Pricing custom work well is a strategic advantage

How good is your business at pricing custom work?

If you don’t have a way of pricing custom work that consistently accounts for your costs and labor, how do you know if you’re making any profit on these deals? How would it feel to find that you’re losing money on half your custom work?

Do you have a spreadsheet or software program to help? If not, do you have some other formulaic means of pricing work?

If you read the May 12 New York Times “You’re The Boss” piece by the owner of Paul Downs Cabinetmakers, you’ll learn that these guys are fortunate enough to have a formulaic method to determine the price of a custom item.

That they have this formula puts them ahead of most businesses that do custom work. However, the trouble starts when they discuss what’s going on behind the scenes as there are a number of things going on that conspire to cause problems when reality and the pricing formula meet on the shop floor.

The failure points

Downs mentions that the spreadsheet’s material prices haven’t been updated in over 6 years, that material use and overages are not tracked, that tool use and labor methods have changed and that the info in the spreadsheet is sometimes entered wrong and fails to match the reality of the work actually being done.

As you read about all the possible failure points of this spreadsheet and how they’ve allowed it to become outdated and stale compared to their business reality, you can’t help but wonder how they got to that point.

Here’s the thing… this type of situation is pretty common.

Our tendency to think we’re too busy to address these critical, but tiny (at the time) maintenance issues has a way of giving us permission to postpone giving them attention. We think we’ll take care of them someday since some other thing seems more important right now.

It doesn’t seem to work that way, despite the best of intentions.

What usually happens is that the business lets these little things get out of sync an hour at a time, a day at a time, a week at a time and so on until we find that our internal systems look like they were designed to run some other business (or none at all).

At some point, things will have crept so far out of line that you’ll have no choice (like Downs) but to address them. Not only has the job you face become massive, your strategic advantage of having accurate, formula-driven custom pricing will have become the exact opposite.

Why does it matter?

The trouble with getting your business into this situation is that it severely damages your ability to see trends, know if you have enough (or too much) raw material or labor to deliver upon your work commitments.

If you’re already stuck, you have to consider the cost of continuing with a broken pricing model, assuming you have one.

If you aren’t sure you’re turning a profit on custom work – the showpiece work of your business – this merits immediate attention.

This is your best work. It’s the work that generates the reputation that earns your bread and butter work. It’s the work that you use to get your best, most profitable clients.

And yet you aren’t sure exactly how much profit you make on it?

If a close friend was in that situation, you know how you’d react. You’d go out of your way to make the situation clear to them, helping them if possible.

Why not do the same for yourself?

Should this take six months?

No, it shouldn’t. While Downs says his expert worked on this for six months, I suspect what he really means is that it took six months from start to finish – not that his expert worked on it eight hours a day, five days a week for six months.

The important thing to remember is that this doesn’t have to be perfect the first time.

Start with the highest impact item you can wrap your head around. and implement it. Tweak and add pricing components one at a time to improve accuracy.

This allows you to see results and adjust for accuracy and additional information without allowing any single change to be so complex that you have no way to assess its worth, much less its accuracy.

Get to work!

Win on low price, lose on low price

Do you depend on having the best price to win business? If so, are you sure that’s really how you want people to choose your company?

I ask that because if you cut your price 10%, that 10% comes out of your profit margin. Perhaps obvious, but not always something folks pay attention to – particularly when price is used as an end-all, be-all to close a sale.

You can tell that’s going on when you intentionally keep silent when someone names the price of a product or service. Stay silent long enough after they react to your “What’s the price?” question and the “we’ll win on price at all costs” salesperson (particularly the novice) will often get nervous and say something like “Of course, we can go lower…”

Use low price as a component

As Amazon Web Services SVP Andy Jassy is fond of saying, “I’ve never met a customer who asked if they could pay more.”

So how do you balance between being too expensive and being the one with the paper-thin margins?

Don’t get me wrong. Using price as a component of the things you use attract customers is fine. Where you run into trouble is when it’s used as the primary decision point. In those cases, you’re more than likely going to get burned and less likely to attract long-term customers.

One common example is using products and services as loss leaders. It’s OK to leverage price in this way as long as you know your numbers very, very well *and* you know that once you get that customer, there are plenty of opportunities to provide more value to them – value that they’ll be happy to pay for.

Fail to do this and you’re headed for trouble. This isn’t just about milk at the back of the store. You see it frequently with internet-based services. How do they offer “free” to so many people, yet still make a profit?

They know how much it costs to offer that free service.

They know how many of those freebie users will convert to paying customers because they want services, features and benefits not offered to freebie clients.

They know their margin on the paying customers is enough to fund the freebies, plus profit margin, so that more paying customers raise their hand and say “Yes, I need that.”

Bottom line, they know their numbers and they never stop recalculating them, just in case something changes.

Low price isn’t owned by the internet crowd

You can use free or cheap as a lead generation carrot as long as you too know your numbers, and make sure that you’re using that offer with the right prospect.

That’s where most businesses get started down the wrong road – they make the offer to the wrong group of people, ie: people who would never have been their customer in the first place.

If you make your offer to the right people, that’s a different story altogether – and that’s the magic formula no matter what your pricing is like.

The timeshare business has done this for years by giving away a free night or two, dinner, etc – all in order to get you to see and enjoy what their facility offers. They know historically what percentage of people will buy if they take the time and make the effort to attract the right prospects to their offers.

Using low price requires well-crafted offers

Timeshares don’t make their numbers by giving away all those free nights, golf rounds, lift tickets and meals to anyone and everyone. They’re careful to pre-qualify prospects using financial, behavioral, demographic and psychographic measures to make sure they closely match historical buyers.

When you attract people with a low price offer, the goal isn’t simply to make it free or available for a low price, but to provide enough of a taste with as little risk as possible to the prospect so that the right person can make a decision to become your newest client.

If you can do this without killing your margins during the period between the time they taste and the time they get serious about buying the real value you can deliver, then low price can work.

Do you know your numbers that well?

 

 

All else is seldom equal

A question came in earlier this month… “How do I compete with businesses that can offer similar products/services at a lower cost?

The question is “Why are you depending on price to close your sales?”

It’s important to examine because *so many* people focus on it. In a weak economy, it’s natural for price pressures to be everywhere. Did you choose to compete on price, or did it sneak up on you?

If price is your edge, it should be an intentional, strategic choice. All else being equal, price will be the natural decision maker since buyer won’t have to sacrifice based on price.

The trouble is, all else is seldom equal.

Wiggling

In product sales, a competitor’s prices are usually lower because they sell more and can get better pricing from their suppliers. If supply costs are the issue, that’s something you can fix as your sales volume increases.

Until you get there, find some wiggle room. You may find that it makes price less important or even takes it off the table.

Wiggle?

There’s almost always some wiggle room in a price-sensitive situation for the underdog who is hungry enough to do more (ie: provide more value) than the “low price leader”. Remember, they’re the one totally focused on price and their entire business is built around it (think “WalMart”). Want to compete with WallyWorld on price? Only if you’re crazy.

Is price *really* the only way you compete with your competition? Not in my experience.

Whether you sell products or services, there are certainly those who shop solely on price, but there are always others who want more and don’t mind paying a little more for it.

Are there no other ways that you can add value to these products and services? Have you asked your customers?

Take some time to listen to your customers. I’m confident that if you listen, you’ll find a way to take the focus off price and put it on things that will matter a week or a month from now, when price is far less important.

Let’s talk about an example, something price sensitive and seemingly generic…like carpet cleaning.

Being seldom equal

I could call a dozen carpet cleaners who will do two bedrooms and a hall for $79 (or whatever). Maybe one or two of them would do a good enough job to earn a call back, even though I suspect all of them would do a good job when it came to cleaning the carpet.

Maybe your carpet cleaning skills are only 2% better than everyone else’s, or maybe they’re a little worse (yes, you need to work on that). It matters, but it isn’t necessarily what people highly value when they get this work done.

Your job is to be their carpet cleaner. The name that comes to mind when someone mentions a dirty carpet or that they need to get theirs done.

Not because you’re the one who happened to do it yesterday, but because you’re the only one they’d dream of calling after the way you handled it last time (and the time before, and the time before). You’re the one they talk about at church, in the aisle at the grocery store, at lunch the next day, on the golf course.

Your name comes up at all of those places because you did things no one else ever has and you did things in a way that no one else ever has. The next morning, they’re still reeling from the experience.

An experience? It can be. They may live in a tiny bungalow or a 12,000 square foot mansion. Either way, you can design and deliver a consistent end-to-end experience that they just can’t forget and can’t stop telling their friends about. Ask “What else can we do?”

Rethink your pricing

Despite improving what you deliver, it’s still worth putting thought into your pricing.

Companies often price their goods based on cost, the needs of their sales people, their catalog or their e-commerce store rather than in a way that attracts customers.

Your wholesale costs can’t be ignored, but you can restructure your pricing in conjunction with increased value and change the rules of the game.

Paper. Ink. Electrons. Winston Churchill. Charles Manson.

grulla
Creative Commons License photo credit: kekremsi

Recently, the New York Times published a story about changing prices for books in print and how those prices compare to prices for electronic books.

In particular, the story focused on comparison pricing occurring at Amazon.com for books published both in paperback and for the Kindle, a very popular eBook reader manufactured and sold by Amazon.

The story teaches a very valuable lesson. It starts by quoting customers who automatically assume a lower manufacturing cost for an electronic book, since the incremental cost of producing extra copies appears to be (or close to) zero.

Customers, unaccustomed to seeing a digital edition more expensive than the hardcover, howled at the price discrepancy, and promptly voiced their outrage with negative comments and one-star reviews on Amazon. â??Really, James Patterson?â? wrote one reader from Elgin, Ill. â??Why would it possibly cost more for a digital download than printed and bound ink on paper?â?

Nowhere

Nowhere does anyone say anything about the fact that the reader gets the same VALUE from both books.

Nowhere does anyone say anything about the fact that the reader can read the Kindle version on their PC, Jerry’s iPad, Dad’s Blackberry, Joe’s iPhone, Sandy’s iPod Touch or their brother’s Mac.

Nowhere does it talk about the ability to share comments/annotations, read a page on one device and find it in that same place when they start reading the next time on a totally different device.

For that matter, nowhere does anyone note that the value of the book has nothing to do with the cost of ink, paper, binding or electrons.

Neither should the author of a book, regardless of the means used to deliver it.

Oh the cost of it all

Yes, I realize that the printed book seems like it ought to cost more.

After all, someone had to put it in a box, put it on a truck and deliver it to the local bookstore. There’s the cost of the driver, the truck, the fuel, the paper, the ink, the brick and mortar that built the store and so on.

The difference to most is that people typically don’t see the costs invested to deliver the electronic form, all they see is that 1 copy costs no more than 2 copies because it’s just another download.

When people howl about the price of an electronic book, no one considers the amount (much less the cost) of research and development necessary to design the Kindle device and have it manufactured and shipped to the U.S.

They don’t marvel at the costs of the servers and software to support the book’s transport to a wide range of devices and software viewers.

They don’t consider the boardroom and engineering efforts to work out deals with cellular carriers so that the device can download newly purchased books and sync anywhere in the world without so much as a login.

But none of that matters. It’s great evidence. Great talking points.

But it doesn’t matter one bit.

What matters

The value of the content inside the book is what matters.

What if you opened that book and in two hours of reading learned something that changed your life, changed your business or cured a problem you’ve had for years?

Is the allegedly zero incremental cost of that electronic book in any way relative to the value you received from it? No way.

Are professional baseball bats priced like a 2×4? Are a PGA champion’s golf clubs priced like stainless steel and graphite you might find in an auto parts store? Of course not.

So why is it so easy to assume that a printed book is worth more than an electronic version?

Because no one put any effort into convincing you that the electrons (or the paper and ink) don’t even begin to set the value.

98 cents

Your body is worth about 98 cents in “ingredients”.

Going by that measure, Winston Churchill and Einstein are each the equivalent in value of mass murderer Charles Manson.

I don’t think so.

Never let your products/services get to the point where the value you deliver is calculated primarily by the container it’s delivered in and/or the material it’s made of.

Does it make you squirm?

Best wedding cake dolls ever.
Creative Commons License photo credit: ToastyKen

The oft-referenced-here Cialdini work “Influence” speaks in volume via today’s guest post from Rob’s IM Reports.

While the guest post’s video is intended to be funny, it does a nice job of illustrating a situation most of us have faced at one time or another.

You might also have created some of them. Did they make you squirm?

Preventing squirm

How you communicate value (and thus price) – and do so ethically, without royally ticking off your customer – is HUGE to maintaining your price structure.

Maintaining that is critical to creating the profits you need to stay open, grow and if necessary, hire.

We’ll talk more about that next week as we jump into the Amazon e-book pricing mess.

The power of measurement

Despite Chris’ assertion that information wants to be free, some of it just isn’t. Sorry.

In fact, some information is worth far more than the paper it is printed on (or the pixels it lights up).

For example, imagine that your company publishes technical articles. Short, sweet, fine-tuned to a specific purpose for a very specific audience.

The trick is making money from them, so maybe you’ve found that the best way to do that for your company (vs all other models) is to charge for access to your publication.

The Wall Street Journal does this. So does Investor’s Business Daily, as do a number of publications (online or print) in technical fields like auto mechanics, programming and FOREX trading.

Prove it

One of the biggest challenges these firms have is proving their publication’s worth at renewal time.

When renewal time comes up, or the charge appears on the credit card bill, the customer thought process goes something like this:

Come on, why should I pay $300 a year for a technical investing article resource when I can find everything Google has indexed for free?

The answer these businesses might commonly respond with include some of these:

  • Because it’s well-indexed so you can quickly find the exact trading info you need.
  • Because it has a search engine that understands investing terminology so you can quickly find exactly what you need
  • Because our publication is fine-tuned to the audience’s investing style (or whatever). It’s as if it was written solely for day traders with between $4200 and $6500 to trade per day.
  • Because it includes proven step-by-step guides for trading without losing my shorts (pun intended).

All of that is warm, fuzzy but not so exciting.

#3 and #4 aren’t bad but #1 and #2 are Google’s domain. They get better at it every day and paying you for it is going to get less and less likely unless you are much, much better at it in your specialty area.

I got your proof right here

Bottom line, almost all of that is pretty subjective. Bean counters (and spouses?) want hard numbers: “Why do you need this?”

Why not let them tell you?

If your article instructs them and provides them with a skill or offers a way to discover a new technique, make sure your feedback mechanisms (on the site or whatever) allow a way to say “Dude, this article saved me 2 or 3 days of struggling with this task”.

And yeah, it’s a lot like a Digg or a reTweet, but it’s more accurate than that.

The mechanism that works for you might need to be a number they can type in, or it might be a radio button with selections like “Waste of my time”, “Saved me maybe an hour”, “HUGE, DUDE. This got me back on track after a week”.

Whatever it is, it provides them with a way to tell you how much time, money, etc your information, your service, your product, your help saved them.

Think about where you could go with that info, even if it is largely anecdotal and not scientifically defensible.

If you have 100 clients and they (on average) provide feedback via a mechanism like this that says you save them 112 hours per year, seems to me that your prospects might want to know that information.

It also seems like it would be a great way to totally defuse the “your price is too high” argument (and maybe a number of others).

It might tell you how outrageous you can make your money-back guarantee. If it’s 30 days but it should be a year or 5 years, these numbers will give you some insight into it.

Who knows, you might even find out that your pricing and your value proposition are in vastly different places.

Selling the unsellable

loaded for bear
Creative Commons License photo credit: striatic

Adelaide, a Charlotte ticket agent with Delta Airlines, had undoubtedly heard similar passenger comments hundreds if not thousands of times.

“$15 a bag and $40 for two? What’s with that?”

She handled it well, including laughing at the ( joking) speculation by other passengers that all the luggage fees go to her personally. Still, it was clear that she was handling it off the cuff.

But was she trained by Delta to discuss it in a way that would defuse the passenger’s annoyance and/or anger?

Did her employer offer training for handling the situation so that she would not to simply repeat the corporate mantra (whatever that might be), but actually engage in a meaningful conversation with her customer as they check in and deal with their bags?

It wasn’t clear that Delta had trained their staff – including Adelaide – to deal with that question and do so disarmingly.

Obviously, it’s an unpleasant position to place your public-facing staff, so why not arm them with the perfect response that disarms most clients?

Why not prepare them to handle the situation in a way that doesn’t leave everyone with a bad taste in their mouth?

Sometimes, even the things you don’t sell need to be sold.

What Market Price Really Means

Edwards' Cabin
Creative Commons License photo credit: Rob Shenk

Think hard about using market price to arrive at pricing for your products and services.

Wikipedia has their thoughts about it, but quality, reputation, delivery ability and related issues aren’t really part of their discussion.

I’d simplify that to define market price as “The price that a typical salesperson can get for an average product.”

Is that what you offer to your clientele?

Ryan Air cant even afford to flush?

last signal
Creative Commons License photo credit: _sarchi

So you’re probably sick of me talking about the fact that basing the success of your business solely on the ability to beat everyone else’s price is a mistake.

Some would hold out Wal-Mart as an example that I’m dead wrong. Rhetorical question for those people: How many businesses *other than WalMart* run that way and are successful with that business model?

You may not realize that I’m talking about small businesses, not large, multi-national global corporations large enough that if they were a country, it has been said that it would be the 4th largest country/economy on the planet.

Yet today isn’t about beating up on those guys, so let’s move on.

Instead, here’s a little twist: Let’s talk about how depending on price ends up hurting your service, which ends up revolving back and hurting your price because you can’t seem to find enough margin to flush the toilet.

Airline, Castrate Thyself

Most airlines keep looking at it backwards. Rather than adding value, they are castrating themselves in an attempt to trim another time from their cost per passenger-mile (CPM).

Why? Because they’ve created a “permanent” price war by virtue of the way they position their service. They’ve left themselves with no choice other than to constantly be on the lookout for places to cut costs.

  • Like cutting services, making it less and less pleasant to travel – actually getting to the point where it has become *unpleasant* to fly, not just occasionally annoying.
  • Like alienating their most dedicated customers by gutting frequent flier programs.
  • Like getting rid of their most experienced, most skilled personnel in favor of employees who don’t have to be paid as well.
  • Like cutting back on things are fundamental as maintenance on airliners.

Don’t get me wrong, there is a time and place for cost cutting and being careful with your expenses, but there are right and wrong ways to do so.

The problem with that is that someday, you’ve trimmed to the point where the only thing you can trim is the baseline service: which they can’t do. It’s not like you can charge someone to fly from New York City to Los Angeles and then drop them off in Vegas:)

Not so extra extras

So what happens next? You charge for trivial things that people take for granted.

Like buying a ticket on your airline.

Or going to the bathroom at 35,000 feet.

While the bathroom comment was said to “maybe” be tongue-in-cheek, Ryanair later confirmed that they have been in discussion with Boeing about making it a reality.

Wonder if they’ll charge extra for additional flushes? Wonder if people will flush 2 or 3 times as a protest against the fee? People will find ways of silently paying Ryanair back for their transgressions – I don’t think I have to elaborate<g>

Maybe they think those extra fees won’t be considered as part of their price, allowing them to be the low price leader.

I don’t know what they’re thinking, much less if they are.

Alternatives?

My analytical side says they know how many times the toilet gets flushed per flight, on average – if not per route. Given that they know the cost, they can easily add .25 per passenger per ticket (or .07, whatever it might be) to cover those expenses.

Meanwhile I have to wonder why that isn’t already built into their overhead.

Imagine a future airline ticket receipt that looks like this:

ryanairreceipt

As for charging you a fee to sell you an electronic ticket, I’m hard pressed to find a defense for that, much less an alternative.

What I can say is that even today, with travel spending curtailed by so many businesses, it would be a great time to be competing with businesses who make misguided decisions like these.

I don’t know their management. I have little doubt that they are smart people or they wouldn’t have gotten to where they are.

But this? Somewhere along the line, they’ve been derailed and seemingly forgotten what business they’re really in.

Meanwhile, there’s Branson

If a different entrepreneur ran these airlines, what would they do differently? What would they do to compete? One alternative is Richard Branson’s way, but there are others.

Your turn. If a different entrepreneur ran your business, what would they do differently?

And why exactly can’t you do those same things – even it’s only a few of them? Start with one.

The photo? You’ve probably figured out by now that the photos in my posts have some meaning. Sometimes they’re a message to a specific person who reads the blog. Sometimes it’s a puzzle for everyone who reads Business is Personal. Sometimes, they’re just another form of sarcasm<g>

Today is different.

I want to recognize a strong photo that I found on Flickr. It’s the last photo that someone took of their dad before he passed away. Such a strong image, I thought I should share it.

Thanks to HR wizzo Tom for passing along the airline stories.

Stampedes and shootings: Just another Black Friday

It’s hard to imagine why big national retailers continue to play the fools game, thinking that by discounting their prices 40-50% or more they’ll increase their profit.

Perhaps they think they’ll make it up on volume.

When you cut prices, the first thing that you give up is a piece (or all) of your profit.

Retailers who spent the weekend falling all over themselves catering to an upscale clientele don’t have this problem, especially if they’ve cultivated and groomed the relationship with that clientele all year long.

They didn’t have to go to the home of an employee and explain how a young employee was trampled to death, simply by having the misfortune of being the guy who unlocked the front door to his employer’s store.

When price is the only way you have to differentiate yourself from your competition, you deserve any pain you feel on your financial statement at the end of the quarter.

Is that the only competitive edge that you can find? If so, you aren’t looking hard enough.

Is there a Wal-Mart in Pamplona?

Another “competitive edge” – one that contributed directly to last weekend’s trampling death and injuries at a Long Island WalMart – is the special sale that starts at 0-dark-thirty in the morning and offers limited items at the special pricing. 2010 update about stampede.

Our store is better because we can get our people to the store before yours. Woooo, impressive.

If your competitors’ move their start time to an hour before yours, when does it end? Do you start a Cold War over who can open their doors first? In an ultra-competitive environment, is that really how you want your clientele to choose who their vendor is?

Do you really have to stir up a frenzy over one (or 10, whatever) $299 plasma screen TV to get people into your store? Is that the only edge you have?

Don’t get me wrong. I’ve told you to read Cialdini and will again. We’ve discussed scarcity and will again. However, we’ve also discussed common sense. Hopefully, we don’t have to discuss making sure your staff and clients leave the store alive.

Is it really worth having 300-400 people stampede over your staff and each other as if their survival depends on it? This isn’t the first time it has happened. Human behavior is not a surprise in these circumstances.

Yeah, sure. You can blame a small percentage of morons for this ridiculous behavior, but it isn’t just the customers in that store who were in the wrong. But… big retail, in their typical lazy way – they continue to confuse the customer with the sale as the most valuable part of their business.

All this focus on creating temporary insanity among your prospects for one transaction on one day illustrates the lousy, if not non-existent, relationship that most large US retailers have with the buying public.

That’s where the problems really lie. When you commoditize your marketplace by competing solely on price, you’re one of two things: Wal-Mart or crazy.

Wal-Mart can afford to do these things. Their entire business – and the systems that drive it – is built around that premise. They have the logistics, automation, buying power and mammoth size to make it happen.

If you aren’t Wal-Mart or crazy, you have to do something different and better. I don’t mean to suggest that you can just double your prices, do nothing else and expect all to go right with the world.

You can’t.

Remember, Business is Personal. Build the relationship. Deliver the value. When nothing else matters, they’ll shop on price.

Make other things matter.

[audio:http://www.rescuemarketing.com/podcast/StampedesAndShootingsBlackFriday.mp3]