Has Conventional Wisdom Trapped You in a Low-Price Game?

By Ted Garrison

Ted Garrison, author of Strategic Planning for Contractors, works with businesses in the construction industry. He can be reached at Growing@TedGarrison.com

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 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 of taking responsibility for them.

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 the 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, I should note 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 construct 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. A competitor could offer a lower price because they are willing to work for less profit or no profit at all; because they desperately need work; because they made a mistake in their estimate; because they have a policy of low-balling bids and aggressively submitting change orders; or because they perform substandard work. 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 the higher price is justified by the higher value received. 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 of tasks. 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 chains of the conventional wisdom that customers only care about price, you will open up many doors. To help you to get started, below 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.