It Won't Work In My Small Town
The following is from a letter to Frank Blau, published in PM back in April 2003:
“It was with mixed emotions that we read about your retirement in this month's issue of PM.
“A few years ago, our business was the kind that you so often write about. We were a steadfast time-and-material shop, and we were clueless regarding our true cost of doing business. In fact, my husband David and I were ... dead set against flat rate pricing ... and often commented that 'those kinds of rates will never fly in our small market.'
“You, among others ... finally convinced us to crunch our numbers because we couldn't possibly run a decent business at the rates we were charging. How right you were, Frank! What a shock it was to us to find that we were losing money consistently on every job. Once we knew our costs, flat rate pricing was soon to follow.
“When we changed our way of doing business, it opened up a whole new world for us. We have increased not only our profits and our customer satisfaction, but we have expanded our services as well. Instead of living a miserable day-to-day existence that included unhappy customers and even unhappier business owners, we actually look forward to working on our business.
“All the money in the world could never repay you for the sound advice you gave us.”
Maureen K. Francis
David G. Francis Plumbing & Heating
A little background: David is a conscientious professional who believes in doing right things right. David also has a very clear vision for his future - a vision where he is the best contractor available in his small town of 7,300 residents. The following are some e-mail excerpts chronicling the challenges and victories through the years since we began our business relationship.
October 2001After calculating costs, resulting in considerably higher rates, David and Maureen ordered the introductory version of our upfront pricing book. At about the same time, an ad began running in the local newspaper, right next to theirs. Here's David's note:
“I was just reading last night's paper and came across an ad for water heater installs from a fellow P&H contractor.
“ARE YOU READY?
“Has anyone seen an ad for a lower price for a 40-gallon natural gas water heater installed? Would you believe they placed his ad next to mine in Monday's paper?”
What a rocky start! David and Maureen had just ventured into upfront pricing, which in their case meant higher pricing, just as a local “competitor” began a price war on water heater replacements. How would they counter this attack? David continues:
“When in the supply house today, the contractor's name came up. I just listened and took it all in. We believe it will only be a matter of time and the problem will be gone. But still, it creates a problem that we will have to deal with until then.”
It's obvious that David and Maureen understand the stakes. Because they had to know their costs before they could even begin to try upfront pricing, they knew that the low-ball water heater guy couldn't possibly survive. But remember, they're in a small town. People talk. Word about these bargain prices are bound to spread like wildfire. Right? Following is their strategy for dealing with the low-ball price:
“I have my customers ... They are a happy bunch. There also is a certain grade of customer I do not want. The other guy wants that type of customer (I sent three calls to him today).
“Problems occur when the newspaper places my quality-focused ad next to the Water Heater Boy's ad. The grade of customer I do not want calls me before calling the budget-priced guy since they already know his price. I will not give a price over the phone. You can use any phone script you want, but the bottom feeder searching for the lowest price is just a waste of time. I think it best not to enter his market and instead, do what we do best.”
Already, you can see his vision at work. Rather than worrying about the low-priced race to the bottom, which is not part of his vision, David recognizes his core customer. He knows he has to stick with his pricing in order to properly serve this customer. When a customer chooses “Water Heater Boy,” it's not really a loss to David because the customer wasn't a David-Francis-Plumbing-type customer in the first place. Here's how the story plays out.
December 2001/January 2002“December 18.
“Water Heater Boy bounced a check for his ads. Sounds like a short-lived business plan.
“Well, I have picked up several customers who did not get the price as it was printed in the paper. No surprise, huh? Each customer felt like they were getting ripped off. Water Heater Boy also has failed his heating test four times. I have just lost a boiler install to him.
“Finally, the Water Heater Boy episode comes to an end.
“His case was heard this morning before the plumbing board and a 15-day loss of license was given with no fine. If it happens again, the fine goes up.
“Water Heater Boy tried to play the low-price game. Apparently, one way to keep prices down was to reduce overhead by cutting out licenses and certification. The plumbing board, though lenient, didn't agree with his business model.”
This battle played out over about three months, during which time the Francis operation had implemented a significant price increase and a new way to price jobs. Instead of losing business to the bottom feeder, its low-priced “competitor” sent it new business.
Lessons learned so far:
- 1. If cutting prices requires cutting corners, the business model is doomed.
2. Word does travel fast in a small town. But it's not just low prices that people talk about, it's good service, excellent quality - in short, people talk about getting more value for their money.
After overcoming a price-driven attack from an unlicensed “competitor,” David and Maureen now face an even bigger foe - nature itself. Will upfront pricing help them or hurt them? Will their vision for a bigger, better company sustain such a formidable onslaught? We'll continue next month as David and Maureen take on Mother Nature.