The Real Costs of LEDs in Sign Manufacturing

This article was published by Sign & Digital Graphics Magazine July 8, 2016. VIEW HERE on their website.

By: J. Bryan Vincent, Ph. D. | Partner, Principal LED

As an LED manufacturer exclusively serving the electric sign industry, we are constantly evaluating our material costs with both distributors and sign companies. I regularly hear about tightening margins, and typically the finger pointing goes back to the easiest target—material suppliers.

My friends who manufacture plastic, metal, paint, and film tend to agree. When I travel to different sign shops, I hear each of them tell me about how “competitive” their market is, as if somewhere there must be some Garden of Edenwhere there are no price pressures.

Material providers have become the magic bullet for sign companies to improve gross profits and often purchasing managers play manufacturer and distributor against one another. While this approach may generate profits in the short term, I do not believe it will produce sustainable results. In fact I suggest that it may be harmful to the long-term health of our industry.

Evils of Price Erosion

No one knows what price erosion feels like more than those of us who have manufactured LEDs for signs over the past decade. In ten years, we have seen the performance of LED modules double or triple, while average sales price has eroded by eighty-plus percent. While this is primarily a function of the semiconductor industry, it is not typical for other more commoditized sign materials.

Imagine, as a sign manufacturer, if the same 4’ x 8’ double-sided monument sign that you were selling in 2005 for $5,500, you sold today for $750. That is exactly what has happened in the LED sign module business. In order to do this, you would likely have to cut corners—from materials to less skilled labor to lower margins. The fact is that we have started down a viscous path that I believe may hurt our industry in the long term if we don’t start thinking differently.

Pricing Pressures

People often ask me where the bottom is for LEDs. Figure 1 tells the story clearly. Prices have started to bottom; however, module brightness has continued to advance thanks in part to our big brothers in the general lighting market. The LEDs inside of the module now only cost about 20 percent of the total manufacturing cost of a module, with the rest being VHB tape, plastic housings, lenses, PCB material, wire, other electric components, and freight costs.

This will create an interesting scenario where at some point no more light is needed, as signs are more about distributed light than bright point sources as in general lighting (we will explore this later). Regardless, this scenario means that further cost cutting comes at a price and LED manufacturers only have two levers—reduce services or cut corners on materials.

Low barriers to entry in the generic module business have compounded LED price pressures. In fact, just the other day one of our estimators was called for a layout request using one of our sign modules. When the estimator suggested a better option, the sign company went on to explain that he wanted to use the module he requested because it was closest to the specifications of a low-cost competitor’s LED module he had already purchased and since they did not offer these services, he wanted us to do a layout so he could get a good module count. Wow! Talk about brazen.

Every day I hear about “LED suppliers” that have not even been in business a year, with no office or support in the USA, offering long warranties and modules at rock bottom prices. What is worse, I see sign companies putting their reputations on the line to save $50 on a set of channel letters. A $500 service call alone will not only wipe out the savings but likely all of the profit on the job—not to mention a tarnished reputation. Fundamentally, I believe that sign makers know this is bad business, but current macro-economic conditions have been driving this behavior.

Taking a Hard Look

I have felt for some time that we needed to approach this problem differently; so at my company, we decided to take a hard look at who we are and what we believe. And I know other reputable LED manufacturers have done the same. Our belief is that we as a manufacturer exist to help make our customer’s lives simpler, and we’ve found that many sign shops are time and resource poor.

So instead of lowering prices or cutting corners on materials we went back to the drawing board and decided that we should only create products that were a representation of what we believe. This was a big bet, but the results have been remarkable.

Here is the simple LED-lit sign analysis that drove our decision to change how we innovate (keeping in mind that these numbers can change a lot depending on a wide range of variables):

Summary Cost Analysis

In this case reducing the LED costs by 20 percent only saves the sign maker 3 percent on the total job cost. The industry doesn’t need cheaper products, it needs better, more innovative ones. If we could cut our customers labor and/or install time in half, we could sell something at twice the cost that still saves our customers in installation/labor costs—and maybe more importantly, save them time. With this simple idea we decided to initiate some experiments to see if the logic would bear out.

Three Experiments

Our first experiment was aimed at the installation side—a pre-assembled LED product for retrofitting fluorescent lights in sign cabinets that we released in 2014. At the time, honestly, many people were skeptical. The prevailing thought was that sign companies “build stuff” and that no one would value pre-assembled LED sticks for the service side of the sign business. We hoped differently and after setting up a manufacturing operation in the USA, we began offering these units.

Well, the product took off and since that time we have widened the range of T-12 products and other value-added assemblies. Today a large part our revenue comes from our assembly operation. We had begun to reinvent ourselves and how we thought about LED sign products.

So we tried the experiment a second time, aiming now at new-sign construction. Remember earlier when I said that high brightness LED point source lighting has become affordable? The question then became, how do we distribute light more evenly at shallow depths? The result was a module product we released earlier this year that allows for even illumination over a wider area. The idea was that by spreading the light more evenly we could dramatically reduce a sign shop’s manufacturing times and costs for large cabinets and cloud signs by reducing the number of modules needed for a given job.

Needless to say, we sold out before the first 5,000 units hit our distributors’ shelves. We really shouldn’t have been surprised. It validated what we had learned from our first experiment—that sign shop owners are smart, they understand where their real costs are and they truly value time.

Now for experiment number three. Why not? We were are on a roll. As our team visited sign shops we realized they have thousands of LED modules on their shelves in various colors and brightness from a bunch of different manufacturers. This back stock represents a lot of tied up cash, and we thought to ourselves—If we can save time and help improve our customer’s profits, why can’t we help them free up cash by reducing their inventory?

So we developed a unique LED sign module that is designed to be as versatile as possible. The idea is to have a single module can provide three different outputs (from 140-240 lumens per square foot) simply based on how it is wired. With its removable batwing optic, that one module can now be used for just about any sign with depths from 3.5″-18”.

From a financial perspective, one module for multiple applications means less shop inventory, which means more freed up cash. We will wait and see how experiment number three pans out as we expect the product to be on our distributors’ shelves sometime next month.

Daryl Foreman, a sales manager at my firm with more than 37 years in the sign industry, recently reminded me that this way of thinking is not new to the sign industry. In the early 1980s Gerber introduced the Gerber Signmaker 4B, one of the first computerized plotters for cutting vinyl. It was way more expensive than hand lettering—retailing at around $17,000—but sign companies realized that they could quadruple their throughput, reduce scrap, and save tons on time and labor.

“I tell people all the time you should not focus on cost per foot, but really evaluate your cost to use the product,” says Foreman.

Valuable Lesson

This is by no means an advertisement for my company. Other LED manufacturers are engaging in similar experiments and analysis. However, let’s forget sales, profits and margins for a moment.

The lesson that I learned from these three “experiments” has been very valuable. What I learned is that we had to change our vista. We were hearing that sign companies want less expensive materials. But what sign makers reallywanted was not lower prices—they wanted innovative products that make their lives simpler and saves time (which in turn saves money).

We have begun to apply this understanding to customer service, sales, and other areas of our business. I just wish we had done so earlier, but necessity I guess is truly the mother of invention.

I acknowledge that this is not a traditional article, but I really wanted to share what I have learned. I believe that this formula can be applied to your sign business as well. My hope is that suppliers, distributors, and sign makers all continue to innovate and cooperate so that together we can all grow and continue to provide innovative, quality illuminated signs for years to come.