Differentiate? Who Me?
I was having lunch with an old friend, Tom McKee, a founding partner of McKee Consulting Engineers. As I drank the last of my coffee, Tom looked at me and said, "You're fortunate, Hank. You're in a bu...
I was having lunch with an old friend, Tom McKee, a founding partner of McKee Consulting Engineers. As I drank the last of my coffee, Tom looked at me and said, “You’re fortunate, Hank. You’re in a business where you can charge $300 an hour.”
“Actually it’s $375,” I said.
“I’m in a business where we’re lucky to get $100,” said Tom, “and every job we see is heavily bid. I don’t understand why engineers have such a hard time making money compared to accountants.”
“I’ve thought about that, too.” I said. “According to economic theory, price is determined by two things: the value of the service offered and the cost of alternatives. If every experienced engineer billed say, $400 an hour, the customer would pay it if the value were there. On the other hand, if the customer can find competent engineering advice for $100 an hour — and if there is little value difference in the service — the customer will go for the cheaper alternative.”
“So you’re saying we underprice ourselves, and there’s no help for us?” asked Tom.
“I do think engineers generally bill less than lawyers and accountants. I’m not really sure why that is, but I suspect it has to do more with the mind set of engineers than with your customers.”
“What do you mean?”
“Customers focus on price if there is no other differentiator,” I said. “But many customers will choose a more expensive alternative if the benefits are presented properly. In 1972 after the first oil shocks, U.S. auto manufacturers had a problem selling cars, but they still controlled virtually all of the North American market. If you had told them that they would lose significant high-end market share to Japanese and German luxury cars, I think they would have laughed. But Cadillac and Lincoln are struggling and BMW, Mercedes and Lexus are not.”
“That’s an example of a superior product beating an inferior one, but in our business we provide a service,” said Tom. “And our customers are totally price-oriented.”
“I’ve heard lots of engineers say that,” I replied. “But I’m not sure it’s true. Let me give you another example. I was waiting for my winter tires to be put on at my local tire store. Someone called and asked about tires for a 1999 Honda. The salesman told the caller the tire she should buy and quoted a price. Then the customer hung up.”
“She’ll probably call five stores before she makes a decision,” said Tom.
“But the only real information the salesman told the buyer was the price,” I said. “The customer had nothing else to go on. He could have asked how long she intended to keep the car, what kind of driving she did, how many drivers there were in the family. Then his advice could have been better. If she’s going to sell the car in four months, she should go for the cheapest tire. If she plans to keep the car for years, she should go for a long-lived tire. If she does lots of high speed driving on expressways, she should buy a tire for that. If she has a teenager driving the car, that might influence the advice the salesman gives her. The point is, if he learned to ask some pertinent questions, he might give her different advice from his competition. And he might pick up the customer just because he is different — even if he isn’t the cheapest guy in town.”
“But does that have anything to do with my business?” asked Tom.
“I think so,” I replied. “At our firm, we charge more than some accountants, but we make a point of going the extra mile for our clients. The extra benefits we provide convince some people to use us. But we’re not for everyone. We tell our customers up front what our philosophy is, so they can decide. If I’m dealing with a company with $200,000 in income and I can save them 10% on their taxes, they’re happy to pay us a few thousand more for the extra effort we make. We will send people to other accountants if we feel they’ll be better served.”
“Fine. But in our business, all the clients are very focused on cost,” said Tom. “There are no criteria to segment them with.”
“I suspect you’re wrong. Most people are focused on costs and benefits. If you can provide a decent extra benefit, some people will be happy to pay for it.”
“O.K. You haven’t convinced me,” said Tom, “but I will think about it.”CCE
Hank Bulmash, MBA, CA is a principal of Bulmash Cullemore, chartered accountants of Toronto, e-mail: email@example.com