Bidding Wars Heat Up
In a tough economy, price undercutting can get extreme. Here, a cabinetmaker's anecdote sets off a long discussion of price competition and reality. August 11, 2009
It finally happened to me. I bid on built-in entertainment cabinets and was undercut. My price was $6200. Materials, without any markup, came in at $1900. Someone gave her a price of $2000. She said he's reputable and does this for a living and said I was charging her too much and insisted to know what I pay myself. I was stunned. I politely told her I charge $60 an hour for shop time, explained my bidding technique of figuring materials, time, and then putting a dollar amount on everything. She said she refuses to believe that I could be that much higher and that as a consumer, she deserves the best possible value for her dollar. Then to top it all off, she has seen my work before, and she told me that his quality wasn't as good as mine, but there was no way there could be such a huge difference in price. I tried to make sure that he was including everything, so it was an apples to apples comparison. She swore he was and that the only answer was that I'm trying to price gouge. Luckily I'm in a position that I don't need the job, so I don't have to subject myself to her attitude. I'm stumped as to how this other guy is still in business. I stuck to my guns, and remained as polite as possible.
(Business and Management Forum)
From contributor A:
We know how you feel. What was the size of the unit you quoted? What kind of materials and finish? Any special install or bells and whistles?
From contributor B:
It was maple with a dye stain. Other than that, just a basic precat satin finish over that. Not much for bells and whistles. Part of it is a 30" deep cabinet that's 109" long and 24" high that is supported on one end by a full height cabinet, and the other side by a wall that sticks out 14". I had figured some metal brackets with adjustable turnbuckles to be buried in the wall and hidden in the partitions to prevent sagging. I could be wrong, but I don't think this guy can make it to long by doing projects at prices like that.
From contributor C:
I had a similar experience , where the other guy's price was a lot lower than my materials. It was a library in a house which the customer wanted to be all solid rosewood . I talked her out of all solid and was going to use rosewood veneer and just solid edging etc. The other guy got the job , because I couldn't possibly go as low as him . I bumped into the customer and asked if the other guy was going to use rosewood like she had asked . She said "the carpenter said he would use oak and that he could stain it to look like rosewood". Apples to apples, huh? Wait till she sees what she will get, and she has a writing desk made of rosewood to compare it to.
From contributor D:
With only two bids we don't know if you both made a mistake or not. Most likely the other guy really whiffed, but did you look at your numbers and make sure something isn't counting incorrectly or entered incorrectly? Either way, the fact that she would make the assumption that you are gouging her rather than believe that there could be a problem with the other price shows her desire to "save", clouding her judgment or the inability to make a correct decision. I don't think there is anyway to salvage this one. You can ask your suppliers when they come around why he apparently gets such better material pricing than you do. He must be getting material at 60-70% less than you.
From contributor F:
Shake it off and move on. You probably got undercut by someone who has excess paid for materials, no overhead, and a phone that's not ringing. There are many out there who are getting desperate.
From contributor Z:
I had a lady who wanted a bamboo vanity. I gave her a price over the phone and after they thought about it for a few days they invited me over to show them some samples. After the meeting was over, they told me they were hoping it was going to be about $1100 cheaper. I told them the price is what it is. They said they would think about it and call. I didn't expect them to call. They did. Still trying to get the price lower, told me they had another bid a few hundred lower and asked if I would match. They also added some edgebanding to the doors and drawers and were still expecting a lower price. I told them I have formulas and the price is what it is. They called a few days later wanting to talk price again and that the job was now a rush. I didn't even pick up the phone. According to me the job was dead.
If they are going to undercut you that much, so that the materials can't even be paid for - let them. Give the lady your card and tell her when she needs this item to be finished correctly, that you could come in and make it right.
From contributor A:
It sounds like an imaginary woodworker underbid you. My guess is she's lying. My second guess is that's a labor only quote.
From contributor Z:
That is what I said about the guy who underbid me by a few hundred. I figured it was an imaginary woodworker's bid. Why else would they keep calling insisting that I lower my bid when they already had a lower bid? I know my reputation is good, but when money is the only object why do they keep trying? I really had to restrain myself from asking who the other woodworking company was.
From contributor G:
Regarding Contributor Z's statement: "I really had to restrain myself from asking who the other woodworking company was", I have an ethical question. Why wouldn't one of us ask who the other company was? I usually do not, but maybe I should?
From contributor H:
The statement "he'll make the oak look just like rosewood" is an all time classic quote. I think she might have even accepted laminate, if it looked like rosewood. Some jobs you are just better off without.
From contributor Z:
Nothing ethical to do with it. But it will put the homeowner on the spot, especially if they are using the mythical woodworker. I figure if you ask who the company is, all you have to do is see how long the pause is. That will tell you if they are thinking up a company name to tell you. I'm sure some of them do have other quotes and that some of them may be lower. But when they tell me that they want me to do the job because of my reputation then I want to think why do they want me to lower my price. If my reputation is that good, then I am probably worth the extra money.
From contributor I:
When ever I lose a job, often the case these days is because of the same type of low-ballers. I always ask who I'm losing the job to. I would say 2 out of 10 will tell.
From contributor J:
Contirbutor F got it right I believe. The guy probably had paid excess material from a previous job and just wanted to earn some quick cash. The lady does not care how or why. However, even with that said I doubt the quality will be there. Stuff like this happens to all of us. It has happened to me with stairs and railings. We just have to move on.
From contributor K:
Move along and keep on bidding. Not only do we now have to deal with shops scrambling for any cash flow whatsoever, we also have to deal with the thousands upon thousands of people who got laid off and can't find a job who have some tools and are now bidding too. It is an ugly cycle.
From contributor B:
I end up with paid-for material quite often. But who is stupid enough to give it away and work for wages? I wouldn't think this was a shop. I would have asked who quoted this kind of price. I always do this. I figure they owe me that if I spend the time designing and quoting the job.
From contributor L:
She is going to get what she paid for. It could be he had the material sitting around and his house payment is due. Free labor, and turn plywood into cash. Or he works in another cabinet shop and he stole the material from his boss. I had a nice cherry kitchen to do last December. It was a done deal, except this home owner/builder wouldn't decide on the final drawings and was talking switching to painted cabs, and it started to drag on. At the last minute, this guy drastically undercut me to get the job. I was out of work for a month thanks to this low-ball bidder. Would you do a finished, flush inset Cherry kitchen, medium size, with many upgrades a large pen. cabinet, and an island for $5000? He needed the work. The materials alone would be over $4000. If he built his own doors and didn't outsource anything he might make $15 an hour. Customers are now expecting that all trades work for nothing as unemployment is well over 9%. Licensed electricians are working for $25 an hour.
From contributor M:
I was (good-naturedly) chastised the other day in a meeting with a contractor and an architect. I said, 'It is what it is'. I'm glad they called me on it. That phrase doesn't communicate anything constructive at all. It conveys a lack of cooperation, helplessness, a detachment from the work, a lack of concern.
In your case with the vanity, clearly it didn't cost you a sale. But you could have approached the dialog differently and maybe gotten a better result. You could say, this is my price for this design, but if we did adjustable shelves instead of drawers, I can save you $x. We can also build it in maple instead of bamboo for $x less.
A dialog like that may very well end up landing the original design at your price. Many people will pay extra if they trust someone and believe that person is looking out for their interest.
From contributor N:
In today's economy things like this will happen, there is no point losing sleep over it. There is the perception that everyone is starving, those with no work and no savings are truly desperate, and no one can compete with a desperate business owner. I have been watching these forums for about 5 years now and have been truly amazed at some of the prices quoted here. I could never get some of the claims stated. It looks like the pendulum has swung the other way. The smart thing to do is to walk away when you can't make an acceptable profit. In hard times, sometimes a guy needs some cash flow worse than a profit and does stupid things to get his hands on the cash.
From contributor Z:
She was dead set on what she wanted. She wanted her specific design and she wanted it cheaper than I had proposed. I know what my costs are, and I am very unwilling to lower my prices to have "work". With that kind of work I can make as much sitting in front of the TV while drinking pop. On the first phone call I got from her after the meeting, she grilled me about my construction techniques, material usage, time line, delivery and installation methods. Although I think she was trying to be an informed customer, these are red flags to me. She was already a PITA and I hadn't even gotten the job yet. I don't need or want clients like this. I have reduced my prices before in my early times of my career. I always regretted it, always. When you do that, you are usually taking away your own profit.
I assume that people we build for have the mentality that if we charge $1000 dollars for something, that money is going straight into our wallets. They don't have the concept of fees, rent, electricity, insurance, materials and taxes. That $1000 is likely about $225 in your pocket. And you worked a lot more than a few hours to get it. They have it in their heads that they make $160 a day and that you should make the same. But they never include all of your overhead.
I know my business, I know my pricing. It is what it is. It doesn't matter that they don't like to hear it. I rarely say it to them. But some people just can't comprehend it or are not willing to show that they do. You get what you pay for and I will not make lower quality items, and therefore I will not have an inexpensive product.
From contributor Z:
I truly would rather work for Joe average guy than a Monty rich guy, because at the end of the day Joe will appreciate what you have done with his hard earned money and Monty will just be glad you are finally out of the way. Of course, this is just a stereotype, but a very true one in my case. Lawyers, engineers, doctors and dentists seem to have a hard time seeing someone who works with his hands make "real" money, like we can't possibly be worth that much. I may not be able to diagnose a strange disease, but I bet they can't hammer three nails in straight and true either.
From contributor O:
The thing that I learned years ago is to not bid the job to get it. It goes without saying that you bid the job to make money. There are going to be people like this and we can ask ourselves why we did not get the job. The best thing that we can do is to just move on and this person is really not worth our time or our consideration. I have many times bid jobs and gotten the results back and was outbid. I pulled my hair out trying to figure out what I could have done to win the job. The bottom line is that you deserve a fair rate and your shop rate is more than fair. I know this stings. It always does. I wish you much success.
From the original questioner:
I figure that she will get what she pays for. I have better things to do than cry over spilled milk. I did go back over my numbers and the drawings and saw I missed two pullouts. I'll just have to pay better attention next time.
From contributor D:
Always ask who you are bidding against and what the results are from each bidder. It will educate you to where you are in the market and where you are against specific competitors.
If bidder "A" always beats you by 20% and does a good job then you either need to change how you are doing things or not bid against him, or find out what he does that isn't the same and bid to what he does with alternate additions for your standards.
From contributor Z:
I rarely bid against others. Most of my work comes from word of mouth and they have seen my work and the responses from my previous clients. Many times I already have the job before I walk in the door. When I do bid against others, 85% of the time I am the higher bid. Sometimes I get it and sometimes I don't. I don't care what the other businesses charge. I know what I need to make to do the job and to keep the business healthy. Until I get desperate for money I will not compromise my business workings because people want my work but cannot afford it.
What most people don't realize is that when you become a "good" client you will likely get a better rate from me. If you are a PITA, that rate will likely be higher next time. Ethical or not, if you are a hard client to work for, you will pay for it one way or another. It would be nice to see what others bid, but really, do you need to know? Do you plan on changing your business because company "A" always comes in 20% cheaper than you? I am speaking about very small shops, 1-4 man. The bigger shops have more options. They can buy in bulk or streamline operations by offering fewer quality products. I am a 1-man custom shop. I can do just about everything, but there are things that other companies are set up to do much more efficiently and I cannot compete, so I don't. In times like this when the economy is faltering and jobs are tougher to come by, you may have to work to survive. I am no where near that point. I won't take a job that will likely cost me money or just pay the bills. That is not why I took the risk as a business owner. I took the risk to make more than I could working for others. If I am going to make the same when I worked for a company and have all the risk and the long hours and having to deal with all the aspects of running a company, I might as well go back to working for somebody and work my 8 or 9 hours and come home and turn off my brain. I went into business for myself to make some real money, not paycheck to paycheck money.
From contributor P:
Lately we've been beaten by more competitors who took the job way too cheap. Sometimes they offer an option I didn't think of or that I won't do that cheapens the end product. That's the way it goes when the economy tightens up. Some will survive and some won't. But I always want to know who I'm bidding against and if I lose, I want to know who I lost to and by how much. It's a fair question to ask and I never minded asking. Some won't tell and if they don't I am reluctant to bid to them again. I don't think anyone was ever offended by my asking. I think when they don't tell it's because they are embarrassed to tell me someone did a "sell" job on them. If I lose fair and square, hey, I lost. Go on to the next one. I think all any of us want is a fair shake.
From contributor Q:
I always look at the sales process as an opportunity to exchange information with my potential client. There is certain information I need to get from them and there is certain information they need to get from me. There is also certain information I want them to have.
At our first meeting I try to always give them the information I want them to have. When someone hires me, they are hiring my company. My company is fully licensed and fully insured. My company pays for these expenses as well as all other expenses associated with running a legitimate business. I do what I can to keep the expenses as low as possible, such as driving my personal vehicle which gets better gas mileage than the company truck. If there is any money left over after the company has paid for all of the operating expenses, I then get to pay myself for the work I have done and give Uncle Sam his cut. The goal of my business is to stay in business and provide me with a modest income to help support my family.
I run my business mostly by myself. My wife helps out as much as she can but is usually busy enough with her full time job in Manhattan which provides us with a steady income. The cost of a project is determined solely by my clients. If the project cost is above my client's budget, my clients either need to increase their budget or change something about their project that will lower the cost. If we need to lower the project cost, we need to work together to find a suitable solution. I can not lower their project cost. I can only offer them suggestions on how they can lower their project cost. I do not use those exact phrases. I do my best to try and convey as much of this information in friendly, informal conversation while discussing project detail.
I try to exchange this information with my potential clients early on because it informs them of three main things:
1. Who I am (a legitimate business owner trying to make a living)
2. I am willing to work with them to help them keep their project within their budget.
3. I do not lower the cost of a project. The client is the only one who can lower the cost of their project.
There will always be someone else out there willing to do a project for less than what it costs you to do the project. If they are a legitimate business and can make a profit doing it, more power to them. This is what makes our country great. If they can't make a profit, they won't be around very long. I plan on being around for a long time so I choose not to work for free.
From contributor L:
There is also the issue of getting paid when the job is done. My bookkeeper just called and she was telling me that all of her clients are very slow, have little or no work, and if they have work, getting paid is a big problem. People are starting to hoard money and just not paying up. Her clients are general contractors, subcontractors of all types, farms, small businesses, small retail stores, etc. So who knows - the shops that are undercutting to get the work may not get paid, as they are working for less than desirable customers.
From contributor R:
A major hotel chain has asked to delay install of a new front desk (that is already built) as the funds are not there to pay me. I did thank them for their honesty and requested a partial payment.
From contributor Q:
You should also charge them a storage fee. If you are tight on storage space, rent a climate-controlled storage unit and collect at least two months rent from the client.
From contributor S:
It would be awfully nice if someone would send me a check for what we have already delivered. Even our best accounts won't pay their bills. I have called them and they honestly say, "Sorry we just do not have it. We will pay you as soon as we can." I guess that is better than our bad accounts that say, "the check is in the mail", when they know damn well that they have not sent it. I can't run a business this way. Got lots of work, delivered all kinds of projects, and not one wants to pay up.
From contributor T:
Go back to the non-paying customers and tell them that you have to take the doors back to the shop for a final polishing/touch-up and keep them until they pay.
From contributor R:
I have about 10,000 square feet empty now so no storage charges. Recently, I did take a few doors back in order to get paid and it worked. In that case the homeowner was lying about my check being ready and when he called about a drawer being out of alignment (it wasn't) we went to the house. It reeked of pot smoke, and I made the decision to take a couple of doors, and it worked!
In the case of the hotel, as with most all of our clients, they are being honest with me and for that I am suggesting that business to business negotiation is how we are going to get through this. So far it is working. We are getting positive response and some payments. I have a job we signed long before this all started and it is carrying us through this for at least another three months. We also have some on-hold jobs who want to get started. I am finding better results in approaching this with a sense of understanding and negotiating to see the equalization in how we can provide and get paid. I was raised to deal with the truth and while it may anger me I still have to honor it.
From contributor U:
I wonder if these same customers would dare step foot into a 5 star eating establishment and bicker with the management over the price of a real good meal and real good service.
From contributor I:
I wonder if the hacks who are giving their work away are reading this and what they might be thinking.
From contributor W:
Here's another take on what's behind such super low-balling. Last summer I was low on work, so I returned to doing some general construction work. I bid $6000 on demolishing a fence around 3 sides of a backyard, building new with a more costly design, all set in concrete, with several extras. I threw in some repairs on the deck, too. I never heard back from the homeowner. I ran into her at the post office months later. "What did you do about your fence?" "Oh, you were way too high. I got another bid for $2500. My husband's not very happy though. After it was done they doubled the price to $5000. But they didn't charge me for 40 man hours so I still got a deal".
Their "bargain" also only included 2 sides instead of 3. No concrete. And the much cheaper design that they absolutely did not want. No deck repair and no extras. What I'm saying is, there are a lot of contractors out there who have no intention of delivering what they've promised for anywhere near the price they bid. They routinely expect to raise the price and lower the quality. It sounds to me like that's the only way the other guy could bid your job for less than material cost. Whenever I run into a deal like that now, I relate this little story to the homeowner. It gives them something to think about.
From contributor X:
For you guys who are having trouble getting paid, in times like these it is vital to have a policy, spelled out in your contracts, that you need to get paid on delivery. That means you have the check before you unload anything and carry it into the house. This is important, because we have had a customer say that we can just unload everything and they will come back in a while with the check, which of course they don't. And once you have unloaded the vehicle, do you really want to load it up again?
We have sometimes required that the final payment be received prior to delivery. This is what some of the big box stores require, so why should we be different? If you are installing, then there should be a separate fee for the installation, so at the very least you will only get screwed on that part if they choose not to pay. I typically have progress payments scheduled, and if the payment is not received on time, we stop working on the job until we get it, and the delivery date is revised to reflect the lost time. Driving the delivery truck up to the job site and driving away without unloading may be a PITA, but it usually motivates the client to pay up.
From contributor Y:
Contributor I stated: "I wonder if the hacks who are giving their work away are reading this and what they might be thinking." Actually, I am one of those hacks. A few years ago, when I was just starting in this work, there was only one other outfit that made furniture in my market. There are a few reasons I undercut them:
1. I did not understand the complexity of a job. As a result, what I thought should have taken 20 hours instead would take 60. The result was that I would end up with $5 an hour for the project.
2. I was just starting out and did not have the skills to justify asking what a seasoned professional would. I was "earning while I was learning", and glad for the opportunity. Other people were paying for my experimentation, and I was usually glad to have it. Otherwise, I'd be spending money on my own materials for "spec" units.
3. As time went on, and I got better at what I do (faster turnaround, better refinement), I felt that I could justify a boost in my rates, because the quality of my work and service was getting better.
4. I generally charge others for my work what *I* would pay for it.
5. My target market were people who otherwise could not afford what my competition charges. I figured I could come in and "scoop" them. I have found that the people who otherwise could not afford them, couldn't afford me, either.
6. Over the years, my friends and colleagues would chastise me for how little I was asking, admonishing me to charge more. They would say that people would not value my work because it's not worth as much. I asked them "How can it be of any value to anybody if they can't afford it in the first place?"
Only now am I getting my feet under me, refining both my practices and my final product. Profitability would be fantastic if I can keep a steady stream of work coming in, but in this economy, it's catch-as-catch can.
The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).
Comment from contributor B:
Very touchy subject. I've had a few customers try to pull fast ones on me, but I learned a lot about crooks growing up. The bad thing is that you can't usually tell a deceitful person until itís too late so I cover my assets. As for residential projects, if customers want me to work for them, they will pay for all materials up front or at least 1/2 of the total. I demand final payment upon delivery before anything comes off the truck. Installation paid after completion. So not only do I cover my materials, I also cover my shop work and the customer sees what the next payment is going towards, the product I am offloading. Worse case scenario, customers attempts to stiff me after installation. At that point my professionalism tends to slip towards the window, but diplomacy usually prevails and I get my payments. I don't ever leave without payment. My work, my terms, period.
I recently went back to sign a contract and explained the terms to client. She was hesitant to pay a down payment. I kindly informed her that "I do not come out of pocket on anybody's materials. They must be paid for so I have everything I need to work with and complete their project in a timely manner. Besides, if we are going to work together on your project we both must establish a trust with each other."
As for cheapskate customers, I tell them, "I don't sell cold burgers, stale fries and flat sodas. See ya somewhere." As for hacks, a lot of us have been there, especially if we started our businesses in our mid 20ís. I am reluctant to hire helpers for fear they may take my knowledge and their new found experience and just to go their own way and immaturely blow it. That leaves me where? On the other hand, if I can learn that objective beforehand, I can train the hired hand and show him how to price jobs and what it takes to be "The Man" so he wouldn't have to lowball my next potential jobs. Sure we will all compete for business but why do we have to compete on dirt cheap, unreasonable prices. Heck, if you are going to hack a job, present yourself well and raise the price. You have to. Desperation may only fix a short-term problem, but pricing the jobs the right way will keep you moving forward. I wish we could establish, in our areas, a set of pricing rules so we could keep all of our prices profitable.