Competing on price

Jul 15, 1996

We hear it a lot these days: “We can’t compete with the five-man firm across town— they’ll do the job for half what we charge,” or, “How can a big firm like ZH43C do that project for that money— they must be writing off their losses in the name of marketing,” or, “ABC Hotel Corporation expects us to actually reduce our price on each succeeding project we do for them because they think we can do them in less time!” No doubt about it— there’s plenty of pressure on pricing for most of what architecture, engineering, and environmental consulting firms do. Clients want more for less. Sure, they want good design, and they want responsiveness, and they want you to meet their schedule— but they want what they want and they want it done inexpensively. Yet, in spite of all of this pressure on fees, there are still firms out there— large, mid-sized, and small ones— making 10%, 15%, 25%, or even higher profits on net revenues. What are they doing that allows them to be so successful in this price-competitive marketplace? Here’s a quick rundown of my observations: They aren’t afraid to walk away from a client. There’s nothing revolutionary about this concept, yet it is so much harder for some firms to do than others. The ability to walk away from a client that doesn’t want to pay you what you are worth really comes down to a state of mind. If the principals of the A/E/P or environmental firm don’t think their company’s services are worth what they are trying to charge, there’s no way they will be willing to walk away from a cheapskate client. And it’s sad but true that too many principals think this way. I can remember vividly a discussion we had in a firm that I worked in years ago about whether or not it was morally “right” for us to charge more than 2.6 times raw labor for asbestos technicians when the demand for their services was staggering, only because that’s the way we priced the rest of our generic structural, civil, and M/E/P services! They over-invest in marketing. One of my own secret strategies is to always over-market such that you cannot meet demand for what your firm does. This certainly helps your attitude and willingness to walk away from a client who doesn’t want to pay your price— somebody else is standing right behind them in line. Of course, implementing this strategy requires you to step up to the plate with an open checkbook. You need to fully expect to spend more than the industry norm of 5% or 7% of net service revenues on marketing. It’s hard for some people to understand how spending more on overhead allows you to be more profitable, but when it comes to well-used marketing dollars, it does. Think about a company like Proctor & Gamble, the makers of Tide laundry detergent. No one could say that laundry detergent is not a price-sensitive market. Yet, go to the grocery store and check out what Tide sells for compared with lesser-known brands. Tide has significantly higher marketing costs than other detergent makers, yet those costs are recouped several times over in higher volume and higher prices per ounce. They constantly look for ways to drive down the cost of production. This is where most A/E/P and environmental firms concentrate their efforts when price competition gets tough. It undoubtedly makes sense to look for efficiency gains in terms of drafting, report preparation, paperwork reduction, and so on. It’s no panacea, however. Gaining a real competitive advantage in cost of production usually requires a significant investment. This investment is usually in new technology— better computers, software, networks, databases, and so on. I’m convinced these investments pay off in the long haul, although some market sectors (i.e., state DOT clients) discourage it by their antiquated overhead caps. But until more firms are willing to walk away from those clients, they will continue to discourage efficiency gains to reduce overall project cost and instead look at cost per man-hour for what firms in our industry do. They position themselves as experts in a particular service or client type so they get dragged into projects by other consultants. This is often a common thread among firms that are getting better fees. These firms have (or are perceived to have) some unique expertise that gives clients the impression they are getting more for their money, even when they are paying more than they would for other local service providers. And these companies exist in virtually every client type or service market— you know who they are in the markets you serve, whether we’re talking about stadiums, airport terminals, solid waste, golf courses, or indoor air quality. They drive down marketing costs by getting everything they can from their existing clients. We all need to hear this proven advice time and again. Even in our own firm, many of our 120-plus consulting clients don’t know all the things we do. You have to train your people to cross-sell and get the message out through other means to your current clients that you can probably do more for them than you are currently doing. They don’t pay salaried people for overtime, yet they expect most of their salaried people to work overtime. Some people out there think I must be some terrible slave driver to suggest that salaried people regularly work more than 40 hours a week and not get paid for it. But it’s rare to find a firm that can compete in a tight price market and do so successfully while paying salaried (exempt) employees for every hour of work. They reduce the number of bodies needed to manage the business and keep everybody else working on projects. The vast majority of firms in our business have a culture that reinforces the idea that all owners participate in every management decision the firm has to make. As the firm grows and matures over time, this becomes a recipe for disaster. Ask yourself if you really need all of those management committees, marketing committees, stockholder meetings, 18-person boards of directors, 5-person executive committees, and so forth. Perhaps you’d save time and money by shrinking or eliminating as much of that stuff as you can and getting your senior people back to work. They’ll be better off because they’ll keep their project and client skills sharp, and the firm will be better off because it will be able to do what it does for less money. Let’s face it, folks, price competition will not go away. But a well-managed A/E/P or environmental firm will find ways to charge more than its competitors where it can, and keep costs down where it can’t, and be successful anyway. Originally published 7/15/1996

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