Knowledge has Its Price Too

Background

Harry was in the ready-mix concrete business. With lots of construction and developments underway, concrete was a good business. Like his competitors, Harry ran a busy yard lined with trucks loading sand, gravel and cement for construction sites.

The Problem

To customers, unfortunately, concrete was concrete -- an undifferentiated product called a commodity. Harry noticed the first thing contractors asked on the phone was "What's your price on a yard of concrete today?" Then they called three or four other ready-mix places to find the lowest price that day.

It was easy to be caught in a "race to the bottom": low prices, skimping on the mix of materials, paying the lowest wages, using poorly maintained equipment, giving poor service -- and ultimately getting little or no profit.

The Solution

Harry decided he didn't want to race to the bottom. He had to do something to rise above the pack. After we analyzed the problem, I worked with Harry to develop a script. He began by asking contractors questions that showed his expertise about the applications of concrete.

First he asked, "Before I tell you my price, tell me what you're going to use it for?" If it was for footings or for sidewalks, curb and gutter or for wellhead seals, his next questions was, "What municipality are you pouring in?" Because he knew the zoning differences, Harry would remind them that the city and county had different requirements." Harry even offering bidding advice, telling contractors, "When you get quotes from the other guys, remember to ask for 6 sacks of cement per yard as opposed to 5 sacks, or you'll wind up jack hammering it up and redoing it." Then he'd remind them about additives for surface texture or hardening speed. He even alerted contractors that some suppliers of concrete had a "standby charge" if the trucks had to wait to unload--which he did not.

Immediately, contractors were listening closely to Harry's questions.

By the use of scripts and questions that demonstrated his knowledge of construction requirements, he was able to differentiate his offering. He was not just in the concrete business; he was also in the concrete applications and the "I'll keep you out of trouble" business.

The Result

Harry became a valuable supplier because the last thing that contractors want is trouble from architects and building inspectors. They learned that Harry had the practical knowledge to keep them out of trouble. And, he consistently got a higher price for his product. The other suppliers fought the commodity price war. Over 15 years, Harry made a good living from good contractors who understood that price is not everything. Finally, having secured his retirement getting a good Valuation of Small Business,Harry sold the business.

What happened then is very telling. The person who bought the business had a long history in the other end of the concrete business--concrete as a commodity." His answer to the question, "What's your price on concrete today?" was "What's your best price and I'll beat it." In four years, the business was bankrupt.

Commentary

Every business has four components: product, knowledge, service … and then price. In my consulting with small businesses, I have found most of them focus on price, maybe some aspect of product and service, but forget totally about their knowledge - their valuable "extra". Why? Because it is an intangible. But to customers, it is very important and they are willing to pay for it. It can be the essential difference that set you apart and makes you offering unique Small business value development.

If you've been in business more than 10 years, you've forgotten how much you know - the stuff you learned the hard way. Most of your customers don't have this knowledge. By presenting your knowledge in a systematic way, you differentiate yourself, provide added value to your customers and justify a premium for your offering. Knowledge has value, too.

WOODRIDGE

Business Management Articles

Knowledge has Its Price Too