Put your margins where your value is.
If you hide your margins in a commodity price, your clients will find lower cost alternatives.

Last week on July 3rd we were getting ready for a Fourth of July pool party at our house, working around the house all day preparing.  Late in the afternoon Kathy asked me to check the AC, as it felt very hot in the house while the AC was on.  The thermostat verified the AC running but the temp wasn’t going down.  I went down to the furnace room where everything looked normal (like I would know if it wasn’t?) and then went outside. The AC unit was not running! It would periodically click on and off, so something was obviously broken.  Since it was after 5pm on the day before a holiday and we would be leaving early on the 5th for vacation, I told Kathy she would have to live without AC until we got back.  She was having none of that: she suggested (I am not sure I had a choice) to call the furnace company, as we have an annual agreement with them, which she thought might make a difference.

I phoned the company, speaking to a pleasant woman at an answering service who takes my message and says the on-call tech will call me right back.  I am skeptical.  Fifteen minutes later Tom calls to learn the issue and I explain the problem.  He asks if I would like him to come to out, since we are under a contract; the emergency after-hours response fee is $90.  I tell him to come on over and he promises to be there within the hour.  Wow! About 30 minutes later Tom arrives and very quickly diagnoses the issue: a bad capacitor.  I hold my breath and then ask him if they carry the part on the truck.  They do.  Within 45 minutes of his arrival, Tom has diagnosed the issue, replaced the part, tested the unit, done his paperwork (this took the longest) and is on his way with an imprint of our credit card.  I am grateful that the furnace company had someone on call, available, qualified, and had the part to fix the problem.  All in all, Tom has made me look pretty good.  Within an hour and a half of being alerted to the problem, I have it fixed.  We, including our dog Sally, and our guests coming on the Fourth will all be comfortable.  Score it a win!

Now I don’t want to seem ungrateful, because I was not.  When Tom gave me the bill it was for $350; when I checked it I saw that the capacitor cost was $254.  I mentioned it to Tom who sheepishly said “Yeah, they’re expensive”.  I didn’t care: $350 to fix my problem was definitely worth it.  People today are great consumers.  With all the information at our fingertips and most everything a day or two away from Amazon, as a society we have become very comfortable looking things up.  So, after Tom left and I was in the cooling comfort of our fixed AC and with a well-deserved evening libation, I did a quick look up on Amazon to see how much the $254 capacitor really cost.  A simple search showed… $16! I am well versed in the saying “Quality, price, or speed; pick any two”.  But $16 to $254 feels like gouging.  Don’t get me wrong, I was very OK with paying $350 to make my problem go away, but the price should have been $300 for the emergency after-hours response and $50 for the capacitor.

This reminded me of the early days of reselling PC’s.  We used to make $500 selling a $2500 PC [our cost was $2000 and we marked them up to $2500] and install it for free.  Then Dell and Gateway 2000 came around (with an 800 phone number, long before the internet), and they sold a similar PC for $1800, below our cost.  Since our clients could buy them cheaper than we could, we figured we needed to move our margins (which were built into the hardware) to where the value was: the installation.  We ended up having our clients buy their PC’s direct and we charged for our installation services (which was where we added value).  Over the years we had to constantly increase our value and always make sure our margins were in the value add and not the commodity product.

I would suggest our furnace company rethink their margin strategy and put the margins where the value is. Clients don’t like to feel gouged.

What I am reading:
Professional:  Trillion Dollar Coachby Eric Schmidt – Amazon Link
The Leadership Playbook of Silicon Valley’s Bill Campbell
Personal: A Gentleman in Moscow by Amor Towles – Amazon Link
He can’t leave his hotel and you won’t want to.