Price, Value & Going Broke

Sometimes it takes a good 30 years for concepts to take hold.

First heard of The Babys way back in December, 1978 in the studios of WAMU-AM, back when I firmly believed that anything after Credence Clearwater Revival just wasn’t music.  The Babys?  Just another glam-rock combo, but not real music.  But as my Dad used to tell me, it’s what you learn after you know it that really counts….

Every Time I Think Of You” was the hit from The Babys third album, Head First, reaching #13 on the Billboard charts. An old college chum recently posted this video on his Facebook page and – WOW!  How did I miss this the first time around?

Maybe that’s the point of this 35 question quiz we’re working through.  We tend to jump to conclusions about things without properly vetting the issue, simply because it’s easier. Snap judgments don’t require us to re-examine our pre-conceived notions, allowing us to reinforce our pre-conceived notions.  So with great thanks to The Babys, let’s continue re-examining our pre-conceived notions with the “Third Five.”

#11.  Most people care only about price.  FALSE

It sure seems that way, though.  Especially today.  But it ain’t true.

People pay more for similar or even the same stuff every single day, often without thinking about it.  Have you ever bought anything at a convenience store?  Everything there is more expensive than it would be at a grocery store, yet people are always in there buying stuff.

Why? Are they stupid?  Don’t they know?

They’re swapping price for convenience.  Maybe you’re not near a grocery store, or you need to get in and out in a hurry.  Maybe you only want a small bag of chips and a 16 oz soft drink instead of a full bag of chips and a full liter.  The bigger selections are a better deal, but maybe you just don’t want that much.

Do you always buy the cheapest gas you find?  People will swear up and down they always do, but can you honestly say you’ll drive around and comparison shop when the needle’s nudging empty?  And to those who still say you do, if I told you 75 cents was sitting on the sidewalk across town just waiting for you to drive over and pick it up, would you?  That’s what 3 cents a gallon savings on a 25 gallon fill-up amounts to.

“But John, if I fill up three times a week.  That savings will add up.”

75 cents per fill-up three times a week is $2.25 cents per week.  Over 52 weeks you’ll save $117.00.  That’ll put a dent in the ol’ overhead, won’t it?

Maybe you have a larger fuel tank, or you fill up more often.  I get it, but all that driving around to save a few pennies is a fool’s errand.  I get controlling costs – it’s critical to any business.  But so is time.

“Well yeah, small stuff – who cares? But when it comes to big ticket items, all they care about it price.”

Look, your customers will always complain about price…because they can.  But as we hinted at last time, most customers worry more about paying too little for something than they do about paying too much.  Especially for the big stuff.  Think about that for a few minutes.

In fact, you can pretty much be sure that price isn’t their biggest concern if they tell you they have 3 other prices that are lower than yours, and that you better get your price in line if you want their business.

Think about that one for a few minutes, too…

#12. You can cut your price and make it up in volume.  SO FALSE IT ISN’T EVEN FUNNY!

Oh, please.  Do the freakin’ math.

If you’re operating  on a 20% profit margin and get the bright idea that if you cut your prices by 10% (hey, it’s the economy – you gotta, right? ‘Cause everything costs less in a recession, right?), you can sell more jobs and get by.  And you do have a good handle on your actual job costs – not hoped for, but actual – don’t you?

Any idea how many more jobs you’d have to sell just to stay where you were in terms of profit?  Anyone?  Buehler?  Anyone?

100% more jobs.  Twice as many.  Two times.  Double what you’re doing now.

You’d have to double your sales volume just to stay where you were financially.  You’d basically have to work twice as hard as you are now for the same amount of money.  I know times are tough, but how the heck are you going to do that?  You’ll need twice as many hours in a day, or twice as many people to do the work.  You’ll need twice as many trucks, twice as many tools, twice as much office help to handle twice as much paperwork.

Oh, and twice as many customers.  Let’s not forget them.

Just to stay in the same place.

“But wait a minute John.  I’m a one man shop, and I’m not getting any work now.  I gotta cut my price so I can at least stay busy. “

Okay, I get that.  Five percent profit of something beats 20% profit of nothing all to hell every day of the week.  At that point, you’re not cutting your price and making it up in volume.  You’re cutting your price to survive.  After all, everything costs less in a recession, right?

#13. Most customers enjoy the price negotiation process.  FALSE

Study after study shows not only do customers dislike this process, they HATE this process.  With a passion.

So why do they do it?

Because more often than not it gets them a lower price.  The lowest price?  Doubtful.  Very doubtful.

Do any of you enjoy the process of buying a car at a “let’s get it on” car dealership?  Folks will spend weeks researching the price structure, dealer holdbacks, profit margins and carmaker incentives so they can walk into the dealership and stick it to the salesman.

How often does that work out?  Look, the guy on the other side of the desk does this several times a day.  You do it once every four or five years.  Who are you betting on?

People hate haggling, but they do it because they think they have to.  It’s called negotiating, and chances are you’re giving your customer plenty of signals – written and verbal – that your price is, in fact,  negotiable.  If you’re worried about your price, if you’ve ever told your customer “you better sit down,” or if you’ve ever warned them that “this isn’t gonna be cheap,” you’re letting them know that your price is less than firm.

So don’t be surprised when the price hammering starts.

#14.  Customers like it when you cut your price a little at the end to seal the deal.  FALSE

Hold tight to your price and at the very end tell them “alright, I’ll take $500 off it we can sign the deal right now.”  They smile and say, “sure, that’s fair,” and sign the contract.

And then the fun begins.

What did you just tell your customer?

“Mr. Customer, I was trying to steal $500.00 from you by padding this price, but you were too smart for me.  Now that we’ve established that I am, in fact, a thief, there’s no way you can trust me.  So you better plan on watching me like a hawk during the job just in case I was really trying to steal $1,000.00, and I’ll completely understand when we have issues when the job is done. Oh, and you’ll be perfectly justified in trying to hold back some of the final payment.  Have a nice day.”

The real price of the job is the price you’re willing to do it for.  If you were willing to take $500.00 less than the price you put down in the proposal, why did you put that price down in the proposal in the first place?  You’re telling your customer you were trying to steal.

And he caught you.

And he can’t trust you.

And maybe, just maybe, if he pushed you a little harder, he could have gotten you to drop the price another $500.00.

If you were him, how would you feel?

#15. Most businesses go broke because their prices are too high.  FALSE

Businesses generally go broke because their prices are too low, not too high. If your prices are too low, you can’t maintain gross profit margins.  If you can’t maintain gross profit margins, you run out of cash.  And if you run out of cash, you can’t pay your bills.

And if you can’t pay your bills, what happens?

“But John, if my prices are too high, I won’t get any work.”

Possible, but if your prices are too low, you won’t be able to pay your bills, which means you won’t be able to do any of the work you get.

Remember, the difference between your total job cost (materials, direct labor, and overhead – including what you pay yourself) and your selling price is your profit.  The smaller that difference, the less margin for error you have.  And any price cuts you offer your customer come out of that “margin.”

Well, times are tough; I have to work at tight margins to get jobs.”

Again, I get it, but tell that to your insurance agent, or your auto mechanic, or your accountant, or the gas station, or your stationary supplier.  There’s a recession. Everything’s supposed to cost less in a recession, right?

The tighter the margin, the more you better hope your costs (materials, direct labor and overhead) don’t move.

And that you don’t make any mistakes.  Or run into something unexpected. Or get sick.

So you gotta ask yourself one question: “Do I feel lucky?”

Well, do ya?

And speaking of luck, the #13 was certainly lucky for The Babys.  ”Every Time I Think Of You” hit #13 on charts in early 1979, and two years earlier their first hit, “Isn’t It Time“, also peaked at #13…

Gotta love lead singer John Waite, giving it his mid-70′s David Bowie-lookin’-androgynous best.

2 Responses to “Price, Value & Going Broke”

  1. John – this is a great subject and is some of the most important info that can possibly be put out..after all, we can’t buy taco if were not in business because of poor pricing! Thank you for getting this info out..i keep arguing with people that prices go up in a recession not down, since cost is distributed over less widgets sold..but man the resistance is tough..keep up the great work!

  2. Thanks Gerry — seems like lots of folks forget that the first line on a profit and loss statement is “sales.” That part has to get done right, and it has to get done profitably!

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