Pricing for ‘perceived value’
I was down at our local coffee shop this Sunday morning and while sitting outside drinking my coffee I was reading through the latest issue of CWB (Custom Woodworking Business) where I came across an article entitled “Pushing the Limits—Doing the unusual jobs ‘that nobody else wants to do’ is standard fare at Philip Sicola Designs.” About halfway through the article there was a section on pricing and I wonder what you all might think about what was said there. (The emphasis on certain phrases are my own)
The idea of pricing on the basis of “perceived value” requires a different mindset for a custom woodworker, Sicola says. “When a cabinetmaker starts his own business, he figures prices by thinking, ‘It will take me 10 hours, I’ll have so much in material, plus a certain percentage of overhead,’ and that’s how he figures the cost. But I don’t. In high-end custom work, what’s important to the client is the perceived value. Money is not an issue. I base my price on what I perceive to be the value of the project, and then I work backwards to figure out what to do to equal this value. That’s how I do all my jobs.
“The perceived value is partly from the client and partly from you,” he continues. “You both agree that something is worth $10,000. It may only cost you $500 to build, or it might cost you $12,000 to build. You have to control your own costs to stay within the budget you create. I have sold things where the actual cost to build them was only 10 percent of the price and I have sold things where the cost was 130 percent. That’s what you call the learning curve.
This fireplace surround is about 25 feet tall. The curved fireplace panel is a softwood substrate covered in aniline dyed silverleaf. The center portion is textured resin covered in LuminOre. This project cost over $50,000. Back lighting accents each side.“Once I realize what the value of a piece is, I won’t come down on the price. However, it does take a little bit of nerve to do that and say, in essence, ‘I really do believe in myself,’” Sicola adds. “And it’s risky. I give prices on a job before I even know how to do it. I’m on the leading edge all the time, and I think pricing is one of the hardest things in this business. I don’t always succeed in making money, but most of the time I do.”
Sicola also says that his standards are very high and he always give his clients the value they expect. “The perceived value has to be real, you can’t just make something up,” he says.
I was wondering what you all might think and just how this kind of thinking can apply across the broad spectrum of building and remodeling.
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Profit is like oxygen, food, water, and blood for the body; they are not the point of life, but without them there is no life. —Jim Collins & Jerry Poras—Built to Last
Replies
Your market determines the approach If you are building to the high end market you may be able to increase profit (repeat, may!) At the cost of some lost projects if your view of value and your clients converge. If you price things above what seems fair or reasonable most will either figure out how to do without, get another builder, or substitute something less expensive.
The princple is the same as your tools. if you need to buy the most expensive tool to feel secure then you do so, however if you are willing to accept somethings less then the most expensive you have just practiced what your clients do.
Moderate and low income will always seek percieved value rather than pay a premium.
Frenchy you're confusing me there, don't you mean
That's would be my take on it at least.
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
"Moderate and low income clients will always seek a low price rather than judging a service for it's percieved value and paying a premium."
I'll have to disagree with that statement. I've found that plenty of moderate or even low income people will pay for quality work. People are very divergent and whiole there are more high dollar people ABLE to waste money on name brand builders, more lower income folks actually KNOW what they are looking for and which builders in town do good work. Some lower income folks have grown up in thde depression and have an ingrained habit of looking for the best value. Some of them act this out by buying the cheapest they can find. Others actually LOOK at what they are geting for the dollar which is the true measurement of VALUE.Excellence is its own reward!
i'd agree with piffen on this one... high income people can afford to pay higher prices.. but what always surprises me is you never know which customers will pay your price until you ask.. ..and often times it is the low and middle income customers who will pay the price when someone "well-off" will not... a lot of it has to do with the customer's personality.. some people , no matter what their income, always think they can get it cheaper..
if you look around the prospective job site and try to make a guess as to what they will pay.. you will probably guess wrong.. you will guess too high or too low..you have to explore the budget and the personality of each customer...
here's one example of "perceived value " that almost always blindsides me....landscaping.... we build some pretty nice projects from time to time.. and try to deliver good value for the customer's dollar.. lets say we have built a nice custom victorian for $300K...everything included , everything EXCEPT the landscaping.... they then turn around , hire a landscape architect and a landscape firm and shell out another $100K.. all for really simple stuff that our crew and our excavator can easily do and have done in the past...
the problem was a lack of communication on our part.. and the customer's perceived value that the only way to get the landscaping they wanted was to hire a specialist..
a lot of times this is the root of the perceived value miscalculation... as General Contractors we know we can hire or execute in-house almost anything our customers want...but we never raise the issue so they go elsewhere for some of these specialties..Mike Smith Rhode Island : Design / Build / Repair / Restore
Piffen-The problem with percieved value is when it costs
you ten grand to build a project but the customers 'percieved value' is only
eight grand. ...
In talking with cutawooda back in the crown
molding prices discussion I had said:
I think the answer to all this is somewhere in the answer to my question there
"Where did my view of what a septic system would cost come from?"
How do we gauge that in our potential customers?
... people don't call me in the first place unless they
want a certain kind of attention.
That's what we get to only it's more for our unique and obscure capabilities
rather than for the uniqueness of our attention to service.
Part of what adds to percieved value is the emotional
or image included... --Great paragraph with a lot of good points!
if you think that their 'percieved value' for this job
is fifteen grand but it will only cost you four grand to do it, do you charge
the percieved value?... --I say yes
...Sometimes yess but you can do yourself a good turn
by charging them half of that, say 7500 and they are then not only happy with
the job but delighted with the price, having expected to pay more, and you have
traded that excess profit for loyalty and trust (don't think that they won't
talk to their friends about the great contractor they have found) --But
there is a potential problem in that! When they make that recommendation
to their friends and neighbors they might say "wow what a great project
they did and they were inexpensive too." Do we really want to risk possibly
being referred to others as the low cost solution? That just (possibly)
creates a price obstacle to the sale of that next project. I would rather not
risk it. I want us to be recommended as "the only contractor who could
possibly handle a project like that" or "the most artistic contractor"
or "the best problem solving contractor around". Those are all reputations
and brand images that can help sell projects at a premium price. It's my goal
and responsibility to my shareholders (me) to make every effort to maximize
the profits my company can earn. For the last six years I been thinking like
that more and more which might help make up for the twenty before that where
I didn't.
Is this statement any better or more accurate phrased like this? It's still
a gross generalization but sometimes we have to make those kinds of generalizations
to sort out and qualify which customers we should be talking too.
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Edited 7/14/2002 12:50:57 PM ET by Jerrald Hayes
"But there is a potential problem in that! When they make that recommendation to their friends and neighbors they might say "wow what a great project they did and they were inexpensive too." To we really want to risk possibly being referred to others as the low cost solution?"
I realize that there are risks either way. In the past, I've had a few of those 'cheap' referalls. Now, the most common referral is "If he says he can do it, he will and it'll be a fair price no matter how much it is"Excellence is its own reward!
Interesting discussion. I have a question. How do we determine a common perceived value?
An old friend of mine bought an old slightly run down house, had it torn down and had us build him a new house on the lot. All told he has at least $350k into his property. I know that there is no way that he could sell that house in that neighborhood for more than $250k. Does that mean that we should not have built the house for him? I don't think so. We liked the job and he likes his house. Is it a good value? In the long run, maybe. If he sold it tomorrow, no way.
We have a lot of customers like this. Fortunately they do perceive value in what they pay for, even if we think it is a waste of money.
SCHELLINGM- I have a question. How do we determine a
common perceived value?- That certainly is THE QUESTION and that's
why I brought this all up. I been on several projects just like you were describing.
I just sort of accidentally and clumsily stumbled on to "selling by perceived
value". A few years ago I got a call to look at a difficult stair railing
project. I found out from the project manager when I got there that several
other stair shops had been there to look at the job and said it couldn't be
done. The builder told his project manager to give me a call even though at
the time I might not have been really considered a genuine stair and railing
shop because he said that I would at least figure out a way it could be done.
Looking at the job I said yeah sure it could be but it wasn't going to be easy.
The railing they wanted was iron and brass balusters with a solid cherry cap
rail. Right there I knew they were talking about getting a specific look and
not shopping for a railing that would "meet their budget". The "impossibility"
that the other stair shops saw that I just saw as a "difficulty" was
two helical wreath turns that would have to turn 180° and drop 28"
on a 4-7/8"radius. I knew it could be done because I had seen it in books
although I had never seen it done in actuality.
Driving back home from looking at the job I was going over the wreath turns
in my mind thinking about how I would do them and how long it would take. Thinking
back to a sculpture I did in college, carving a chain out of a solid block of
wood I figured it would take me a full day to shape each wreath from a glued
up blank. So I began to think...$55 dollars an hour times 8 or 9 hours...works
out to between $440 and $495 labor ... the cost of the cherry for that piece...wide
thick stock at $6.5 to $8.50 a board foot... lots of waste...that would be about
$60 to $100... for each wreath I should charge something like $540 to $600...when
all of a sudden... a little voice in my head said "HEY WAIT A MINUTE!
These two pieces are the only obstacle keeping all those other stair shops from
being able to execute the project the way the end-user-homeowner wanted it....What
are those two pieces really worth then? ...What are they worth to the builder
who has promised the owner that he could get the job done for them just the
way they really wanted it?... Arbitrarily off the top of my head I then decided
to price the project based on something like a $2400 price for one wreath and
a $2700 for the other.
It was right then in the midst of all that visionary thinking and figuring that
I got pulled over for speeding.
Well, altogether with all of the other railing work to be done that only amounted
to a 5% or 6% increase in my total project price but those two pieces were earning
my company money at the rate of around $240 per hour (they ended up taking just
a few hours longer than the 8 or 9 hours I guestimated). My price was accepted
no problem and the builder had his markup on top of that when he presented it
to the client.
So I learned a lot from that one project that forever changed the way I have
priced projects since then. After working up a basic estimate for a project
I look at the whole project again and try an break it down into smaller component
parts that I can rightfully charge a premium for. I'm also now genuinely in
the stair and railing business since we can fabricate stuff that other shops
can't or wont.
I'm not sure I have a real valid formula yet for determining that pricing premium
yet. Right now since it's usually me and not one of the troops that has to fabricate
those parts personally I think what would it take to get me off of my butt and
make that part for a client when I could be doing something else I really enjoy
like watching a Yankee game. Seriously that's how I think about approaching
and determining a perceived value and ultimatly a price.
That makes me think that there are really two part to the equation. What's
it worth to the client and what's it worth for your company to take the
risk in attempting to produce the piece? You also really have to know your
client's preferences and values(in this case a builder) and the their clients
expectations and tastes too (the homeowners).
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Because it is subjectively percieved, I don't think that any formula will work consistantly. It has a lot to do with experience - both work and in reading people.
BTW
'It was right then in the midst of all that visionary thinking and figuring that I got pulled over for speeding."
I've run a red light or two while doing such creative work. Myt wife prefers to do the driving now, which is fine for me. Driving is so boring unless you kick it up to eighty or ninety and that's just not how I want to die.
Excellence is its own reward!
Back then when that happened I told the cop I was actually surprised and thrilled
that the car I was driving could go that fast. It was an ancient Saab 900 that
finally passed on soon after that at 470,000 miles. R.I.P. I still really miss
that old car.
"Because it is subjectively perceived, I don't think
that any formula will work consistently." I think you are 100% correct
on that but can't we work on techniques and methods for making better guesses.
When doing faux finish work or murals I consciously think about painting and
poster art I've seen selling for particular prices and then covert those numbers
in to value per square foot numbers and try to use those number in determining
a value of our work albeit on a larger scale often with a muted attention to
fine detailing.
Also what are the areas in building and remodeling where we should be thinking
of selling on perceived value? I've brought up handrail wreaths so what about
it parent domain of curved work. Can we sell curved work at a premium? Shouldn't
we be selling curved work at a premium? Drywall is pretty much a commodity is
there ever was one in the building and remodeling business but there have to
be areas of drywalling that should be priced differently just for the value
they deliver. I saw this guy post his drywall website here the other day responding
to the Need
fancy sheetrocker in Atlanta discussion and I thought looking
at the stuff on his site that that kind of work has to be priced at a premium.
(I'll bet he knows what it worth and does just that)
Sure I know a lot of premium areas but I'm wondering what are the other areas
of premium work that people have discovered that clients are willing to stretch
and spend the extra dollar for? What was there experience and what were their
strategies in setting the prices for the work in those areas?
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Curved work is automatically higher not only because it takes more time but because therre are so few guys with the patience and skill to do it. So anything requireing extra skills sets you apart and into a realm of less competition. Carved wreathes (I've never tried carving but sub some out and find a world of difference in the way carvers charge - some a turn key price and some various hourly amounts with the hourlies ussually cheating themselves but taking longer to turn in a finished product) are in a zone that I consider 'art' and never include in any firm bid but charge cost plus so it is a percieved value item. It adds image and uniqueness to the home.
Exclusive or unique
Image projected
Assumed added value
Signature work
Neighborhood recieved ( I know a painter who prices his work based on the area he works in instead of his cost)
'celebrity factor' is another one. Suppose you are working for a famous movie actor who has just been reported to have signed a contract for five million on his next movie. You know he's got the bucks available. His wife just got pregnant. He wants the job done by _______date.
You know he ain't got much time to shop around. You also know that he'll probably decide to show up and want it finished a week or two earlier than agreed. And you know there'll be little nit picky items to follow up and punch out later. He may have an interior designer show up and change half the details while you are half done unannounced. He may have guests staying at the house while you are working there that means you can't make noise before ten O'clock AM....
'Excellence is its own reward!
let look at another point of view on percieved pricing. What about the customer that saved every penny, work two job and ate generic can good, just to have a nice house. Then a storm blows in and destroy some shingles.
Then the local handy dandy repair guy ( license and bonded of course) quote a very high price for an easy repair. and all he can say is, look at the fancy cars and house you can afford it. value is, one dollar more than somebody will pay for it. Its bad if the 50,000 dollar fireplace that no body will pay. and then somebody will, same item,different value.
Good point for discussion!
The problem with percieved value is when it costs you ten grand to build a project but the customers 'percieved value' is only eight grand. "But my neighbor down in Nasau had one like this built for only 8000!" Then you have to put on the salesmans hat. I tend to have a leg up on the way in the door because with the track record of projects I have done, people don't call me in the first place unless they want a certain kind of attention.
Part of what adds to percieved value is the emotional or image included. For instance, if they have a beautiful house with a well manicured front but some shingles have blown off in a storm and the roofer who replaced them didn't pay too much attention to colour matching, they have this spot on approach that looks like a knee patch on blue jeans. If they are the kind of owner who lets this bother them every time they drive home and look up, it is worth a fairly large price to them to have it done well. They are already wrestling with a sense of frustration from the last guy they had out and don't want to go wrong and choose a barely acceptable job again. If hubby finds it acceptable but wifey is aggravated by the look, a redo is immeasurably preferable to the cost of marriage counseling or a divorce atty. (Laugh if you want but lots of high dollar people live out on that edge)
OK - now if you think that their 'percieved value' for this job is fifteen grand but it will only cost you four grand to do it, do you charge the percieved value? Sometimes yess but you can do yourself a good turn by charging them half of that, say 7500 and they are then not only happy with the job but delighted with the price, having expected to pay more, and you have traded that excess profit for loyalty and trust (don't think that they won't talk to their friends about the great contractor they have found)
Just some thoughts.
The value of a job is what I'm willing to do it for. I'd never raise the price on a customer because of the price of the house or a car. I work strictly by referral and am booked for months. If I underbid a job it's a learning experience, if I over bid something normally went better then expected.
But to hose a customer based on an unrealistic concept is unconsionable.
It's the same as a novice new car buyer who got taken but tells everyone what a great deal they got. Their friends might shop the dealer but no one including previous customers are buying. This trade depends on all new customers cause nobody returns to be raped again.
So price the job based on your expected cost and sleep well knowing someone may be willing to do it cheaper but no one will do it better.
one man's idea of a hosing is another man's breakeven point.. all things are relative..
perceived value is always in the eye of the beholder, and the price goes up with experience.. mostly because you finally realize just how valuable you are
but hey, whadda i no ?Mike Smith Rhode Island : Design / Build / Repair / Restore
How valuable are you?
If the job calls for unique skill that only you have mastered, well that's fine. Yet often the suppoosed skill is nothing more than an ability to drive a nail or cut a board.
Every day I hear others ask what is so-and-so getting for framing, how much do they add for a bump-out etc. I watch while they raise their prices to the high level and laugh when they call me to ask for an extension on the loan because they aren't busy right now.
Another words thay are always anxious to get top dollar and not always ready to react to the market place. In 1999 framers were all busy and some were getting over $9.00 a sq.ft. for framing. This spring if you were working you were at $6.50 or less (and a lot of crews weren't working) The bills go on and the kids always need new shoes so you put your shoulder to the wheel and push.. to fail to understand that and to hold out for top buck is foolish....
frenchy.. you're missing the point...my value is my value...and more often than not.. the guy who calls you asking for an extension on their loan wasn't charging enough.. it's not that he was charging too much.. you've got it backwards...
the upward spiral is to keep raising your prices to cover the costs of doing better work... and teh better work will generate better leads from those that want to build the best job they can get... they ain't gonna call the guy who's 10% cheaper.. they are going to call the guy with the best reputation for good work... and that comes with a price.. the price is a lot higher than the average guy starting out in this business would ever guess...
in '75 when i started out i couldn't do the things we can do now... and neither could my competition.. the ones who survived were not the low price guys , it was the ones who always delivered... and in order to always deliver you have to still be in business which means you have to make a profit.. which means you have to continually raise your prices to cover the higher cost of doing business..id you chicken out , you slip into oblivion..
so.. the ones without the work are not there because their price was too high.. it's because the demand for thier services was too lowMike Smith Rhode Island : Design / Build / Repair / Restore
Mile,
I whole heartedly agree that profit is needed. It's what drives all of us. My point is that there is an upward limit to everything and often those who ask too much pay for it by not getting the job.
The only ones framing this spring were the ones who had built a reputation for reasonable prices and good service. A lot of guys were sitting in the bars bemoaning the fact that they could no longer get $9.00 a foot to frame houses. The ones working adapted to that fact and met the market.
Now sure there are exceptions. Contracts signed earlier for a higher price and such but most were looking this spring. contracts signed now seem to be around $6 or 6.50
I've had to adjust my rental/ sale prices accordingly. My income has been reduced and if I fail to meet the competition, they get the sale and I work for nothing (actually since demo's occur, I'll lose well over $500.00 on the lack of sale.....)
Since there isn't 10% ( or evan a 2%) differance between brands of Forklifts price is seldom the deciding factor. The differance is the service and quality of the equipment. I've been doing this long enough to know that when things get tough the only way to survive is to adapt and work harder/ smarter.
The amazing thing is everyone thinks they do great quality of work. thus they should get more. Yet the builders all understand second grade math. While a great reputation may get you a small premium, a too high of price will get you nothing......
Frenchy- My point is that there is an upward limit to
everything and often those who ask too much pay for it by not getting the job.
Frenchy while that may be true 95% of the time we're guilty of not charging
enough (for premium value work) because we think we wont get the job. I spent
years giving away the premium stuff like an idiot!
I think most guys here think when they don't get a job they blame it on the
price they gave when I bet that better sales skills would have sold the job.
The whole concept of what I am talking about is called Strategic Pricing. According
to McKinsey & Company probably the premier management consulting firm in
the country:
Hey! "a 1 percent increase in price drives a nearly 10 percent boost
in operating profit dollars." That's a huge important statement. Is
increasing price just 1% gonnna make or break selling a project for those contractors
who think they have to price low to get the work? I doubt it. You even confirmed
it with what you said about "Since there isn't 10%
( or evan a 2%) differance between brands of Forklifts price is seldom
the deciding factor. The differance is the service and quality of the
equipment."
"many companies do not understand the pricing dynamics they face,"
how very true especially for contractors.
The amazing thing is everyone thinks they do great quality of work. Thus they
should get more. It isn't just quality that counts towards justifying that extra
premium charge. It's something else. I'll have to pull my copy of the Experience
Economy down off the shelf to get in to this one more and explain what I
mean. One word I can think of right now is it has to have Cachet. See ya tomorrow.
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
I think everyone needs to understand the economical context that we are dealing with. It all relates to the supply and demand curve... It always has, and always will. When any Joe can supply the work, the supply is high so the price is low on the curve. When Jerrald is the one guy who can do the wreath (all other said it's impossible) then the demand is high and the supply is down to one guy. Price= very high.
Jerrald (or Sonny, Shelling, Piffin, or Mike,) all typically deal with an upscale clientele. They are not hosing the poor who would otherwise use the money to buy medication for their dying little girl. Keep this in perspective. When a client needs a staircase, they can call any number of people and they can meet their need, all within a fairly narrow range. When they want a wreath, or for Armin or Stan, a hardwood, cantilevered, and carved winder, they desire more than just a way to get from floor x to floor y. They want prestige, status, and a big dose of "wow!". Those who can provide this (and typically there are not many) deserve (and owe it to their business) to charge much. These same customers drive their expensive cars to their skybox at the latest Stones tour. Both are very expensive propisitions. Do they complain that Mick and the boys want $150 for the nosebleed seats? Or that the Germans want $120k for 4 wheels and an engine? Of course not. They want the best and will pay for it. End of issue.
Frenchy, I certainly do not mean to pick on you, and I hope you will not take my words as an attack, but I see that you're examples against Jerrald are forklifts and framing prices. Both of the pricing strategies for these items coincide with the economic principles that have been proven over and over. I would wholeheartedly argue that there is a huge chasm between the price determinants for the items you have mentioned and those that were the root of this discussion.
Jerrald, I have noticed your recent activitity on this forum, and I want to thank you for stretching us. I can tell that you not only desire professional developement for yourself, but also for the rest of us. Keep asking the hard questions... we all need to think about them.
Jon Blakemore
Edited 7/16/2002 12:06:09 AM ET by Jon Blakemore
For what it is worth I think most of you have a valid point or two from your perspectices. The key word in the title of this discussion is "Perceived", and the main issue is who is doing the perceiving. If somebody with more money than common sense wants a certain type of widgett that only one person can make, then the sky is the limit !! Back to that old supply/demand that was mentioned earlier. If it was me asking what a fancy widgett would cost, and you told me xxxxxx, I would soon be figuring how to tell my wife that we were going to go without widgetts. Perception is directly related to ability to pay, what is pocket change to some, is a fortune to others. Everthing is relative, wow that sounds like a song somewhere.
Bottom line is charge all that you can get, and then make that seem fair by great service and quality.
That is the end of my intelligence for now, and probably a lot longer DAN
"Perception is directly related to ability to pay"
That pretty well sums up this discussion concisely.
If that's the end of your intelligence for now, I feel deprived - like a man who has had a quick glance at a #10 hottie smiling at him but before she disappears from view....
Excellence is its own reward!
Jon-- "It all relates to the supply and demand curve...
It always has, and always will." -- Yup I think that's the
real bottom line to the whole thing.
"Jerrald (or Sonny, Shelling, Piffin, or Mike,)
all typically deal with an upscale clientele. They are not hosing the
poor who would otherwise use the money to buy medication for their dying little
girl"--. Thanks for clarifying that for all of us. Hey I regularly
work with AmeriCares HomeFront contributing my time and expertise to projects
where the people normally could never afford our level of expertise. In fact
I think anyone working the luxury market can and should make sure some of it
trickles back down somewhere.
"Keep this in perspective. When a client needs
a staircase, they can call any number of people and they can meet their need,
all within a fairly narrow range. When they want a wreath, or for
Armin or Stan, a hardwood, cantilevered, and carved winder, they desire
more than just a way to get from floor x to floor y. They want prestige,
status, and a big dose of "wow!".-- Yup that's it. Armin does
wreaths too. I once saw the jig he created for one project here a while
back. So if I'm in NY/NE and he's in Michigan ( I think) where's the rest of
the competition for that kind of work. In Westchester county where I am while
there is a good chance that is probably another shop that can an will fabricate
wreath railing turns I don't know who they are. In fact of the closest shops
that I know of for sure that will do them two are 140 miles away in Rhode Island
and the other is on the other side of NY 209 miles away.
Like I said those are the ones I definitely know of, and there are probably
other shops that can do it that are closer that I just haven't discovered yet.
But if those are the shops that I know of how, my competition so to speak, how
much trouble is it going to be for a Homeowner-Consumer or a local GC to find
a shop with the capability. I've been doing them for years now always keeping
my eye out for other shops with the capability. (I would love to outsource it
if it worked out for a particular project).
"....Do they complain that Mick and the boys want
$150 for the nosebleed seats? Or that the Germans want $120k for 4 wheels
and an engine? Of course not. They want the best and will pay for
it. End of issue.-- thanks again for clarifying that too
"(Frenchy)... I see that you're examples against
Jerrald are forklifts and framing prices."-- The forklift comparison
I don't mind since it's a pretty specialized piece of equipment but a lot of
guys do framing so it's a lot more commodity like. It a lot more fungible. Sure,
you have to be a lot more careful that you don't price yourself out of the framing
market. The stair work that we do do that is part of the general stair market
is NOT priced with the same high value-added markup that we use for the tangent
curve technique rails or wreaths.
Jerrald, I have noticed your recent activitity on this
forum, and I want to thank you for stretching us. I can tell that you not only
desire professional developement for yourself,-- That's exactly it right
now I am trying to stretch myself. I've been participating in these online
forms on building and remodeling since way back in 93 or 94 on AOL in a forum
called P.L.A.C.E.S. (Anyone here remember them?). I've learned a lot and developed
a lot of my own ideas. In in a little bit of a spurt here right now looking
to question of lot of what I think I learned before I go out and re-boot my
company this fall in a growth and expansion mold.
I've been working on the redesign of my web sites and some of the sites I'm
working on for other contractors so I'm at my desk and on the net a lot these
past two weeks so maybe that's what I've been able to post a lot lately.
I really appreciate all the hard criticism I can get since a lot of the stuff
I say if I don't have an idea of an explanation or answer for it in my head
how in hell is it going to survive in the cauldron of the real work marketplace.
So far I seem to be on the right track with this "Pricing for ‘perceived
value’" and "Strategic Pricing" but hey, ya never know.
It took me almost two decades to figure that much out. I like and am proud of
myself as an artisan. I've designed, drawn, painted, and built some pretty neat
stuff over the years. I have no self-esteem problems there. But I still see
myself as pretty much of an idiot and a mediocre businessman. I've been puttin'
along as a small mom and pop type operation for a little to long now. Nothing
at all wrong with mom and pop operations but that's just not the challenge I
want anymore. Time to get my rear in rear once-and-for-all and do all this stuff.
Time to to see if I can build a real COMPANY. That would be kool.
Thanks for your help.
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
"The value of a job is what I'm willing to do it for. "
That may be, but how do you decide what that value is? I think that Jerrald is asking about those jobs or parts of jobs that are really worth a lot more than we are charging. As a gc I am on both sides of this question. We have a few talents or skills that are not common and these skills are one of the reasons that people hire us. We also are frequently looking for someone to do something that we can't do ourselves. It is usually a small thing (relative to the cost of the house) but we (and our client) would pay a significant premium for this service. Instead of feeling ripped off by a high price, we would be grateful for the opportunity to pay it, because what else could we do?
I don't think there is any formula for this but it certainly is an area that deserves our attention. What are our unique or uncommon strengths? If we can isolate the parts of the job that need those strengths, perhaps we can raise our rates for those parts of the job.
I'm reminded of the story of the retired engineer who was called into a factory to try to fix a very expensive machine that was holding up the production of the entire factory. None of the young engineers at the plant was able to find a solution. The oldtimer said that he would find the problem and fix it for $50,000, knowing that the shutdown was costing the company that much each hour. After looking at the machine for an hour, crawling under and around the entire machine, the oldtimer took a piece of chalk out of his pocket, made a little mark on a part on the machine and told a mechanic to replace that part. He then turned to the company comptroller and told him where to send his check. The accountant sputtered, "But all you did was make a little mark with a piece of chalk." The old engineer smiled, winked and said, "That's right. Five cents for the chalk and the rest for knowing where to put it."
schellingm-
If you don't know what you are willing to do a job for I cannot help you. Heck I've worked for free to help a friend or someone in need. I also have worked for a company that blatently ripped people off. Here is an example:
I was doing window repairs as a subcontractor for $20.00 per hour. I did a job for a little old man living in a row house where all 15 of his s/h windows wouldn't stay up. I was in and out in an hour and used $45.00 in materials. Including my labor total cost to the window co was $65.00. I had to hand the customer a bill for $675.00 for the repairs and he paid with a home equity check. I had trouble sleeping that night so I quit the next day.
So the point is I was willing to do the job for $65.00 Hell I'd have been clickin my heels and gone fishing the rest of the day for $200.00. But charging $675.00 no matter what you know,(unless youre saving a life) for an hours work is criminal in my book. And yes I think most lawyers are criminals! (LOL)
I think "the
story of the retired engineer..." that Schelling told was very apropos
and it remided me of aother one I once read about in Selling
the Invisible (arguably the best and clearest bookon service marketing I
ever read and what we are doing as buildier and remodelers is marketing our
service(s))
The moral of that little parable as the author Harry Beckwith tells us is...
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Reminds me of the story (I guess the discussion is over when we start telling old stories) of an old woman who went to chuirch and heard the visiting preacher laying it all out with one scripture after another. He must've quoted two hundred in his sermon, all from memory. She met him at the door after the service and complimented him, saying, "I would give half my life to know the scriptures like that!"
"Madam", he said, "I did"
Excellence is its own reward!
piffin "I guess the discussion is over when we start
telling old stories"-- I don't think so, but I've been gabbing so
much I didn't want to talk over anybody else who might be getting ready to ask
or say something about all this.
I've still got questions. In the Pushing
the Limits article that I cited to start this whole conversation off it
said regarding how he (Philip Sicola) prices the work ( the projects)
Is that okay? Is that the way all high end value added work should be figured?
What about the stuff that is more fungible-commodity-like like standard framing,
drywall, or painting. Is figuring it out that way okay for that kind of work
too?
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Jerrald, it is okay to price your work anyway you want, and it is also okay to charge any amount you want. How you arrive at those numbers is important only to you, and possibly the prospective customer. Eventually you will be asked by somebody that had a lower perception in mind, to explain how in the world it could cost so much. Until that time your main concern should be how much profit can be made while still giving the customer what they "perceived" as good value. Only they know how much that they are willing to pay, and only you need to know what your true cost to produce it were. As long as the difference is a positive number, then all goes well. If you assume that you are doing desired work, that not many are offering, then you can do very well. Just remember that if you do well that others are sure to mimick your efforts, and they may try to cut prices and steal market share. Good luck
Dan If I have been learning from my mistakes, I should be smarter than this.
The way I figure it------
In any commercial transaction there are gonna be 3 important figures to keep in mind
1) cost (to produce)
2) price ( dollar figure at which the transaction will take place)
3) percieved value
I can think of no circumstance where an intelligent consumer will pay a price MORE than the percieved value.He will always strive to reach a price lower than the percieved value and will be thrilled if he can get a price lower than the cost(to produce). In this forum we have a lot of guys who don't actually know their true cost(to produce) and so constantly sell at a loss.They subsidize their customers in a lot of ways they aren't even aware of.
As a business,If you are able to sell based on the percieved value you are in a whole 'nother ball game.The cost of your time has little to do with the profit you can honestly make. If the consumer is free to honestly search for goods at the lowest price relative to percieved value----and also to buy below cost(to produce) without any ethical or moral judgements thrown at him---------why can't a business seek to price according to percieved value?In fact a great many successfull businesses do just that----off the top of my head---Rolex,Coach,Mercedes,Krug etc. probably spend tremendous efforts to sell according to percieved value and tirelessly work to SHAPE that percieved value.
Almost anybody here can do this to some extent--- even when selling a "commodity" trade like roofing or framing. All you have to do is put some effort into educating your customer in the percieved value of YOU.My customers can buy roofing services from an infinite number of suppliers-----but there is only one source of roofing services provided by Stephen Hazlett. All I have to do is educate my prospective customers untill they realize that they don't just need a new roof----they WANT a roof from Stephen Hazlett.It doesn't work on every prospective customer, but it works on enough of them
Steve I thought you breaking it down in to three main points was succinct and
right on the money.(Although when ever I see anyone break something down in
to x number of it's component parts I always wonder if there is another one
we might be missing).
"I can think of no circumstance where an intelligent
consumer will pay a price MORE than the percieved value." Neither
can I, which has sort of been my point.
"In this forum we have
a lot of guys who don't actually know their true cost(to produce) and so constantly
sell at a loss.They subsidize their customers in a lot of ways they aren't even
aware of." Absolutely! That is certainly the hard truth
and when you criticize anyone for that they have a million reasons ( I call
them excuses) to support their pricing position and structure.
"If the consumer is free to honestly search for
goods at the lowest price relative to percieved value----and also to buy below
cost(to produce) without any ethical or moral judgements thrown at him---------why
can't a business seek to price according to percieved value?"
Once again a great point.
"...anybody here can do this to some extent--- even
when selling a "commodity" trade like roofing or framing. All you
have to do is put some effort into educating your customer in the percieved
value of YOU....they don't just need a new roof----they WANT a roof from
Stephen Hazlett." ---That's just good Brand Development don't you
think? I been sort of taunting anyone involved in what I was calling a "fungible-commodity-like-trade"
to see if they would respond. I happen to think even that kind of work can be
elevated to a higher revenue level. I think the questions we as contractors
have to ask are ( and I am sort of directly asking these questions of you):
How do we do it? How do we "market our brand"?
What are the "actual mechanics" of Brand Development?
What are we doing to educate your customers?
How do we weed out the ones that can't be educated so we don't waste (to
much of) our time on them?
One question I think is sort of critical though and I ask it as sort of a caveat
or caution. In your case is "Stephen Hazlett the individual" the brand
or is "The Stephen Hazlett Company" the brand?
Great post Steve thanks
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Jerrald,I operate as an LLC(Hazlett Roofing & Renovation LTD) and Because of the very high potential for liability I am carefull to keep all my work within the envelope of the LLC. As a practical matter ,however, most of my customers equate my company with ME and I am fine with that.I have absolutely ZERO interest in developing my business in to something which could be sold outside the family.
I think before someone starts marketing their services ,that they had better have a firm grasp of what business they are actually in. for instance a kitchen remodeler isn't really in the kitchen remodeling business----there are to many customer dreams and emotions for that. A kitchen remodeler is really in the " making dreams come true" business. I am not really in the roofing business----I am actually in the "problem solving" business. Much like a car mechanic.
I concentrate on selling my services to specific types of people that experience tells me I will do well with----solid middle class accountants,insurance salesmen,teachers,nurses,police and fire men,computer programers etc. the more white collar and mundane the better.I also look for VERY stable customers----people who have lived in their homes for years(decades) and plan to stay for years.
Upper middle class customers are too transient to value my qualities and lower middle class customers are often to " cash impaired" to pay my price.I now generally ignore slum areas.landlords,and the very affluent---as these folks fall outside the group I do well with. I don't want every potential customer----just the right ones.
More and more I tailor my advertizing to specific communities that experience tells me are receptive to my "name". I concentrate on being a bigger fish in a smaller pond.I know I can't be all things to all people, but that's ok. after all I only want to appeal to specific groups of people.
since my customers are solid,dependable,mundane,hardworking people I know they will value the same qualities in people they do business with. I can display these qualities through promptness,efficiency,cleanliness etc.Many have lived in the same neighborhood and attended the same church for generations.Thats why I didn't bat an eyelash at pledging a nice 5 figure donation to the churches building fund for a new facility( ground breaking in about a week). I did it quietly knowing full well that the "right people" would hear it through the grapevine.It's a donation I would make anyhow(3 generation of Hazletts have served and attended that church),BUT, its also an excellent marketing opportunity to show you are committed to a specific community----my customers value people who put their money where their mouth is.
If a prospective customer calls me and talks price,price,price I know I can weed them out. If they focus on the PROBLEM -----then I know they are a good prospect.If they are well known in the community for the attributes described above---then I know they are good prospects.If there was a reason they knew my name BEFORE the problem arrived,then I know they are a good prospect. Basically,I want a certain group of people to feel that they wouldn't even DREAM of taking their problem to anybody other than me.
notice I haven't even mentioned workmanship?Thats a whole 'nother topic. Basically workmanship isn't the primary consideration of my customers---although they recieve very good workmanship.these people assume( and recieve ) good workmanship as the natural side effect of all the things mentioned above.they expect solid work,but they PAY for a lot of other things as well and they referr enthusiastically.
BTW, I am leaving for DC,and then the beach for a while. I hope this thread is still alive when I return as it has been the most interresting ddiscussion on this forum in months.
This is a great discussion for guys like me to lurk in. I just finished an MBA, and am considering my options for going into business. I just wanted to point out that the technical term for what you're discussing is called "price elasticity of demand".
It's based on the idea that for normal goods and services, if the price goes up the demand will go down and vice versa. But, how much demand rises or falls depends on the specific product. If I'm selling wheat (a commodity) and I raise my price by 10%, I am likely to lose 50% of the demand for my product. That's because people can buy wheat from plenty of other people, or they can buy potatoes or corn or rice instead. I'm getting 10% more per unit, but I'm selling 50% fewer units, so raising my price decreased my income. That is called "elastic demand".
The flip side is "inelastic demand". In that case, if I raise my price by 10% my demand will drop, but by less than 10%. This is typically the case with products for which there are no accpetable substitutes. So I can bring in 10% more per unit, but only sell 5% fewer units, so by raising my price I also increase my income.
Here's an example. Say I'm the only heavy equipment dealer in town. I am currently selling 100 backhoes a year for $100,000 each (of course I've never bought a backhoe so I'm making these numbers up). That gives me an annual income of $10 million. Since there are no acceptable substitutes for local contractors, demand for my product is inelastic. Say I raise my price 10% to $110,000, and my demand falls 5% to 95 units a year. I'm selling fewer units, but my income has gone up to $10.45 million.
The trick for any business is to understand the price elasticity for your product. If demand is inelastic, raise your prices (charge a premium, charge "perceived value", however you want to say it). If demand is elastic, you can increase income by lowering your price (all else being equal). This is a little simplified, but the concept holds.
Stephen,
I appreciate your succinct comments. Could you elaborate on your marketing research process a little? Specifically how long before you realized exactly what business you were dealing in and, then after that realization, how you determined the segment you desired to target?Jon Blakemore
Jon, sorry to take so long to respond but I have been out of town for a week and a half or so........
I do almost zero work 4-5 months a year so I have plenty of time to anylyze exactly what I am doing and apply what I learn to making the other 7-8 months most effective.
Although I firmly believe in the value of advertizing I want to spend my ad dollars effectively so the first thing I noticed was my ad in the newspaper attracted one type of customer( one that I really didn't want) ----but my yellow pages ad attracted a better type of customer----.I am a little slow---but not a complete idiot, so, I eliminated the newspaper ad.(maybe 8 years ago)
That made a big impact on me but what helped the most was charting the last 3 years of jobs------finding out EXACTLY where each job came from and exactly how each job produced financially.This let me weed out certain types of work that were time consuming and not very profitable.And it also created roadmap of where to concentrate my sales efforts------after all if I have a couple of natural markets and specialties why not fully exploit what naturally works for me instead of trying to serve a broad based market where I will be just a commodity.
I got in a virtual argument with my rep at the phone company a few weeks ago 'cause I have already set my ad budget for 2003 and I am scaling back my yellow pages ad a bit to concentrate my ad $$$'s in the area's that have generated the best returns for me( church bulletin,sponsoring little league teams,community programs,sports programs etc.).I have also used 4 different ad styles in the yellow pages and I am going back to the one that generated the most bang for the buck---thats what p'oed the ad rep---for me the most productive ad turned out not to be the most expensive.
jon, I didn't have time to go into too much detail yesterday,but I can talk a little more today.
About 15 years ago I read a book about starting your own roofing business. The author pointed out that we really needed to be aware of what we are really selling. On the face of it we are selling a new roof----but we are also selling curb appeal,pride of ownership,security,peace of mind etc.I thought about that quite a bit over the years and eventually found my little niche.
I have used about 4 different yellow pages ads
1) a small size which generated a reasonable amount of a particular type of work I was looking for
2) same ad EXCEPT it was in color. this ad turned out to be the best money maker
3) roughly the same size ad,in color but with a different type style and different location(in column instead of display ad)----this ad was cheaper but virtually worthless as a lead generator
4) larger ad in color(about 1/4 page) this ad was interesting in that it generated virtually none of the work type that ads 1&2 pulled in. It did generate a modest amount of a type of work I am not really looking for and prefer not to do. It was also several times as expensive as ad #2
when I looked at profit generated from each ad instead of dollar volume of sales ,ad #2 came out the clear winner.
I also came to see that certain neighborhoods were populated by customers with one approach to solving problems,and other neighborhoods had very differrent views on how to solve particular problems(repair vs replace,ignore,diy,brother -in -law bargains etc. Occupation and economic strata tells a lot.
SHAZLETT--"...I hope this thread is still alive
when I return as it has been the most interresting discussion on this forum
in months."
Steve I don't think there is going to be too much problem keeping this dialogue
alive from my point of view in that I still have tons of questions and ideas
on it throw out there although what you've written about in you last two posts
has brought up a hole other line of questions and thinking that I been exploring
lately so I think I'll have to ask them in another discussion to keep things
on topic here.
This is why I really appreciate these kind of dialogues. Your comments blew
the dust off some other stuff in "the attic" I call my mind. Thanks
for the push.
"Architecture is the
handwriting of Man." - Bernard
Maybeck.
In one of the discussions over in the JLC
Markup & Profit forums, Allan Edwards a home builder down in Houston
Texas said something to me that I thought was valuable and probably one of the
key bullet point issues regarding Pricing for ‘perceived value’.
He said:
I replied to him "Ya know what that really pretty much describes what
I’ve accidentally stumbled on these last seven years or so. Maybe it was
a controlled or directed accident because I certainly didn’t set out with
that in mind. Chance might only favor the prepared mind, as Louis Pasteur once
noted, but it was still luck nonetheless."
I think anyone trying to adopt Strategic Pricing increases has to consider
is the Product (or Service) distinct and unique enough to warrant
the premium. In my case not everything we do warrants the premium pricing
but there are certain things we can single out for that treatment
is the Technique proprietary or recognized as unique, something
they can't get from another contractor?
is the skill and Talent in the crafts people needed to deliver the
product viewed by the client as special and above average. Is it even seen
by the client? If it isn't is there a way you can make it seen? It doesn't
necessarily have to be an above average skill it just has to be perceived
that way by the consumer/client
do you and/or your company project a larger than life Persona or Image.
Is that part of your Company's Culture? Do you or your company personnel
project an air of confidence and self-assuredness that inspires and drives
your clients faith and trust in you or your company?
I think working towards those goals is a way to make this work.
"Architecture is the
handwriting of Man." - Bernard
Maybeck.
This Saturady morning while having coffee I was reading an Inc Magazine (online)
article that I printed out last night entitled:
20 years makes for a long article (20 pages) but I thinkit's really worth the
reading time.Shawmut Design and Construction is a now a $325 million per year
builder-remodeler-contractor!
About two thirds of the way through the article here's one of the things I
read there that relates to this topic of Pricing for ‘perceived value’
, Strategic Pricing and stuff:
Something to think about again huh?
"Architecture is the
handwriting of Man." - Bernard
Maybeck.
Dan-"Jerrald, it is okay to price your work anyway
you want, and it is also okay to charge any amount you want. How you arrive
at those numbers is important only to you, and possibly the prospective customer."
Dan what I am trying to get at is the actual "mechanics" of developing
a Pricing Strategy. I'm interested in hearing about how and what other contractors
are actually and actively doing to setup and create their Price Structure. Saying
"it is okay to price your work anyway you want"
is sort of like saying "it's okay to build that addition anyway you want".
It is and it isn't okay. If I build it "anyway I want" and it holds
up then it is okay but if I build it "anyway I want" and it falls
down it isn't. What I am getting at if the are acceptable sets of standard operating
procedures and techniques for build additions there should also be acceptable
sets of standard operating procedures and techniques for Pricing.
"Only they know how much that they are willing to
pay, and only you need to know what your true cost to produce it were."
Really? I am not so sure about that at all. Maybe I might not be understanding
exactly what your getting at. But looking back at my illustration where I explained
how I accidentally stumbled on to "Pricing According to Perceived Value"
or Strategic Pricing (msg=21655.10)
from previous experience with this builder I had a good idea of what he would
pay (and what his clients would be willing to pay too). From that illustration
you can see I also had a pretty good idea of what the "true
cost to produce it would be. And you'll recall I saw I huge gap between
those two numbers! Should I have just left it like that? Should I have left
all that money on the table? I don't think so.
I guess one of my points is we (contractors) have to breakdown what it is we
do, examine our service offerings and then look at them as hunks of value and
evaluate them to see if they might be worth more than we have been charging.
Don't you think?
Just remember that if you do well that others are sure
to mimick your efforts, and they may try to cut prices and steal market share.
That's for sure too Dan. Taking that thought a little further I'm thinking we
(contractors) should also look at our service offering in terms looking for
protected or insulated markets too. How about that too?
Thanks
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Great discussion, Jerrald, lots of great business concepts expressed in very practical and humble ways that are easy to understand. What I think you're trying to get at is well illustrated in the art world where mostly everything is based on perceived value. As you pointed out, when you produce art, you can charge a perceived value of what the market will bear. If you produce competent results that are copy what everyone else routinely does, then you get the going wage rate. One guy paints a square of canvas and gets a million bucks, the other paints a house and gets $10/hour. Just to end the discussion we could all muse about who is the happier person, and what is the real source of his happiness. Of course that's another topic. Enjoy the day!
homebody- "One guy paints a square of canvas
and gets a million bucks, the other paints a house and gets $10/hour. Just to
end the discussion we could all muse about who is the happier person, and what
is the real source of his happiness." --Great point and yeah that
is another great discussion to have too. I've been real happy for 18 years just
building neat stuff ( that's one of my company slogans by the way "We Build
Neat Stuff" but I've been thinking lately that if I was a millionaire too
I would be even more happier. And I could be happier in more places. And I could
be happier with more people too.
The "happier with more people too" is very important too. In the
Who
Will Build the Future discussion one of the root problems that was brought
up was that we as an industry didn't generate the revenues that would allow
us to offer better compensation packages that would attract new career entrants.
One of the other problems is because of the high failure rate in our industry
we do little to earn a new career entrant's confidence and provide them with
any sense of security. (According to the Better Business Bureau the nationwide
failure rate of our businesses, building and remodeling, is approximately 50
percent per year, with 95 percent going out of business within five years.)
I think if more building and remodeling businesses can adopt and develop Strategic
Pricing Strategies that can only go to the bottom line and put us in the better
position to answer Who
Will Build the Future.
Thanks homebody, I appreciate your comments
Profit is like oxygen,
food, water, and blood for the body; they are
not the point of life, but without
them there is no life. —Jim Collins
& Jerry Poras—Built to Last
Adjacent Point -
I had a discussion locally here today on a very similar topic that sort of helps define that top end of perceived value and some negative consequences from exceeding it in billing...
A few years ago a roofing company did some work on a bid. The portion of the roof they worked on may well have been worth close to 20K IMO. They bid just over 14K and got the job with a couple pertinent clauses in the contract. One was that the customer was to be 100% satisfied before making the final payment. (Not a clause that I'd want in my contract! I do fine work and get referrals all over the place but 100% is a scary thought) Another clause was that extra undefined charges would be made for repairs of rotten wood discovered after the tearoff.
It turns out that he was able to find three boards that needed replacement and the bill for that work came to 4K or so.
My take is that he was able to appeal to their percieved VALUE by quoting low to get the job and then applied HIS percieved value to make his profit.
End of story, the owners got wise to him - paid the four grand for the rot repair and then found one excuse after another to hold up his final payment of six grand for a year or two because they weren't 100% satisfied. He had all that aggravation, call backs, and interest payments to make on his LOC because while he thought he was hosing them, he left them in the drivers seat. Additionally, they worked his reputation over at the cocktail parties when they could've been giving him glowing recommendations.
Short version - he tried the weasel way to working them over when they probably would've been happy with a total contract price of 20K up front.
I get to hear these stories from them because they find me trustworthy.
Excellence is its own reward!
Well I guess that I need to work on my communication skills as well, so here comes the next version of my take on the issue of perceived value. While there are lots of ways to calculate cost to produce, and figure overhead, I don't think I have heard of any reliable methods of discovering somebodies "perception". It seems obvious to me that you would want to price your services as close to that percption as possible, as long as it was high enough to allow the profit that you are striving to attain. But how do we find out without just asking if they are willing to pay our price? If they say yes to fast then money was left on the table, if they say no you have two choices, negotiate or say good bye. If I missed something, please enlighten me, becaus I have given up bidding mostly, and just charge time and materials. No big profits, but not to much trouble either, so I am happy if not rich.
Dan Striving to become adequate
There is no sure way for us to know the perceived value of a specific service that we offer, even by asking the customer, but just by thinking in terms of perceived value we are less likely to sell ourselves short. In addition, a high price, even if it loses us the job, can help us in the long run by creating the perception that we do high quality work that carries an appropriate price tag. You pay for what you get. If the customer is not satisfied by the cheaper competition this enhances our reputation.
The marketplace is the final arbiter of perceived value. This is most obviously seen in the market for artwork. While our services have no secondary market where they can be bought and sold, our future work and value is determined by the prices we charge now. If we bid low, we set our prices for this job and future work at a low level. If we bid high, we set our prices at a high level. While we may lose a few jobs, we guarantee that those jobs that we do will be profitable and we can concentrate on doing our best work.
SCHELLINGM-"... just by thinking in terms of perceived
value we are less likely to sell ourselves short."-- Great
point Schelling and maybe a key bullet point if you were to summarize this whole
discussion.
This one too--"a high price, even if it loses us
the job, can help us in the long run by creating the perception that we do
high quality work that carries an appropriate price tag." and
it a good point to think about for anyone who doesn't have all the guts they
need to charge that higher price.
"The marketplace is the final arbiter of perceived
value. This is most obviously seen in the market for artwork." --
Yup I agree I think I may have drawn that parallel to the artworld and if I
didn't thanks for the help. It's getting tough to sort out what I've been thinking
from what I've actually written lately. Thanks for the help.
And this one too--"...we may lose a few jobs, we
guarantee that those jobs that we do will be profitable and we can concentrate
on doing our best work!!!." (my emphases and exclamation points)
"Architecture is the
handwriting of Man." - Bernard
Maybeck.
Dan--"Well I guess that I need to work on my communication
skills as well"--This a a tough medium to communicate in for sure.
There are no facial expressions or variations of vocal intonation to help us
communicate in the online world (...yet). I realize that when I comment in response
to someone a lot of the time I am just making a semi-inteligent guess at what
they are talking about or getting out but the more we do write about all of
these issues the better we begin to understand each other.
"I don't think I have heard of any reliable methods
of discovering somebodies "perception".--I wasn't really thinking
about it or along those lines when we started this discussion but there actually
are "reliable methods of discovering somebodies "perception"
(of value). I hadn't heard of any up until maybe four or five years ago. This
is the real realm of CRM (Customer Relationship Management) Technology and maybe
why we as builders and remodelers should begin to start thinking about this
kind of stuff,geez,... the rest of the business world is.
I had one of them explained to me by one of my sister-in-laws once and it was
called Conjoint Market Analysis. She gave me a bunch of URLs on the subject
and what follows are some of my notes from some of those URLs and maybe that
will help explain and define it a little. (The bold print emphases were placed
by me)
What you had said in an earlier post about "Perception
is directly related to ability to pay, what is pocket change to some, is a fortune
to others. Everthing is relative,..." well Conjoint Market
Analysis and it's parent CRM is about collecting the data and determining the
relativity for different demographic groups. While developing a real genuine
conjoint market analysis program for a small or even a mid-sized builder and
remodeler may be cost prohibitive and impractical we can sort of mimic it on
a small scale. How/ By raising our prices on certain product or service offering
and seeing if the price raises are accepted or rejected by what kinds of groups
of customers. I've essentially done that with stair parts and a few other services
over that past couple of years. That sort of in a way answers your statement
""But how do we find out without just asking
if they are willing to pay our price?" I think we just have to
test (ask) and find out. If we really are going to be "real" "genuine"
businesses we have to conduct Market Research
Another method that I also just recalled while writing this was something I
learned about when I was reading a book about Game Theory in Business a few
years ago. ( The film A Beautiful Mind was about John Nash, one of the pioneers
of Game Theory). The book was Co-opetition:
1. a Revolutionary Mindset That Redefines Competition and Cooperation; 2. the
Game Theory Strategy That's Changing the Game of business and while trying to
learn more online about Game Theory I stumbled across a real neat online simulation
of the technique that showed you how it could be used. I will have to check
through my old notes to find more on that one though. That simulated tool could
easily be adapted and converted to something that could have a real world application
for us.
"If they say yes to fast then money was left on
the table, if they say no you have two choices, negotiate or say good bye."--
It's interesting Dan but the phrase "money was left on the table"
comes up over and over again in that book too.
My point in asking all this is to get at some real world techniques some of
us may have accidentally stumbled upon that might work for others.
"If I missed something, please enlighten me, becaus
I have given up bidding mostly, and just charge time and materials. No
big profits, but not to much trouble either, so I am happy if not rich."--
I understand your sentiment Dan. I haven't figured it out at all completely
yet myself but I am making gobs of progress in these last few years. I'm still
working on it all and it ain't at all easy I know and I've taken my licks for
it too. The subject came up somewhere else the other day and I realized I haven't
done a T&M or Cost Plus Fixed Fee project since '93. It hasn't been easy
and it also takes a lot of guts sometimes too.
I know a true story too of a salesman for a trade show exhibit building shop
that seems related here. In a conference with the company's production staff
to discuss the price they would submit as a bid for the project the he was told
by the estimators that a $60,000 price was what they had determined to be the
selling price. The the salesman said " You know what? I think I can get
$90,000 for it." And ya know what? He got it. In this case the buyer was
a television network but somehow that salesman gauged the value of that little
exhibit to that network and he got the price.
The quote I think that works here is from the song Rock Island from the Broadway
Musical The Music Man-- "But you gotta know the territory"
"Architecture is the
handwriting of Man." - Bernard
Maybeck.
Piffen I know I just read another post either somewhere here or on JLCOnline
that also illustrates what your point when you said "Short
version - he tried the weasel way to working them over when they probably would've
been happy with a total contract price of 20K up front. " But sorry
I just can recall enough of it to find it but I do think that's very true.
This might apply to the story Keek has just posted and told in his Estimate
or GUESTIMATE? topic (that wasn't the post I had in mind but it it certainly
close and similar)
"Architecture is the
handwriting of Man." - Bernard
Maybeck.