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Southeast
Construction Magazine: February 2006 Issue |
Has
Conventional Wisdom Trapped You in a Low-Price Game? - Part
1
By Ted Garrison |
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John Kenneth Galbraith,
noted economist, coined the expression “conventional
wisdom”. However, he did not consider this a compliment
and even wrote, “We associate truth with convenience,
with what most closely accords with self-interest and
personal well-being or promises best to avoid
awkward effort (author’s emphasis) or
unwelcome dislocation in life.” He added, “Therefore,
we adhere, as though to a raft, to those ideas which
represent our understanding.”
Or, as authors Steven D. Levitt and
Stephen J. Dubner wrote in their recent best-selling
book Freakonomics, “So conventional wisdom
in Galbraith’s view must be simple, convenient,
comfortable, and comforting—though not necessarily
true.”
What does this have to do with you?
It supports the myth that customers only care about
price. Despite the fact the myth isn’t true, it
impacts the way people think and act. Peter Senge, author
of the Fifth Discipline, has declared, “Our
organizations work the way they work, ultimately, because
of how we think and how we interact.” Therefore,
if we want to change our actions, we need to change
the way we think and interact with clients. Unfortunately,
many contractors hide behind the myth because it’s
easier to blame the customer for their low profit margins.
Instead, stop believing the myth. It’s true
that approximately 27 percent of consumers only care
about price, but that leaves 73 percent who care about
value. Stop focusing on the minority, especially when
they are the least profitable. Let them go and focus
on the profitable prospects. Abandon the low price market
because it’s the least profitable.
There are two ways to create a competitive advantage.
The first is low price and the second is to differentiate
your services from your competition. Companies can differentiate
themselves by offering better or different services,
or a combination of both. In the price game the only
solution is the lowest price. Unfortunately, it’s
virtually impossible to defend a price position.
Also, there is nothing wrong with seeking to be the
low “cost” provider because that allows
you to make a greater profit at any price level. (In
this discussion, cost is the contractor’s expense
to build the building, while price is the amount the
customer pays the contractor. The price less cost equals
profit.) But even if a company is the lowest-cost provider,
there is no guarantee that some other firm will not
offer a lower price. If the prospect is only looking
at price, a company will lose out if it isn’t
low.
In contrast, if a company differentiates itself by
providing greater value, it only has to convince the
prospect that your higher price is justified. This company
should not allow a myth to influence it to only focus
on doing things cheaper, suppressing wages or trying
to do less for the customer. Instead, turn things around
and offer greater value.
A general contractor client of mine did this. They
asked their current clients if there was anything they
could do for them that they were not already doing.
The clients came back with a long list. The contractor
reviewed the list and replied, “We can do all
those items, but we will have to charge an extra 1 percent
fee.” The clients responded, “Fine.”
This resulted in an added $200,000 in revenue at only
a cost of $18,000, or over a 1000 percent return on
the extra work. The contractor’s customers were
delighted and obviously the contractor was ecstatic.
Once you rid yourself of the conventional wisdom that
customers only care about price, you will open up many
doors. Here are a few items that many customers claim
they want more than low price.
• Avoidance of confrontation—make the
process more enjoyable.
• Provide guidance on the construction—after
all aren’t you the expert.
• Show them how better quality products can have
a greater value over the long haul.
• Deliver the final product faster—after
all, time is money.
Stop hiding behind the conventional wisdom that price
is all that matters and open the doors to greater profitability
and happier customers.
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