Download The Demand Curve for Digital Printing

Digital Printing
The Demand Curve for Digital Printing
BY MARK W. FLEMING
Although digital printing can provide greater value in many applications,
it still must compete with existing production alternatives for customers' print
expenditures. In an industry dominated by low-cost offset, the demand curve
lor digital printing is highly elastic, with a dear cost threshold for significant
volume penetration. For color, that threshold is 5 cents per page.
or several years following the launch of the
first digital color presses, vendors tried to
position digital printing as a technology that
created new markets. They thought that if
digital production printing were unconstrained by the economics of existing competitive markets, volume would soar as customers recognized the
value of the technology.
Now that most digital color press manufacturers
have emerged from major reorganizations, the hope
that digital printing would create new markets has
been replaced by the reality that the technology must
compete with existing production alternatives for nearly every impression. Correspondingly, some of the rhetoric about the value of digital printing has been
replaced by talk about "elasticity of demand." However, this term has been little more than a buzzword in the
promoters' lexicon. It appears that until now no studies have been published on the elasticity of demand
either for digital or for conventional printing.
The demand curve is a fundamental relationship in
economics. It describes how the consumption of goods
or a service varies with price. Since a demand curve can
predict volumes, it is a very useful tool in market forecasting and product planning.
In 1998, Strategies on Demand developed a microeconomic model relating the demand for digital printing to the direct printing cost. Although we have used
this analytical framework to track and forecast the
growth of digital printing since that time, this article
marks the first public disclosure of the demand curves
and associated elasticities of demand. It is particularly
timely, since digital color is just now approaching the
high-growth threshold that monochrome crossed a
decade ago.
F
An Historical Perspective
A quick review of the divergent paths that monochrome and color digital printing took in the mid1990s shows how the demand curve has recently
brought these segments back to a common course.
Print on demand (POD) was born with the first
digital book production initiative in 1989. Over the
past 15 years, most of the incremental volume on highspeed digital monochrome presses has come from
products such as books and manuals, directories,
financial and legal documents, periodicals, forms and
labels that had been printed conventionally in short
runs. In fact, digital production printers from Eastman
Kodak, IBM, Oce and Xerox have largely displaced
smail-form offset presses and duplicators and have
forced major manufacturers such as A. B. Dick, Diddc
and Multigraphics into bankruptcy.
In 1994, Indigo and Xeikon introduced digital
color presses positioned to follow the monochrome
POD model. The new color technology attracted promoters who had no previous experience in the commercial printing industry. They forecast explosive
growth for digital color, confident tbat it would quickly take on the industry by competing with offset in run
lengths up to 5,000 units. However, these predictions
were unsubstantiated by the economics of the market.
Since the cost of digital color printing was 30 times the
cost of offset and the quality was limited, the industry
properly relegated digital color to a few low-volume
niches. Digital color press sales and print volumes
stalled.
This rejection led the digital color press manufacturers to abandon POD as a positioning strategy and
turn to applications such as personalized printing that
did not directly compete with offset. This approach
was also attractive to offset equipment suppliers and
their allies in the conventional printing industry, who
hoped that digital color would not follow the same
POD path that was so disastrous for short-run monochrome offset in the mid-1990s. For several years, this
unlikely consortium tried to convince the industry that
digital color would not cannibalize the conventional
printing business.
Economic realities. However, the notion that digital color
was complementary rather than competitive with con-
September 22, 2004 • The Seybold Report • Analyzing Publishing Technologies • © 2004 Seybold
Publications
Digital Printing
ventional printing did not fare well in the marketplace,
liecause it ignored two economic constraints. The first
is that digital and conventional printing compete for the
same customers. The print budgets of these customers,
collectively comprising the total marketplace demand,
have not increased merely because the suppliers have
introduced a new production technology.
In fact, the total demand for print has historically
tracked the gross domestic product {GDP}, with little
regard for changes in production methods. New technologies have penetrated the publication and commercial printing industry by replacing existing
technologies. Offset printing replaced letterpress in the
1960s, digital electrophotographic printing usurped
digital impact printing t)f transaction documents in the
1980s, and monochrome digital printing supplanted
small-form offset and electrophotographic duplication
in the 1990s. The only cases in which new technologies
were truly complementary with existing technologies
have been those where the new technologies attracted
incremental groups of customers. For example, inkjet
printing opened up the home printing market, which
was additive to the existing office printing market.
The second economic constraint is that the
demand for print is price-sensitive. In the late 1990s,
suppliers touted examples where digital color printing
fetched up to $1 per A4 impression. However, they
eventually discovered that the market was very thin at
that price level.
In 1998, Strategies on Demand projected that
when the direct cost of digital color fell to $0.05/A4
imp,' volume wotild begin to grow significantly, JListas
monochrome POD impressions had surged ahead earlier in the decade.- By 2001, when it was becoming
clear that personalization and other "complementary"
applications would not generate appreciable volume at
the prevailing cost levels, Xerox publicly set 5 cents as
the cost target for the DocuColor iGen3 to be launched
the next year. Since then, all the major digital color
press OEMs have reduced the direct cost of printing on
their high-capacity presses.
Fortunately, the monochrome side of the industry
has not been plagued with the hyperbole and misdirected marketing that led to so much confusion in the
color segment. Over the past 15 years, monochrome
digital printing has steadily captured an increasing
share of short-run offset production on the basis of
continuing cost and productivity improvements. Now
that the digital color press manufacturers are coming
to grips with the economic requirements of the market,
volumes are beginning to grow rapidly in this segment
as well.
The Mathematics of Demand
To understand how the demand curve for digital printing is derived and used, it is necessary to dip into some
mathematics. Although the underlying economic theory is beyond the scope of this article, the essentials can
Quantity Q
be understood in terms of common algebra.
The demand curve links the market price p to the
quantity demanded Q for any good or service, as
shown above. Eor normal goods, the demand curve is
downward sloping, which means that demand increases as the price drops.
The price elasticity of demand f is a measure of
how the quantity changes when the price changes.
Mathematically, price elasticity is expressed by the
equation
e=-{AQ/Q)/{Ap/p).
(!)
For example, if a 2% drop in price results in a 1%
increase in demand, the price elasticity is -l%/(-2%) =
0.5.
When there are no readily available substitutes for
a given good, the price elasticity of demand is low (typically less than 1) and demand is termed inelastic. For
example, the price elasticity of demand for residential
electricity is 0.13, and that of the entire food category
is 0.40. Demand for certain staple foods is very inelastic: 0.10 for salt and 0.25 for coffee. However, when
substitutes are well-established in the market, the price
elasticity of demand for a given good can be greater
than 1, and the demand is said to be elastic. For example, within the food category, the price elasticity of
tomatoes is 4.6 and that of haddock is 2.2,' since consumers have many alternatives to each of these particular foods.
In the case of digital printing, the major alternative
is offset lithography, which, along with gravure, letterpress and flexography, has dominated the publication
and commercial printing industry for decades. It
should therefore be no surprise that the demand for
digital printing is highly elastic.
Relationship to cost. Strictly speaking, the price of digital
printing is the value at which it is sold to the print
Voiume 4, Number 12 • The Seyboid Report • Analyzing Publishing Technologies
Figure 1. Fundamental
economics. The
demand for any
good depends upon
the price in a
relationship
described by the
demand curve. The
price elasticity of
demand is the
relative increase in
demand
corresponding to a
relative decrease in
price.
Digital Printing
DIGITAL
Color
Year
1991
1995
1996
1997
1998
1999
2000
2001
2002
TOTAL MARKET
Color
Monochrome
Volume Averaqe Volume Averaqe
Cost
(A4 imps)
(A4 imps) Cosf
2.9E+08
8.1E+08
2.7E+09
5.6E+09
6.8E+09
8.2E+09
1.0E+10
1.2E+10
0.31
0.25
0.21
0.17
0.14
0.11
0.09
0.08
2.6E+10
6.6E+10
8.7E+10
1.1E+11
1.5E+11
1.8E+11
2.3E+11
2.6E+11
2.5E+11
Monochrome
Volume Averaqe Volume Averaqe
Cosf
(A4 imps) Cost^ {A4 imps)
0.013
0.011
0.009
0.009
0.008
0.008
0.007
0.007
0.006
3.8E+12
4.0E+12
4.2E+12
4.3E+12
4.5E+12
4.7E+12
4.7E-H12
4.5E+12
0.011
0,011
0.011
0.010
0.010
0.010
0.010
0.010
' Constant 2002 currency
4.6E+12
5.2E+12
5.4E+12
5.6E+12
5.9E+12
6.1E+12
6.4E+12
B.AE+M
6.1E+12
0.0023
0.0023
0.0022
0.0022
0.0022
0.0022
0.0021
0.0021
0.0021
Source: Strategies on Demand, L,L,C.
Table I. Cost and volume, 1991-2002. In terms of constant 2002 dollars, average direct printing costs have declined dramatically for digital printing. However, the cost of digital printing is still several times the average cost across the total
production market {including digital and conventional printing). Consequently, while the volume of digital printing is
growing rapidly, particularly in the color segment, the penetration remains relatively small.
buyer. However, for purposes of constructing a
demand curve, the more relevant variable is the direct
cost of printing, which generally drives the decision
whether or not to "go digital." The direct cost includes
the amortized equipment investment, as well as
expenses for maintenance, labor, printing materials
{excluding paper), utilities and space directly associated with the printing operation.
In the more mature monochrome segment, costbased pricing is common. In this case, it can be shown
that the cost elasticity of demand is proportional to the
true price elasticity. However, digital color pricing is
volatile and less strongly correlated with cost due to
the lower capacity utilization in this embryonic side of
the market. This is another reason to gauge demand
and elasticity on the basis of direct cost rather than
price.
<:, Ic =d(QJQ
)", (2)
where j3 is a constant parameter. Equation (2) stipulates
that the relative cost of digital printing is proportional
to the penetration of digital printing raised to the power
a. When a is negative, this model exhibits the typical
downward sloping behavior of a normal demand
curve. From Fquations (1) and (2) it can be shown that
the elasticity of demand for digital printing is
f,. =-l/a.
dig
(3)
^ '
Market Data
Given Equation (2), the challenge is to obtain market
data to determine the parameters a and ft.
Most of the research in the commercial printing
industry comes from surveys and focus groups. These
Volume penetration. The promoters of digital printing
methods assess customer awareness and preferences
prefer to describe the size and growth of the market in
but do not provide actual market size, growth or ecoterms of print revenues. But a more useful metric for
nomic metrics. Nevertheless, some marketers might be
print providers and their customers is the volume of tempted to estimate elasticity of demand by polling
digital production printing relative to the volume in the
customers on the quantities that they would be willing
market as a whole. For this reason, as well as some
to purchase at various prices. The results of this
others to be discussed latei; it is advantageous to
approach are highly subjective for several reasons.
express the demand curves for digital printing in terms
First, it is well documented that respondents tend
of volume penetration.
to favor the lower-priced tradeoffs presented in such
The penetration is Q^^ /Q,,,,5 where Q^^^^ is the totalsurveys. Second, these types of surveys are generally
hypothetical, assessing customer intentions rather
volume of printing in the marketplace and Q^^ is the
than
completed actions. Finally, all surveys are subject
digital component. If the direct cost of digital printing
to
sampling
bias, since they cannot encompass the
is Cj. and the direct cost of printing across the total
entire market.
market is c , then the demand curve for digital printing can be expressed hy the equation
A better alternative is to compile information on
September 22, 2004 • The Seybold Repoit • Analyzing Pubiishing Technologies
Digital Printing
l.E-05
l.E-04
1.E-03
1.E-02
1.E-01
l.E-OO
Volume Penetration O
50
40
30 1
o
u
20
I
10
=1
0.00
0.01
-4
0.02
0.03
- • — —1^> ^^
0.04
0.05
Volume Penetration
Figure 2. Demand curves. The upper log-log ^raph shows the best fit to the time-series data by linear regression analysis.
In the lower graph, the same data and best-fit lines are shown in normal linear coordinates. The curves highlight the
existence of a threshold corresponding to an average cost of digital printing approximately five times the average cost
across the market as a whole. At that point, the penetration of digital printing begins to grow beyond 1 % of the entire
market volume. Digital color is approaching this threshold, which monochrome crossed in the early 1990s.
the industrywide cost and volume of digital and conventional printing over a span of time and use the data
to determine the parameters in Equation (2). To simplify the process, it is helpful to take the logarithm of
Fquation (2),
(4)
which can be fitted to the cost and volume data by a
mathematical method called linear time-series regression analysis. The resulting slope of the best straightline fit to the data is (X, which is related to the elasticity
of demand by Fquacion (3).
Table I is a time series of volume and direct printing cost in the domestic publication and commercial
printing industry. Strategies on Demand has compiled
these data on digital and conventional printing over
the past 13 years. The market includes digital, offset,
gravure, flexographic, screen and letterpress printing
of books and manuals, directories, blankbooks, financial and legal documents, magazines and periodicals,
newspapers, catalogs, advertising, forms, primary
packaging, labels and wrappers and other commercial
printing. The digital volumes include production printing on networked page-description-language digital
presses. Data center and office printing are not includ-
Volume 4, Number 12 • The Seybold Report • Analyzing Publishing Technologies
Digital Printing
ed. Direct printing costs arc expressed in constant dollars,, eliminating spurit)us inflation-related contributions to the regression analysis. It should be noted that
these figures represent overall market costs, not necessarily the lowest costs available at any point in time.
tion ^^ l th's extraneous market growth is
normalized out of the ratio and the analysis.
• Inflation. Costs of both digital and conventional
printing increase with inflation, which is an extraneous variable in time-series data. As in the case of
total print market growth, the effect of inflation is
normalized out of the ratio c, /c used in this
analysis. In any case, all cost figures have been
expressed in constant 2002 dollars.
Demand Curves and Elasticities
The upper graph in Figure 2 is a log-log plot of the
time-series data c.lc vs O, IQ from Table I.
Although the linear relationship is strikingly clear for
monochrome printing, the fit is also reasonably good
in the embryonic color segment. Moreover, the slope
• Print quality. While digital monochrome quality has
for color is quite close to the slope for monochrome.
not changed appreciably over the past decade,
Since c^^^^ and Q^^^^ can be considered constant at a color quality has definitely improved, expanding
the market space for digital printing. This change
given point in time, the demand curves for digital color
in quality might be expected to introduce some
and montxrhrome printing are, respectively,
departures from a straight-line fit to the data, particularly in the earlier years.
and
'1c """"' = 1.0-(Q,
(6)
Equations {5} and (6) show that the relationship
between cost and quantity Is approximately cubic. In
other words, the quantity of digital printing varies
inversely as the cost raised to a power ranging from
1/(0.37) = 2.7 to 1/(0.35) = 2.9. Hrom Equation (3),
these are the elasticities of demand for digital color and
monochrome printing, respectively. Since the difference between these two figures is small, for practical
purposes the elasticity of demand can be taken as 2.8
for both color and monochrome. In other words, a 1 %
decrease in cost will stimulate a 2.8% increase in
demand. Clearly, the demand for digital printing is
highly elastic.
• Market awareness. Digital press manufacturers and
their allies in training and consulting businesses
assert that the market needs mt)re education about
digital printing. However, over the past decade, no
other new technology in the printing industry has
received greater coverage by vendors, trade associations and the press. On the monochrome side,
market awareness had reached a high level by
1995, when more than 10,000 Xerox DocuTechs
were in operation worldwide. As for color, the
sharp rise in press placements and print volumes
over the past couple of years appears to be more
closely correlated with print quality improvements
and cost decreases than with any sudden market
awakening to the capabilities of the technology.
However, awareness and demand in earlier years
was probably depressed by the suppliers' confusion about how digital color should be positioned.
Since the volume penetration of digital printing is
very small, the average cost c^^^^ across the total market
is approximately c_ ^, the cost of conventional printOverall, the excellent straight-line fit in Figure 2
ing. However, from an economic standpoint, it would
demonstrates that the impact of variables other than
be expeaed that digital printing would ultimately discost is negligible for monochrome digital printing. The
place conventional printing when the costs approach
color picture is not as sharp, but it is getting clearer.
parity (assuming that the productivity improves
Most of the spread in tbe early digital color data points
accordingly). The driver for this substitution is the can be attributed to the vendors' changing marketing
higher utility of digital printing resulting from its
strategies and to problems with quality. However, the
greater time and targeting value in comparison with
later data points group closer to the calculated demand
conventional alternatives. Therefore, when ^i^, = c^^^^, curve, an indication that cost is becoming the domithe demand curve should pass through the point Q^^ = nant variable.
Q j . The graphs in Figure 2 show this behavior.
Anticipation at the Threshold
Time-series regression analysis has some drawbacks, but they are not major deficiencies. In addition
Since the elasticity' of demand for digital printing e. to cost, the following factors also affect the analysis:
2,8, volume is much more sensitive to cost than might
be expected. The nearly cubic nauire of the demand
curve
gives rise to a cost threshold at which the volume
• Total print market growth. In the absence of any price
of
digital
printing begins to grow significantly. Figure 2
or cost changes, digital printing would be expected
is
graphic
evidence of this phenomenon. At a digital
to grow with increased demand in the overall
print
cost
threshold of five times tbe average cost
printing industry. However, since the demand
across the total market, the penetration of digital printcurve has been expressed in terms of the penetraSeptember 22, 2Q04 • The Seybold Repoii • Analyzing Publishing Technologies
Digital Printing
ing approaches 1% and continues to expand rapidly
thereafter.
Table I shows that tbe monochrome threshold is 5c
= $0.01/A4 imp, which digital printing crossed more
than a decade ago. This year, digital printing should garner 4.5% of the total impressions in the monochrome
market, and 3% additional penetration is attainable with
only modest further cost declines by 2007.
But the industry greatly anticipates digital color.
Although digital presses currently run only 0.5% of the
total color impressions in the market, the cost of digital color is approaching the threshold required for penetration to increase by whole percentage points. With
reference to Table I, that threshold is $0.05/A4 imp —
the number that we determined in 1998.
Today's competitive presses are approaching the
nickel-a-page cost threshold at high-capacity utilization. Although the average digital color cost across the
installed base is currently higher than this level, it is
declining rapidly as the newer presses replace older
models and as capacity utilization grows. As a result,
digital color volume will ramp up to nearly 2% of tbe
total color market in 2007, the same penetration that
monochrome achieved in 1997.
In earlier years the demand curve pulled digital
color back to economic reality. Today, thanks to a dose
of that reality in tbe vendors' new business plans, digital printing is riding the demand curve into the mainstream of the publication and commercial printing
market.
TSR
About the Author
Dr. Mark W. Fleming is president of Strategies on Demand,
L.L.C., Naperville, III., a market research and management
consulting firm focused on digital printing and publishing.
He can be reached at {630) 983-7745 or at
[email protected].
' Alrh()uj;h tht term A4 technically refers ro a metric size, in this
article it is used as an abbreviation for a letter size of dimensions
fJ-1/2 inches by 11 incbes.
- Analysis presented in press briefings and publications in connection with the release of a study Digital Color Production
Printing: Cost and Productivity Benchmjrks^ prepared by Strategies on Demand, I,.l . C , for Xeikon N.V. on October 21. 1998.
' Price elasticities for various goods are tabulated in microeconomics texts sucb as Hein/ Kobler, Intermediate Microeconomics: Theory and Applications, Scott Foresman, 1986, Roger D.
Blair and Lawrence W. Kenny. Microeconomics ii-ith Business
Applications, Jobn Wiley & Sons, 1987, and James Gwarmey
and Richard Stroup, Economics: Private atid Public Choice, Dryden, 1997.
Volume 4. Number 12 * Tbe SeyboSd Report * Analyzing Publishing Technologies