Value-added pricing: Why? -- Because you're worth it!
by Jon Elvrum
Woodworking Technology & Training, Inc.
Among the most commonly voiced complaints I hear, indeed that I have heard over all the ongoing 20 years that I've been calling on woodworkers in general, is the bitter assertion that they just can't compete against "price-cutters" and those "guys who work out of the garages." The perception is not a regional one. It's as firmly entrenched on the plains of West Texas as it is in the concrete canyons of metropolitan Eastern and Midwest cities.
The freeway industrial parks of the West and Southwest ring with an equal bellow for injunctive relief from this particularly galling sense of a "shadow enemy," lacking form and definition, who competes unfairly for "spot cash" and who doesn't pay his share of bills into all the many hands that relentlessly reach into the legitimate businessman's pocket; things like taxes and licenses and insurance and bonds; or less tangible obvious items like modern equipment, or safe work places, or benefit packages for our labor base.
We know that this fellow is "out there poaching," as it were. And we don't know how to deal with him, and in some cases we really don't want to deal with him. In some respects it's because there was very likely a time when he was us.
A friend of mine, a distributor of hardware and machinery who services the Northern California market, just returned from a trip to Europe. This was not a buying trip, but a seeking trip; one in which he sought to better understand what their market was like and what their small shops were like.
This trip arose from a concern about what the market of the future would be for the United States, especially if more and bigger companies follow out leads and move into "new dimension" manufacturing following essentially European technologies. What will become of the small to medium shop, upon which my friend's and so many other distributors have built their family businesses?
Happily, his trip taught him that small businesses are absolutely not imperiled by the new technology. His trip was focused in the western end of Austria and southern Germany. To his surprise, he found over 700 shops existed in the small area he visited. And in Austria whose land mass is about the size of Kentucky, he learned there are over 2,000 small to medium manufacturers.
My friend took along a collection of what seemed to be, from out perspective, extremely relevant questions, in the form of a mild interrogatory -- questions about how machine purchases are justified against production levels; how the small shop preserves its identity against the backdrop of direct competition with companies like Almillmo, Poggenpohl, Alno and Leicht, et al. By the third shop visit he realized how irrelevant the interrogatories were, and how little we really understand about this system we so blithely discuss.
For example, Europeans, when asked if they use the 32mm system, almost without exception will look at you with a sort of puzzled expression and ask :What do you mean? And when you explain the essential elements of that manufacturing process which we routinely assume means the "ultimate" in modern processing, we are likely to find ourselves dismissed with something like, " But, of course! Doesn't everyone?"
Well, what has this got to do with value added pricing? Or what has it to do with that ghostly specter of the "garage shop" hanging over our business and its profits like the smell of death? Simply this: Our counterpart European small-shop cabinet and furniture maker thinks nothing of committing half his profits to mechanization, and into technical upgrading of his mill.
I recently read a quote from a southern U.S. businessman who was enlarging upon his success in having taken such an approach (upgrading technologically and facing the fact of the investment as a necessity, not an option) and his comment was that the businessman who opted not to modernize had already decided to go out of business. He just hadn't chosen a date. To say we can continue doing business in "the old way" is to ignore the obvious; to be blind to reality. There is no question that we must change.
That being said, the major issue settles around how we go about it. To that end I have some specific warnings to sound. There is an ancient Hebrew word from the Old Testament. The word is shibboleth. It has come to mean "a misstatement, widely believed to be true; a myth."
There are many myths, or shibboleths, about the 32mm system which I deal with all the time. Here are a few:
1. Cheaper labor
2. Your problems are all over
3. You're locked into one style
These are but a few of the great lies we live with in the marketplace, and they inhibit out ability to make profits like very little else. We are captured inside a poor self-image which is rooted in the way most of us evolved; in what I call the "Up Off The Bench School of Training."
At good old UOTB we learned that the contractor was a kind of demigod who ruled over us with an iron hand, paid us if we charged little and complained less. We learned to build in a way that served builders who, knowing to the nickel what it took to outfit one of our "garage shops," were always free to leverage us to a lower level of profitability -- all the while knowing that at any given moment, for about the cost of a single kitchen, they could steal away one of out better employees, setting him up in business for himself.
If we look back in our lives, many of us will remember that shop and that contractor who did it for us, or who talked us into doing it with that offer of "all the work we could handle," at prices he certainly knew were exploitive. Was it in your garage?
In that garage shop we learned to grapple with growth. We learned woodworking as craft and business all of a lump, and lost a lot on fine points. We learned to insist on deposits by losing the full amounts. We learned to fire people and hire people based on their ability to be tolerable and agreeable after hours. We learned to buy machines and tools when the price seemed good whether we really needed them or not.
We learned so many things that we got smarter. We even learned that some jobs weren't worth having, and it was better not to have some very busy people as customers. All this knowledge became an accumulated expertise, but is has always lacked form, and especially it has lacked credentials. It has never seemed to be worth anything to know there is or isn't a right way; that this or that fellow is or isn't a good bet; that this or that material is or isn't tricky to work with (unless you know what you're doing).
What it has been doing all along is adding value to your name. It's been making your presence at a jobsite worth more than ever before; your attention to a builder's plans more meaningful. You provide an element that is supplied no where else in the building process. Just as every successful court case depends upon "expert" testimony, in this matter the expert is you.
In the popular mindset of the woodworker, he is one of hundreds of thousands who vies for the same little piece of the spendable dollar. I have an exercise to cheer you up. Take out your phonebook. Find every page that has woodworkers listed and tear it out. When you're done, put the stack of torn-out pages alongside the phonebook from which they came, and observe firsthand how small a minority you truly represent. See how few like you there are who are willing --or capable of or disposed -- to build the mass of woodworking product routinely required of us.
Separate form this mass of humanity those who build totally dissimilar product and recognize that they are inherently non-threatening. Now focus on those relative few who are left to "do it all" and relax! There's plenty of work.
Understand that the ego structure of architects and disigners is great enough so that if they could build the cabinets, they would! But they can't! So they need you! Your value is your experience on the first level; your commitment to quality on the second level. It has been added into the WHO you are since you began.
Finally, comes the understanding that if you can do the work well and can complete the job on time at the agreed upon price -- providing that it's what the customer wants. You'll merit whatever price you charge so long as you believe that it's fair and worthy of your best effort.
In negotiations for companies that believe in themselves and in their products, we discover that what the other guy does lacks any relevance to the discussion, and thus is rarely faced.
The discussion will actually center on things which the company can do and does provide as a routine part of its package, and the flexibility with which the consumer is met; and the willingness to provide out of a component base, whatever requirements the user may demand.
There are three elements all businesses must offer to achieve success in the marketplace, and no business can ignore any one of them. In fact, in seminar, I offer to go into competitive bidding with anyone if I am guaranteed to be in control of any one of the three.
The game plays like this: The three necessary elements are quality, price and service. If you have any two and I control only one, you will always lose. Here's how. You want price and quality. I deliver every 20 years on prepaid shipments. You want service and price? I send out only absolute junk for your top dollar paid. Finally, you want quality and service; never mind price? Good! I'll charge you an arm and a leg!
I don't believe for one moment that the market will not curb excessively high pricing. But the quality builder who offers exactly what his client requires out of a flexible formula of machine capability, hardware innovations and marketing willingness to bring all the elements together will absolutely be able to aggressively improve his profitability in an industry whose profits have been painfully low for a painfully long while. Your value added to the price is a good place to begin to declare a reason for upping the margin. From my point of view, it's about time!
One last point. Thinking back to that contractor who has been exploiting you for so long. The reason he's been able to do that is because while you didn't know who you were, he knew exactly who you were and exactly how much it would cost to clone you.
The current machinery package which is regularly identified with 32mm system production is clearly outside his willingness to risk. The dollars are too great, and concentrated generally outside his control, and yet that package of machinery, in your possession and under your and under your management offers several new advantages.
First, having the flexibility to deliver selective cabinetry from stock parts virtually on demand eliminates the imagined effectiveness of the small garage producer (Deliver a kitchen or two "next day" and blow their socks clean off!).
Second, that garage shop that now wants to get into the game can't put this machinery into a garage because it's rated "industrial product" and generally is of such power requirements that it will cause Edison to just laugh when he asks for 440v or 660v, as they point out to him that turning his edgebander on could "brown out the neighborhood."
The good news is the garage shop's day of threatening your livelihood is over. He just hasn't named the day!
Reprinted from FURNITURE WOOD DIGEST, March 1987
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