Enterprise pricing -- how to collect $100 for $10 in real value

I prefer to sit in the big seats in the front of the plane. How do airlines get away with charging five to 10 times the price for the trip to the same destination as the economy seat travellers pay. (Of course, I never actually pay the real business class fares, but many do. Why?)

As a business owners I want to run for the hills when I see signs of "enterprise pricing". As a marketer, I drool. Nothing is better for increasing your margins than the ability to disassociate the actual cost of your service from the decision-making process to purchase it.

"Enterprise pricing" is the ability of business-to-business marketers to grossly inflate the price of their services because the decision-makers are not spending their own cash. Instead, they are using their company's resources.

Take business class airline fares for an example. Does it really cost the airline five times the amount to provide the service in exchange for a bigger seat, some extra service, and a little food?

Of course not. But the people sitting in the big seats in the front of the plane are rarely spending their own money for their tickets: They are able to charge back the costs to their clients or just have the company's "travel department" pay the fares.

Notably, "business class" seats are much more reasonably priced on resort destination routes, where individuals might choose to spend some of their own money to have a little luxury. (This suggests one advantage of starting a business in a resort destination, but that is another topic.)

I see this phenomena in many other places and one sign of it occurring is that the service can support the cost of sales representatives. "The more selling that goes on, the less value there is," is my purchasing decision-making motto. For example, our service for page turning software, yudu.com, charges about $200 a year for a great package of resources. But you can step up a little and pay $3,000 for a little more for "Yudu Pro" -- and have the guidance of a sales representative. Of course, this is the "enterprise pricing" at work.

Enterprise pricing works primarily in the business-to-business space when you are dealing with managers rather than owners, but you can sometimes see signs of it in the consumer marketplace, usually for insurance claims. If you can find a situation where consumers don't need to use their own money, you can inflate the prices -- of course to the limit that the business (insurance company) paying the bills allows this gouging. The gaming that goes on here is undeniably intense.

As a marketer, of course, you should ask the question about whether you can disassociate price and value sufficiently to earn a decent margin. Here things get quite interesting.

If business-to-business, enterprise marketing pricing is prevalent in other sectors, why does it seem construction businesses do better in the consumer rather than business-to-business space? I've heard stories of painting contractors accepting fees of 30 cents a square foot for new home construction (in bulk), compared to $2.50 a square foot for residential work. Obviously, the business-to-business contractor in this environment is working virtually for free.

The answer in part is the power relationship and the relative importance of the cost to the company purchasing the service from the company selling it. And here is the key formula to success in collecting your enterprise pricing: Provide a simple, bundled, and easy-to-manage maintenance service rather than new construction in the business-to-business space and you can collect that lucrative enterprise pricing income. (In other words, if your service is purchased by a general contractor whose business is buying sub-trade services, you will find it hard to earn a margin, if you can connect with a corporate manager who doesn't full-time manage construction costs, you may make a fortune.)

You may be scratching your head about this blog entry, but I urge you to reread it several times and begin thinking differently about your pricing, margins and market. Yes, we talk elsewhere about branding -- the art of through marketing creating a perception of value that justifies higher-than-base pricing.

But spend some time as well, thinking about how decisions are made, and if you can figure a way to disassociate the your service pricing from the personal responsibility of the decision-maker (and get around the various corporate defenses of "abuse" of this practice), you may find you have enough spare cash to take many vacations sitting in the big seats in the front of the plane.

Of course, the passenger next to you (me) might be there because he has learned to find the loopholes in "enterprise pricing" and has discovered the bargain right under your nose.

Price haggling: Is it a cultural thing?

This posting from BobsLandscaping in Genesee, ID on the Contractortalk.com thread: Let the Game Begin . . ." raises some interesting points about cultural sensitivity, as it relates to business practices including the points raised by the thread's original poster about potential clients playing games to try to negotiate a better price.

The issue is whether you should stand firm on your quote, or build in a haggle-factor in your pricing and be ready to deal. Some posters to the thread suggested that yes, in some cultures haggling is part of the culture, so if you want to do business with people in these ethnic groups, you should behave accordingly. Others say the haggling goes with the territory and occurs because contractors allow it to happen.

The writer of this thread sees cultural sensitivity in a deeper and more meaningful way than most. With true respect for different cultures and values, including religious traditions, you can open business doors that would be unavailable to you otherwise.

I like to look at the business of contracting as a people business. I meet people from all over the world and try to make a good first impression in order to win their business.

Knowing a little bit about foreign cultures helps me make sales. Especially in landscaping, since I'm creating personal spaces for people to relax and enjoy themselves in.

On Wednesday I'm installing a garden for a family from Nepal. It's going to be filled with peppers, vegetables, herbs, and spices from their native country. I'm also using flowers and plants that have special significance to the Hindu religion. They're also having me come by weekly to maintain it and I'll be making a nice profit from this job.

I suppose on principle I could have told them this is what we grow in America, this is the price, take it or get on the next plane home. I would have never heard from them again and wouldn't have the job.

Perhaps I'm wrong (I often am) but it seems good business sense to cater to the customers needs/desires and sell the job.

On the Japanese gardens I maintain there are very strict rules on what can be planted and where and how the garden flows. There are special religious guidelines that have to be observed in all aspects of maintaining the garden. Again I suppose I could tell my Japanese customers that they're in America now and I won't maintain a Japanese garden.

But why though? Can you give me a good reason why? I enjoy it, my clients love their spaces, and I make good money at it.

I also maintain and install Buddhist meditation paths. They are special gardens for walking meditations. There are extremely strict guidelines for how the garden is laid out and how I can work on it. For instance all maintenance must be done with hand tools. No machinery allowed. Not even a gas lawn mower. It disrupts the spirituality of the garden. I charge extra for that and do OK.

Yeah I realize we're in America, but this is a land of immigrants. Always has been, always will be. Yeah it's a pain to deal with the special requirements at times, but it's also rewarding. Not just financially.

Perhaps I'm too open minded, what do you suggest I do? Leave money on the table out of principle? Walk away from jobs because they're not American enough?

But what about the principals and choices involved in price haggling and negotiation, overall?

I'm not so sure what the correct response should be, except that you should never allow yourself to settle for a final price below your reasonable margin. And I tend to believe that with rare cultural exceptions, you should put yourself in the position where your price is your price, and your client(s) are ready to pay because they truly trust you and respect your business and brand.

This of course is easier to say than do when you have many competitors, especially when potential clients are playing off one bid against another or inviting as many contractors as they can find to quote the jobs in some sort of "cattle call". You can to a degree escape these problems through effective marketing (which includes treating your current clients so well that they refer friends and call back for more), but there is no escaping that, with certain specialized exceptions, most people will at least at the outset invite more than one contractor to quote a job.

Regardless, you will increase your marketing success by respecting and relating to culturally diverse groups. If you really know that culture's values requires price haggling, then, play the game.

Unintended construction marketing costs

Yesterday, I picked up my car from the local dealership. The air conditioner condenser had been damaged, and the total repair bill approached $900.00. Although high, I accepted the charge and paid the bill.

I returned home to find in my mail a letter in the dealer's name from the manufacturer (Honda) offering a 10 per cent discount on parts and service as long as you bring in the car for work before July 31.

Today, I returned to the dealership and firmly asked for the credit. To the dealer's marketing credit, they granted it, putting close to $90 back into my Amex account.

While this solution is the correct strategy -- you don't want to alienate a client with marketing promises -- clearly if the intent of the letter is to attract new business and revenue, it backfired in my case. Not only do they have to give back money which would otherwise flow 100 per cent to profit, they have accounting and administrative costs to absorb in processing the refund. And I haven't purchased a cent more than I would otherwise spend.

Price discounts are dangerous, always, for marketing. They cut your margin, induce expectations "if I wait I can get a savings" and often cost real money rather than attract new revenue.

Consider, for example, all the other people who would -- without incentive -- use my dealers' service without the letter. Some marketing guru might count all the letters turned in and "new business obtained" because of the discount marketing piece, but how many would have purchased anyways, at the full price!

I realize many businesses set discounts into their system and expect people to pay the lower price generally -- anyone who pays the full price is just providing a bonus. We for example, charge 25 per cent less for advertisers who pay within 15 days of invoicing. We calculate our sales based on the discounted price, capturing the additional cash for the people who pay late as a bonus which offsets the bad debt.

However, you should always be wary about any strategy where you lower your price deliberately from your existing price base just to find new business. You could, like the auto dealer today, be throwing much good real money after bad in your marketing expense.

The selling message: Establishing equality

Michael Zenga of ZN Custom Builders in Boston started an intriguing thread on contractortalk.com, The Best Sales Technique I Have Ever Used. In it, he outlines a construction marketing model of asking a couple of key agenda-setting questions on first meeting prospective clients.

Look at this wording:

When someone comes into my office - I build Modular Homes - before anything happens, I say hello and then "I really appreciate you coming to meet with me today. Would it be ok if we were to set an agenda for our meeting?"

- They always say ok

"Great. We meet a lot of people and typically on a first meeting we are just trying to find out if we might be a good fit. You will have some questions for us about design options and price, and we will have some questions for you about your ideal home, time frame and budget. At any time you might realize that we are never going to be a fit, and if you do that's ok. Will you tell me if that happens?"

- always get an "oh sure."

"And is it ok if we tell you if we think it isn't going to be a good fit?"

- certainly!

"Ok so all we ask is that if we get to the end of the meeting and we think it might be a fit that we take 5 minutes at the end of the meeting and figure out what a next step might be, is that ok?"

- No problem!

Aha, the contractor is now establishing equality with the client, not subservience, and the prospective customer knows that the contractor can -- and will -- be ready to walk away if the client isn't serious about doing business.

Fair enough, but how do you establish your brand sufficiently to pull this off? After all, you have to attract enough potential clients -- leads -- to comfortably know that when you meet one potential client and turn him or her away, there is always another to follow. This gives you confidence and prevents you from looking desperate for the business. (Sure you can fake it even if you are desperate, but it is much easier to be real and know that indeed you can walk away anytime you aren't happy with what you are seeing.)

Here, I looked into the background of why Zenga posted this thread. He is offering an e-book on Internet marketing (free) , Insiders Guide to Expanding Your Business on the Internet, which I have a sneaking suspicion is a brand-building initiative to attract consulting clients and maybe to build traffic for his own business (though I couldn't find any overt selling of this sort on the materials I reviewed.)

In his materials, I found he makes effective use of the ballpark estimate technique. That is, in exchange for receiving client contact information, he will provide a price range for his potential services large enough that it isn't firm, but clear enough to show the potential client what to expect. This is a good approach, I think, because it weeds out people who are unrealistically low in their pricing expectations, while not tying you down to a specific number until you inspect and determine what is right.

Zenga's e-book contains other materials including advice on how to avoid using the conventional Internet leads services, the effective use of video testimonials, and the like. It is worth your review.

Your start-up pricing challenge

If you are fortunate to be expanding your business during a recession, you have some real advantages. Prices are lower, and many talented people are looking for work. The same advantages apply if you are establishing a new business. In fact, you may be starting a business now because you have lost your job and think you can do things better than your former employer. Many truly successful businesses are established during hard times (many also fail, of course).

Your real test in this environment is whether you can find and retain profitable clients. With many people out of work, some small start-ups price their services far lower than they should to remain viable. And some clients take advantage of these low prices, only often to find to their regret they've paid for more than they expect with incomplete jobs, sloppy workmanship, and perhaps unexpected liabilities.

On the other hand, many new business people are like I was at the start of my self-employment. I didn't know or appreciate how to price my services and worked far too hard for far too little money -- but still provided a really good service. The only problem is, as originally designed, the business could never grow because (outside of working 80 hours a week for something like $35,000 a year in income), I didn't have enough profits (retained earnings) to fund the hiring of competent people for reasonable wages.

Your best pricing challenge solution is to learn how to market and sell your services effectively. You need to know how to find the right clients willing to pay you enough for your work.

Do you know how to network effectively, how to advertise, and how to discover hidden clues within public leads and data to lead to hidden (private) opportunities? Some time spent developing these skills will yield profitable results and help you go beyond the treadmill of starvation-level wages.

Decoy pricing

Bruce Firestone, in the EQ Journal Blog, offers some intriguing suggestions and advice about pricing -- suggesting that creating comparisons with "decoy pricing" can help you to maintain your price.
He offers an example directly relevant to our business (and something to consider for the future):

Pricing is an art. Of course, you must always be truthful but use the smart truth.

Decoy pricing is also very effective. Dan Ariely describes it well in his book. Let’s say you want people to buy your magazine; then you might offer:

a) Internet only Subscription: $59;
b) Magazine only Subscription: $129;
c) Magazine and Internet Subscription: $129.

Now obviously, b) is the decoy. It turns out that if you only offer a) and c), a majority will select the cheaper option, option a). By including the decoy, you can get the opposite result—a majority will order option c) because they are getting the Internet edition for ‘free’.

The psychology underpinning this is that people are not very good at assessing things in a vacuum. They need to be able to compare—to do some comparison shopping.

How much is a magazine subscription worth? I don’t know. But if I can get the subscription for $129 with something that is worth $59 thrown in for free, well, that is the option for me!

Can you use this concept in your own business? Perhaps you may find a model involving service calls and service bundles -- create packages with variables which induce the choices you would like people to make.

In one of his examples, he cites a hotel which reduced room rates to attract clients during a recession -- occupancy continued to drop. Only when the owner discovered that booking agents thought the price is too low (and thus the place must be a dump), and raised prices even higher than before, did volume rise.

Again, most of the time, lowering your price even under competitive pressure will not solve your business problems -- you may make things worse with lower volume and sharply reduced margins. Think of other answers first.

Price, marketing, and sales (for those of us who hate selling)

Michael Stone in his most recent blog entry reiterates that the quickest way to business failure is to try to match the pricing of low ballers.

Low ballers have been in business since at least 1907 that I know of. My Grandfather and I used to talk about his early years as a carpenter. I remember him telling me about the owner of a company he worked for during that time and how the guy was always cussing the “Low Ballers”. So, this is something we just have to live with in this business. Remember, you can’t control them so don’t worry about them. It is a waste of your time and energy.

Stone rightfully advocates that you should market only to people who will pay your price, and suggests you learn how to sell more effectively. He also promotes his useful book, Profitable Sales, a Contractors' Guide.

I agree with Stone, mostly. Certainly you need to have some understanding of basic sales principals and approaches, and we are 100 per cent in agreement that you can't win the battle by lowering your price. Stone is also correct in that you must market to the right people and avoid the low ballers with some qualifying questions and controls.

However, I advocate that effective marketing using your natural talents, skills, and abilities can largely override your need to be great at selling, and that great selling, in itself, without underlying product and marketing skills, is also a road to disaster.

Here, personal experience in the school of hard business knocks has taught me the lessons about the limits of great selling ability. Great selling skills, without underlying marketing and product quality sensitivity, will take you places you probably don't want to go.

You know the types of business I am describing here -- the ones where door-to-door canvassers push junky or sometimes fraudulent services on unsuspecting clients; where boiler room phone teams exploit weaknesses, and where high pressure 'closers' don't let go until you are roped in to buy stuff. Some so-called sales gurus still advocate these hard-rock techniques, advocating a business style reflected by the 90s movie, Glengarry Glen Ross.

Most likely, if you successfully operated a contracting business during good times and are struggling now, you fit into an entirely different category. You are great at your craft or trade, you provide impeccable service, and clients really appreciate your work -- so much that, when things were good, you had a backlog of work, and absolutely satisfied clients.

Now things are hard, and clients are scarce, and the low-ballers are out there, and the leads services are providing crap, and you are struggling. What should you do?

You need to appreciate that your business brand is your greatest asset -- and your brand is your reputation and the trust people have in you. Your strategy should be to develop, maintain, and build on that brand through your marketing methodologies, to the point that clients continue to return to you for more work, and refer others.

The challenge is to avoid relying on referrals and repeat business -- but to systematize the process so you can generate enough repeat and referral leads through your marketing initiatives. You can achieve these results through organized marketing strategies far more effectively and sustainably, in my opinion, than with strong sales abilities (which, if you are like me, you may not have, or wish to use.)

Pricing theory: The grounds for raising your prices in 'hard times'

You know the knee-jerk reaction to increasing competition in a recessionary environment: Drop your prices and cut, cut, cut.

But you have another option IF you have been successful in your branding and business development -- you can raise your prices, offsetting any loss in volume with your increased margins.

In some cases, you will find you have a double-win: Your sales rise even as your prices increase. In other words, you sell more AND improve your margins.

How can this be?

A large part of the price you can claim relates to perceived as well as real value. And this is the stuff of your brand. If your current and potential clients wish to do business with you because they believe their experience will be rewarding, satisfying, and profitable, they'll pay more.

As an example, say you are being sued for a million dollars (as my business once was). Would you choose (a) the lawyer with the cheapest hourly billing rates or (b) the lawyer with the best reputation in the community for winning similar lawsuits? Thankfully, in this situation you will likely choose the correct response: Here, paying more up front actually means paying less long term-- especially when you win the lawsuit and costs are awarded to your favor!

When should you consider raising your prices? You can see some obvious answers, and some which may be surprising:

• When you are so busy you can't handle all the order backlog (a nice problem to have). You could elect to incur additional costs, expand, hire more people, or ask them to wait -- or raise your prices to draw out only the clients who really want your services. (This is not likely to be a big issue in the current environment).
• When your costs are rising; obviously to cover them;

(Now for the more interesting situations)

• When your prices have been static for some time, even though you have kept the lid on costs, you may find you can safely raise prices without offending anyone;
• When your brand is strong enough that clients really want to do business with you; respect you; and trust in your competence (the best reason).

Obviously, you don't want to rashly raise your prices when you are engaging in a commodity service business -- but if you are doing that, you don't need to read this blog as you are not marketing effectively! And you need to be sensitive to your current clients. If you are afraid of disrupting established relationships, you can consider grandfathering prices for selected current clients. Some businesses offer a 'last chance' at the lower prices -- this can generate a nice (short-term) bump in sales as people get in before the deadline; the trade-off is you will drain away business in the months immediately after the price increase; when if you had simply implemented the higher prices, the enhanced margin would be yours to keep.

See: Discount, nah "I raised my prices"

Discount, nah, "I raised my prices"

Someone started a thread on contractortalk.com asking whether it makes sense to offer discounts to draw business during the recession. I really enjoyed this response from "Grumpy", (Thomas Kral, Reliable American, Inc.) in Chicago:

I increased my markups. Smart business dictates when volume goes down markup goes up to achieve the same profit. We are doing less jobs but making twice as much profit per job than we were doing last year, therefore we are doing a lot better financially this year.

Be the black sheep, and do the opposite of what everyone else is doing. There are guys out there pricing like they are going out of business, and that's because they are. I have seen quite a few competitors drop off of various directories, with new low priced competitors to take their place. Sure they are "busy" but are they making money?

What's the point in working for practice?

Do I offer discounts? Sure I run "sales" from time to time. I will sometimes offer $100 if the job site is a high traffic site and I can leave my signs up for 30 days. I am even have coupons on my website, but to be truthful very seldom am I ever taken up on these discounts coupons or offers. Another point that must be made, even in these trying economic times (if you pay attention to the media) very few people are asking me for discounts. Of the last 15 sales I have made not a single person has asked me for a discount.

Why? Because I built the value in my sale. Because I am actually offering more than most of my competitors. Because there are dozens of guys charging more and hundreds charging less, but very few actually doing a better job. Because I take the time to meet with the customer and explain all that in very minute detail if necessary. Because I know more technically than most of my competing salesmen. Because I treat my customers like people not like dollars. Because in most cases people respect me and begin to trust me after they have met me. I started the year with the same fear as everyone else, then I had a tragic death in my company (heart attack unrelated to any work activity). It was bad there for awhile, but when I RAISED my pricing, things started to click.

I discovered that the people who were hiring us weren't hiring us because of our price. I already knew that but forgot it because I was paying too much attention to the media Bull kaka that the sky is falling and we are in the midst of the next great depression... No I realized the people were buying ME not buying my price. I decided that the people would hire ME if I added $500 to the price, and I was right, so I added another $500 to the price and I was still right... and you know what? Our volume didn't go down, not one bit. Our volume has been lower than it was all last year since the start of the year, but our volume has held steady all year even after I raised my prices.

I really believe when you play pricing games you'll get price shoppers. Have you tried raising your prices before you lower them?

Other posters in the thread offer differing perceptions on the issue. Discounting may be part of the 'game' in marketing in some areas of the industry, and may be practical or responsible in others. The question you need to ask yourself is whether you really are increasing your volumes and profits by lowering your prices (honestly) or just playing around with 'discounts' as a gimmick (IE, raising your prices to 'lower' them -- as if the clients don't know the difference.)

In our own business, to get started, I began using a "net" and "gross" pricing policy for advertising. In the early days, before we built up trade credit, we offered the net rate for anyone who prepaid their ads and the gross for anyone who wanted to be billed. The net rate savings is 25 per cent. The system brought in cash.

Today, our discount is available if invoices are settled within 15 days upon publication. Now, our sales team and accounts collection person know not to be forceful or arrogant in enforcing the 'net' discount -- if you pay a little late, you still get the savings. But some people are late, and pay the extra 25 per cent. About a year ago, we analyzed our bad debt levels and discovered that the few advertisers who don't pay at all are almost totally offset by the advertisers who pay the 25 per cent net rate. In other words, because of the net and gross system, we don't have to budget for bad debt. (The Gross rate also solves the problem of advertising agencies requesting commissions. They can have their standard 15 per cent commission if we can bill at Gross.)

Discounts, then, have a place in the picture; just make sure there is a reasonable trade off and value proposition to justify them; not a desperate strategy to bring business in the door. I like Grumpy's attitude and values here.

Fixed or negotiated price

If you read this this contractortalk.com thread "Price is not negotiable" you'll quickly discover that not everyone agrees with the thesis -- and some disagree with extreme emotions. In fact, this thread, while tackling an important issue, descends to the lower level associated with political forums and establishments of ill-repute.

Yet the underlying debate is fundamental: Should you declare your price, and stick to it, or build in "negotiating room" and bargain with the client. I tend to agree with one poster, Seth Holdren, that "it depends" -- different selling situations and industries have different practices; the model of selling appropriate for a complete renovation project at a high-end home may be different than the pricing for installing patio doors.

Many businesses, of course, have pricing grids -- some building supply dealers have sophisticated computer programs where they can 'code' their clients and then adapt their pricing accordingly depending on volume and credit worthiness. The price is 'fixed' in these cases, but of course isn't really fixed if you know the critical points in the process. Others, (ourselves included) have variable publicly posted prices -- if you elect to advertise every month, on contract, your price will be lower than if you advertise one time. These variations of course are appropriate because there is value to most businesses in achieving stable cash flow and predictable income streams.

But, the question arises, if you quote a price, whatever it is, should you bend your price if the client comes back and says "that is too much"? What are your opinions?

Getting your (initial) marketing signals right

Middle Tennessee isn't Malibu, but it certainly is beautiful. Ironically, and unrelated to this posting/question, I have a sixth sense we will be working in Tennessee ourselves in the not-to-distant future.

Yesterday afternoon, a contractor responded to my Construction Marketing Ideas e-letter offer to provide answers to this question: "What is your number one construction marketing concern?"

I did have a question that you might help with. It may be a little basic, but here it goes. What is the most effective way to distinguish my company from the rest of the competition here locally? I am a builder that has spent 25 years in a very high end residential market (Santa Monica, Beverly Hills, and Malibu, Ca) and moved to an area (Middle Tennessee) that has a lot of “builders” that don’t even build to code (no code enforcement in the counties).

The demographics are thankfully changing with people moving in from parts of the country that are more demanding. How do I then get the message out to potential clients that there is a difference in quality and that the additional costs of building a quality product will result in a net gain for them? Many of these clients hire the “locals” thinking they are getting a good price only to find they were really buying an education in who not to hire. Any ideas that you can offer will be appreciated.

Fair question, so I took my first step in answering any question -- seeking a little insight into the person making the inquiry. I Googled the contractor's name and found a couple of tiny references, including one to what appeared to have been an expired or cancelled free ad posting. No website, and the person who had written me had used a regular personal Internet account.

So how does he expect to find any business? Has he taken even the first step to differentiate himself from the local folk whose marketing probably succeeds even if it is as bad as the now-infamous handwritten scratch note we found at our door in Canada some months ago?

Now, it is important this contractor not rush to put up a crappy website -- this requires thought, effort, and planning (or a worthy consultant who knows how to set up contractor websites!) But I think the stuff you could post here would include testimonials from previous clients (even out of state, if they are willing to stand behind their testimonials), some basic images showing the quality of his work, and if he wishes to get more sophisticated, some other differentiating marketing material. You don't get in the game unless you play on the web these days -- especially if you are looking for clients willing to pay a little more than the bare minimum.

Here is a relevant thread on the Contractortalk.com forums describing: What makes a good company website?

Note, simply having a great website still won't solve the problem here, which is even deeper. Marketing to the high end takes reputational excellence -- word of mouth is going to define success here -- and of course you can't get much word of mouth unless you have some clients in the first place.

So, it seems, he may have the classic chicken-and-egg problem. "I"m good but don't have local experience/reputation. But no one will give me that experience/reputation without my needing to beat my head against the wall on price. So what should I do?" Well, you could go on price, selectively, if you sense your early client(s) would be true centers of influence -- but the danger here is you are setting yourself up for more of the same. The other solution is theoretically really smart marketing differentiation/planning, but I doubt this contractor is anywhere near that level -- at least from what I can see of his non-website. (Unless of course he has this in mind and is actually planning and working on his strategy.)

So, is there anything else I can suggest? One possibility is joining the local Home Builders' Association. Membership fees are likely not that high, and the contractor will gain a network of contacts, the opportunity to tie in with additional resources and, if he really works at it, assume a leadership role.

Finally, the letter writer needs to be realistic. He is in Tennessee, not Malibu. Although marketing principals are consistent everywhere, markets are not. He may be able to differentiate his place in the market by selling to new immigrants to Tennessee wishing the higher level of service/quality from his former West Coast location, but is going to need to communicate to these new arrivals his expertise, professionalism, and that his pricing, while a little above the norm locally, gives a whole lot more in quality. But he needs to dress the part. Where is his website, business phone, well appointed/decorated company van/truck . . . where are the signals to the potential client that he will indeed deliver what he says he will deliver? In the long term, the delivery is always the most important thing, but at the start, you have to have your signals right -- if you don't have a pre-qualified and ready-to-go client base, that is.

Pricing woes?

What do you do when your competition starts dropping prices to unreasonably low levels? This Contractortalk.com thread addresses the issue. Some participants say they don't drop their prices; they have enough diversity in their product/service lines that they can get their price on some element of their business, even if competition is hurting others. Others create a three-tier pricing model; "Good, better, best" with differing service options (and set the Good, or lowest, price to match the competition). And still others make judgement calls, dropping the prices when they need to to keep the business flowing.

I'm truly wary of price reductions as a business survival/strategy, unless, of course, you can reduce your costs sufficiently to cover your overhead and earn a profit even at the lower prices (something I think most of us would find hard to do right now, especially with rising fuel costs.) Some people, I realize, take 'unprofitable' work in tough times to keep some cash flowing, but this is a dangerous, capital depleting exercise. You may need to make some hard decisions about reducing your labour and operating costs and hunkering down (or stepping up 'quick fix but low cost marketing approaches such as contacting previous clients or in some cases, canvassing for business).

Gitomer and pricing

My weekly e-letter distribution coincides this week with Jeffrey Gitomer's. His posting, "If you REALLY want it, I'll drop my price" is a reminder that too many of us think that price is the key issue in decision-making, and we tend to cut our own throats in "negotiating" a deal when the client is ready to pay the full price -- and with effective marketing and branding, we can actually earn a higher p rice.

Pricing and value are complex -- we all know that the real cost of manufacturing so-called luxury brands has little correlation with their retail price; but many contractors and sub-trades are trapped in the negative bidding war environment, wondering how they can even hope to win the business unless they (gulp) lower their prices below their actual cost of doing business (bad move!)

I realize the marketplace is competitive now; in many areas in the U.S. and now in parts of Ontario, recessionary conditions prevail, and real purchasers with cash on hand are relatively scarce. You need to be cautious about your expenses and fixed costs and not throw good money after bad -- but thoughtful attention to how you market and promote your business can help you escape from "low bid wins the job (and loses money) tyranny."

Jeffrey Gitomer's weekly newsletter is free, by the way; and you can purchase his books on the used book market for little money (or pay full retail, if you wish, and still get great value.)

Pricing pains

This Journal of Light Construction online thread has lots of insights into the problems when potential clients seem to want everything for nothing. Here is the initial post:

Ready to Snap -- Tired of the games

The next customer (lawyer, president of Hyundai, other well to do professional) that asks me why it is so expensive I am going to explode on. Or pack this whole thing in - no that they will really care.

Have others before me had so many nay sayers and grinders in a row that they almost called it a day?

Will it end? This is so exhausting!

Nicole

Marketing and fun

Like wine, and eating out? Do it. "The more wine costs, the more people enjoy it - regardless of how it tastes, a study by researchers in the United States has found." Intriguing. If we could apply this to our business, does that mean by charging our clients more for the renovation, commercial refit, or GC project management, they'll be even happier with the value?

Here is a simple and effective suggestion: Make the activity you most enjoy in your work and life your primary marketing focus. In other words, take the truly most satisfying part of your work, and build out from that your primary time and energy commitment to develop and maintain your client relationships.

So, if your passion is golfing, you know where your marketing should be. If you love skiing, or hockey, or phoning strangers, or knocking on doors one after another, do that. I enjoy writing and journalism. Since I happen to be reasonably good at these interests, the blog and newsletter are obviously right for me.

This of course does not excuse us from responsibility for the essentials that we do not enjoy. If you are a neat-nick, you will naturally want to be in charge personally of cleaning your work area at the end of each day; if you are not; you will still need to ensure the work is done -- either directly, or by hiring or delegating someone to the task. And maybe for some reason you can't stand talking with your clients -- you just want to do the work well. When they call you, you need to return their calls, promptly. (I'm noticing now, however, that I don't get too many phone calls each day. People write me emails and I can -- good for me, since I am a writer, of course -- write back!)

Most people of course don't enjoy some of the so called "standards" of sales and marketing -- like cold calling and canvassing -- for good reason. And conventional 'networking' where you are supposed to mix and mingle around a business-social gathering is awkward for people like me, who prefer to sit in the corner and read, or eat peanuts. This is fine. In an emergency, we may need to do things we don't enjoy, but we don't need to make them our main-stay and we can still to some extent adapt our interests to the environment (want to talk about golf or hockey, anyone?) If you are in the minority who actually enjoy marketing activities that others dislike, you have a natural edge. I've enjoyed reading forum postings from people who actually enjoy canvassing and cold calling (at least they say they do) and brag about their results. Good for them.

Here are some reasons why you will achieve great results by taking your personal passions and making them your primary marketing focus:

• You will want to do the work, and you will want to do it consistently. For example, many people start blogs, only to give up after a few entries. That won't work. Since I enjoy writing and the personal journalism reflected in the blog, I don't mind -- in fact I enjoy -- taking the time each day for this work.


• Your passion will 'connect' with your prospects and clients. People like being around people who enjoy who they are; especially if they share common interests! And this business is all about relationships.


• If you are spending any money on marketing, you'll spend it on something you enjoy, and best of all, if you do it right, you'll turn a personal pleasure into a tax-deductable business expense.

I of course cannot tell you where your greatest interests and satisfactions should be; or specifically how (without knowing you better) to turn these passions into your marketing strategies. But you can start by simply writing on a piece of paper the three things you most enjoy. Then figure out how to connect the dots to bring these passions closer to your potential clients.

Someone else is cheaper

The "butter story" is one way to overcome pricing reduction requests

Ford Harding relates some really effective responses when a prospective client tries to push down the price for professional services.

In a blog entry from last May, he writes:

Maurie Fulton, a rainmaker who gave me my first job in consulting, knew his field cold and, just as important, knew his clients. Through years of negotiating fees, he was familiar with every ploy that clients would use to get our fees down and had effective counter ploys for all of them. Whenever a prospective client would try ploy, he would real off his standard response with such grace and confidence that the clients would usually move on to another subject without further comment. Here are a few client ploys and Maurie’s counters:
Client Ploy: Someone Else is Cheaper -- Counter Ploy: The Butter Story
On hearing our fee, the client would say that they were talking with one of our competitors who would do the work for less. “So, why don’t you use them?” Maurie would ask, sensing this was just a ploy. Not expecting this question, the client would say that the competitor couldn’t start as quickly or didn’t have quite as much experience as we did, and Maurie would respond with his butter story. “It reminds me of the woman who told the grocer that the store down the street sold butter for half his price. ‘So, why not by it from them?’ countered the grocer. ‘Because he’s out of butter,’ said the woman. To which the grocer responded, ‘Lady, when I’m out of butter I sell it for half off, too.’”

More recently, Harding relays a communication from Glenn Mickle, a consultant with accounting firm Morse Group in Australia:

I have recently started with a regional accountancy/business advisory firm in NewSouth Wales, Australia as their marketing manager after a previously successful career in wedding and portrait photography. I see many parallels. Very busy staff coupled with downward pressure on fees from a competitive market.
In my previous career the first question was often “How much does it cost to have a family portrait taken?” My response “Far and away the cheapest way to do it is to take it yourself.” Then I would be quiet. The next question was usually “Well actually we’d like you to take it because we’ve seen what you can do.” This is OK once you have established a reputation for good work. Much like Maurie’s “Let me help you find someone cheaper” story, there is always someone cheaper. I would also sometimes hear ‘The guy down the road does free sittings.” My response: “Well he’d have a better idea than I would as to what his skills are worth.”
The question of ‘How much?’ is often a way for the client to appear in charge of the situation and for them to appear knowledgeable on the subject. If we find other ways for them to show their knowledge (for example, asking them what their preferences or priorities are and what they’d like to get out of this transaction) they forget about the price and start to focus on the value they are after.
I’m reminded of another hint given to me some years ago which I think fits nicely into your discussion. Here’s what to do when asked one those prickly questions like “Why does it cost $XXX?” Instead of getting on our soapbox and rattling off the many virtues of our products, skills and services blah, blah, blah, our response should be along the lines of “Why do you ask?” Then we find the real reason for the question, which might be “Well last year it was more expensive and I wondered why it was so cheap!”

If you have confidence in your abilities, and are delivering genuine value, you do not need to be the "low bidder". And you shouldn't.

Branding, systems and price

What do you find when you ask Google for links from the keywords, branding, systems and pricing? Nothing to do with marketing, it seems; at least obviously; one of the first listings is for "Brand Energy and Infrastructure Services," which, I learned, is the parent company for Aluma Systems -- I have heard of Aluma, but never "Brand". We learn new things every day.

A lot of successful "small guys" have a great brand. Their reputation for quality and reliability is impeccable and they have no trouble finding clients. I see this among several of the renovator members at our local home builders' association. They win awards for design quality, keep up with industry developments, contribute to the community; in fact they are all-round good people to do business with -- but they don't consciously think in terms of branding and systems, and (this is somewhat disturbing) they price their services as if they are competing in the commodity-based open market.

To make your brand work best for you, I believe, you need to get the other two elements of business right -- systems and pricing. Systems are your rules, procedures, guidelines and processes. In the purest format, they are often written down in a policy/procedures manual, but the manual doesn't need to be written if the systems are simple, easily understood, and no one is going to mess with them without authority and planning.

(I would argue that the best systems in fact are easy to operate in an unwritten format -- they are a sign that you are not getting caught in bureaucracy and paper-shuffling to run your organiation, and that your internal communications and relationships among employees and management is so smooth that this documentation is simply not necessary. I would further admit, however, that after a certain point of business growth, you need to document things properly, regardless of simplicity.)

Understanding pricing, and having good rules and processes here, is also essential, because if your brand is good, you may be underpricing yourself if you are simply thinking in terms of commodity pricing models. Your reputation and quality may be so high -- and your ability to recruit sufficient employees to continue/maintain this quality so limited -- that the only way you will make 'real money' in your business is to raise your price since your volume cannot increase sufficiently. Of course you are really hitting the jackpot if you can either simplify your systems so that less-skilled people can do the jobs required to the highest quality; or you devise a truly effective recruitment/training system so you can attract and maintain the highest quality labour force, and obtain more employees when required. Here, of course, great branding is also helpful.

As Sonny Lykos noted in his most recent comment, you can have a great automobile brand; but if the car is missing the steering wheel, it won't run. Business is like that -- to get to where you really want to go you have to put all the pieces together properly. You may be fortunate enough to have a great brand. If so, look at your systems and prices to capitalize on it.