Prior to that, John co-founded and served as the CEO of 3DLT. The company worked with retailers and their suppliers, helping them sell 3D printable products, online and in-store.
John’s original content has been featured on TechCrunch, Futurism, QZ.com, Techfaster.com, 3DPrint.com and Inside3DP.com, among others. Follow him on Twitter at @Get3DJohn