Desi’s Has Good Insights on Bundling

Sorry it’s been quite for a few days.  The fish were biting up north and we had to start getting fire wood in.  This is our annual “guy” trip.

One of the regulars is Desi who is a real estate developer from the south.  On the way back yesterday, he was talking about how he has evolved his business and what has worked well and what hasn’t worked well.  As you can guess, he is in a brutally competitive business with razor thin margins. 

Desi was talking about how he works with, changes and chooses a variety of sub contractors for the houses he builds.   He uses a sub until they “screw up” then he changes to one of the many that are waiting to do business with them.  He does shop for price but they have to be able to do a quality job too.  He is willing to sacrifice price for quality because he has and wants to keep a reputation.   Lesson for all of us:  if you can’t do a good job for your customers, pricing isn’t going to solve it.  Especially in services.

He next talked about what we would call bundling.  Most of his subs are used for very specific parts of the building process: landscaping, pouring slabs, framing, etc.  As such, it is easy to replace them if they screw up.  He only has one sub that is able to consolidate multiple disciplines: they do the heating & cooling, plumbing and electrical and they do a good job with all three of these specialties.  For that, Desi is willing to pay roughly 5% higher prices to save him from having to deal with multiple subs where there may be variations in quality.  In fact, he is happy to pay that.

This leads me to several areas.  First, as the business owner, Desi is in a position to both appreciate the value and be willing to pay for the value.  It is unlikely that someone else on his crew would be willing to make that decision.  For those of you who call on the crew, a value sell isn’t going to work, you’ve got to call on the President or other senior level people.  Second, by pricing a little bit higher, the contractor is keeping Desi happy with both the price and the quality of the work.  If they got greedy and tried charge a lot more, he would probably say the heck with it.  How much?  That’s something that wouldn’t be hard to figure out if you calculated the cost of changing.  Maybe 7% but probably not 15%.

Finally, if Desi were to hire a produrement person, that persone would/should go to Desi and identify that a) this particular contractor is one of their biggest suppliers and b) he could probably get the price down by at least 5% if he put the work out to bid and used all the tricks that we have come to know and love.  If that contractor is like most of you out there, he would probably fold because in this down market, Desi is one of the few games in town for his region. 

If they were smart, they would refuse to lower price because they do have a valued service.  Would they take a hit?  Probably not, but not for long.  By walking on the business, the contractor would be sending a very important message to Desi that they aren’t going to play that game.  After the first house, Desi would probably have trouble with one of the three new contractors and that trouble would land right on his desk.  He’d call the buyer in, find out what happened, pound the desk and get the old supplier back in at the old prices (maybe at higher prices).  If you’ve got the patience, this stuff really does work.

The point is that you’ve got to understand what happens at your customers and play your own selling game to leverage your value.  If you get too reactive and give the buyers time to undermine it, it’s hard to change.  It’s not impossible though if you begin to offer lower value flanking products and protect your high value products.

Even fishing, you can find good examples of value based selling and pricing.  If you want to be a high value supplier, you’ve got to understand and leverage your value.  Easier said than done?  Yes.  But, here is a good example of a company that is doing it in a down market and doing it well.   Good learnings from the back of a canoe.