One of my best business associates and I used to laugh at the guys who cut corners and squeezed their vendors for every penny. Now he’s just tried to do the same thing to me. Any ideas?
Chasing work at any price leads to problems. Some owners make the mistake of thinking that cash flow will keep them going. Others make it common practice to ask vendor partners to share in the risk, by asking for price cuts that don’t make sense. All parties have to ask, “Is this customer worth having?” Don’t let your company be dragged down by the poor business decisions of another owner.
When vendors chase work at any price, the greater fool theory comes into play. The greater fool theory of selling goes like this. After foolishly agreeing to take a loss to get work, you expect others to be as foolish as you were. You talk someone else into taking a financial hit. Sooner or later, all the other fools are out of business, or no longer willing to work on your terms. Meanwhile your customers are trained to demand crazy price discounts from you. Option to raise prices is gone. Losses grow. You’re out of business, too. Now who’s the greater fool?
Telling vendor partners to cut their margins to the point of loss is a big warning sign. Savvy owners understand that without profit, businesses don’t stay around for the long term.
Another common mistake that comes to the fore, especially in tight financial times, is robbing Peter to pay Paul. A job is lined up, but the down payment is used to complete work on a previous job. Money flow gets mixed up and it gets harder and harder to tell if any of the work is profitable.
The owner ends up constantly scrambling to find another source of cash. There’s no time to evaluate which jobs are worthwhile, and which aren’t. Desperation sets in. Chasing new cash flow leads to taking on new work at even steeper discounts. Losses mount, and one day the company is out of business.
So here’s the chain of events that lead down a slippery slope. Some owners increase their willingness to cut corners and underbid to the point where taking the job doesn’t make sense. Customers learn about pricing by asking for bids. Included in the bidding process are the corner cutters. When the customer is not likely to be a repeat customer, cutting corners is especially tempting, because the consequences of having to deal with that customer long term are out the window.
Trying to maintain market share, an otherwise smart business owner decides to compete on cash flow, rather than profit, and succumbs to taking a corner cutting bid. Now that business owner has 1 of 3 choices: deliver a lower quality than planned, take a loss at the quality specified, or get another vendor down line to do work below cost.
Not one of these outcomes is a sign of a long term, healthy business. The only option that makes sense, when growing a profitable, thriving business, is to go back to the customer, explain the problem, and ask for more money. If the customer refuses, be prepared to walk away. The customer is trying to get something for nothing, and is unlikely to be forgiving if they see a problem with the quality of work.
Reputation is in jeopardy when you deliver work below standard. Profits go out the window if you cut costs too far. Closing the gap on another vendor’s bidding problem only leads to encouraging that vendor to try the same thing again.
Make sure you understand your margins. Set limits on how far you will go to get a job, and stick within those boundaries. And if you see a former colleague making mistakes, don’t make it your responsibility to fix the problem. Remember your responsibility is to your company, not theirs.
Looking for a good book? Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table by Reed Holden and Mark Burton.
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Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Please send it to her, via e-mail at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514.
