Don't let your profits suffer from 'bargain-itis.'
By Anthony Noel
As we examine costs, the second of five operational areas crucial to your company's health, this month's malady in the Fatal Mistakes series is one many of us are all too familiar with: "Bargain-itis."
Last month we discussed the negative prognoses for productivity and pricing, which can occur as a result of not knowing your costs. We said it is difficult to hold employees accountable for their output without realistic numbers for how long given operations take, and noted the value of getting intimate with what you pay for raw materials.
Doing this requires a strategy for tracking costs on every job; a cost-accounting system that is repeated again and again, the input numbers of which are regularly updated to reflect current fixed costs and projected hours worked.
Setting up a cost accounting system is not hard to do. It merely requires a little detective work in researching all your numbers and a commitment to accuracy.
Unfortunately, many companies, having taken the trouble to establish a cost-accounting system, turn around and throw their good intentions to the wind when it comes time to make sales. How? By negotiating or otherwise lowering their prices.
Why? The reasons are innumerable, intriguing, and - when looked at from the perspective of cost accounting - utterly indefensible. Here are a few of the major ones:
Why #1: "Times are tough. We really need the work."
Of all the whys, this one is, in certain economic climates, somewhat plausible. When there is simply no profitable work to be had, it is sometimes necessary to take a "break-even" job or two just to keep people working. After all, a shuttered business is no business at all.
That said, there's a difference between taking a "break-even" job and one you know is a loser. The problem is, the line between the two can be difficult to discern.
Remember this rule of thumb: The more complex a job, the tougher it will be to break even. And the corollary to that rule: If the job is that complex, and the client is showing his cheapskate colors even before the deal is done, that tendency will only get worse as the job wears on.
Why #2: "People expect you to bargain with them. Everybody assumes the first price on the table is a starting point for negotiations."
There is most definitely a personality type that believes they are constantly shopping in an open-air market somewhere in the developing world - meaning, they believe every price is negotiable. But nowhere does any law state that you must play this game, which is always a waste of time and often a bid by the client to gain the upper hand.
One school of sales psychology holds that you'll actually make more sales by coming in high and "giving something back," especially if you twist your face into painful-looking contortions and pepper your "negotiations" with phrases like, "You're killin' me here," and "I guess I can do it, but the boss is gonna flip!" The rationale is that by letting the customer "win" on price, they'll be happier because they "got a deal."
This approach may have merit in certain sales situations. Not one of them occurs in custom woodworking. More on how to tactfully refuse to negotiate in a minute.
Why #3: "I hate selling. Giving a customer price concessions helps me close the sale faster."
This is closely related to Why #2. Although the reason is slightly different, you're still giving something back in order to grease the wheels of the sale.
Like Why #2, this approach has no place in custom manufacturing, and we'll show how to avoid it after we've addressed the rest of the list.
Why #4: "Before we did the quotation, I gave the customer a ballpark figure that turned out to be way too low (or high). I can't go in with a price that's so far off my original estimate, or he'll think I'm either clueless or playing games."
Hmmm. You're in quite a pickle, aren't you? And just how did you get there? Right. You opened, as Ralph Kramden used to say on "The Honeymooners," your BIIIIIG MOUUUUUTH. I guess you won't be making that mistake again, huh?
Never give ballpark figures. But by all means, try to find out if the customer has a number in mind. If it's not even realistic, you'll know immediately and can bow out gracefully. And it could save you time later, if, as you do the estimate, you discover you've hit his threshold number but have only priced, say, three-quarters of the job. Then you can pick up the phone and ask the customer if hey'd like you to do some "value engineering."
But never, ever, give a seat-of-the-pants price.
Why #5: "I purposely quoted a high price because we're so busy. Since there was plenty of room in the number, I didn't mind giving some of it back."
I understand the premise of jacking up a price on the assumption that you won't get the job. What I don't understand is why you'd want to poison your client pool that way.
People talk. Quote somebody an insanely high price and word will get around that your prices are insanely high.
If you want a particular job but just can't shoehorn it into the current schedule, be prepared to tell the customer when you could do it. If they can wait, price it like you always would. If they can't wait but still want you to do the job, and if you're okay with juggling your production schedule, mark up the job at least 25 percent. Fifty is better.
Tell the customer he will be paying a premium, because it costs you money to drop everything and change your schedule - which is absolutely true.
You've now tactfully given the customer two viable options, without risking your own reputation for honesty and consistency in pricing.
Why #6: "I've been doing this kind of work for so long that I'm not worried about it. If I lose money, I'll make it up on the next job."
The road to bankruptcy court is paved with thousands of little bricks, each engraved with this groundless belief.
Generally, the people making such professions are the opposite of our "I-hate-sales" person in Why #3. These folks are the born schmoozers, the woodworkers who missed their true calling: sales. And who usually miss all their job deadlines. And who should be permitted to sell only on a very short leash, which happens to be firmly in the grasp of a Pattonesque, bottom-line-driven general manager or owner who did not come up through the sales ranks.
Never assume you'll make up money on the next job, because if you sell too low too often, that next job may not come. Know what you need to get and get it - every time.
Returning to Whys #2 and #3 and the subject of refusing to bargain, it's not as hard as you might think. To avoid negotiating, simply review your pricing with the customer.
At the first appointment, show him a blank pricing form which includes only your hourly shop rate. This will be enough to scare off many less-than-serious prospects.
If he's still interested, return with your completed quotation on the same form, including profit margin, and let him know it's not negotiable.
This is the quickest way I've found to separate the real customers from the tire kickers, and it will save you countless hours at the estimating desk.
So, two operational areas down, three to go: marketing, overall management approach, and the one we'll dive into next month: capital expenditures.
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