The Art Of Compromise: Is It Good For Business?

June 2, 2005
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A recent letter from a News reader has prompted a discussion by our contractor consultants on the "art of compromise" - when to use it and when not to use it.

Drake L. Bradbury is the service manager for a co-op heating and cooling department. He recently wrote: "I have switched to flat rate, but I am still having billing questions from customers and still having to make corrections on my bills. This was the whole point of switching from hourly rate to flat rate.

"I pride myself and our company that has been in business since 1927 on our customer service. I realize this is the best way to retain my customers. I find myself compromising on billing for heating work so we do not lose their business in other areas of the co-op, i.e., liquid propane sales, gas sales at our three convenience stores, auto center, etc. My manager will give money away from my department to save a customer in another area.

"I understand that compromise is ‘when both parties are equally unhappy.' Why then am I always the only one unhappy? I know why. Because I am the one giving it away! I feel this is a very real situation in every business."

So how far should contractors go in dealing with pricing issues? Is flat rate the solution, or do contractors face similar problems when any type of pricing method is used? Those questions were put to The News' contractor consultants.

Consultants Speak Out

Aaron York of Aaron York's Quality A/C said, "Every contractor at some time must become a skilled negotiator, which is really considered compromising. All of us feel inadequate, especially when we feel that we are the only one doing the giving. We must remember that the other person likely feels the same way. The crux of negotiating is when both parties leave feeling they have been treated fairly.

"Generally less compromise is needed when there is a meeting of the minds before the work is done. Then one can negotiate from strength instead of weakness. With no meeting of the minds, everything can be suspect. And we can simply get in the habit of feeling every complaint deserves a discount or cut on the bill.

"Most customers are saying, ‘Just explain to me why this is proper.' Once this is done, they are OK. This is where the art of negotiating is so vital. When we negotiate well, everyone leaves feeling like a winner."

York also recommended a tape series titled "The Art of Negotiating" by Gerard I. Nierenberg. He said it is a "must listen" for all contractors.

Hank Bloom of Environmental Conditioning Systems opposes what he calls "chop pricing." "I feel we should all charge fairly and get paid for our expertise," he stated. "What I do know is that if you change or lower your pricing you teach your customer how you will do business, and he will always try to chop you.

"That is what you taught him to do. I have no problem negotiating dollars if there is a real reason and we're not just chopping each other. I would teach your customers how you do business by sticking to the original price."

Jeff Somers of Monsen Engineering Company sees the possibility of "creating a monster" if prices are continually negotiated. "Once you leave the customer, the perceived value of the quality service you provided diminishes," he said.

"If the customer receives the invoice days later, they have had too much time to think about the original price you gave them. They may determine that the price was too high and want to enter into negotiations. Once a customer realizes that you will negotiate your fees, you have created a monster.

"Giving away gross margin dollars from one business group to support another is just not profitable to do all the time. I have also been a victim of the proverbial dangling carrot, and once you start standing your ground, your good customers will rise to the top of the list."

Arthur Pickett of Royal Air Systems Inc. does not believe in giving the store away. "If we were going to compromise, I would need to know the amount of future business we could expect from the customer over the next two years to offset the credit.

"Even then, I would be careful to understand what the customer really expects. Sometimes I think we give the store away when the customer would be happy with less."

Steve Miles of Jerry Kelly Heating & A/C documents everything so he has something to fall back on when a repeat customer complains. "We'll make a note in the computer that they were unhappy with our prices and a reminder to quote prices and get approval for all future repairs, no exceptions," he said. "If they call and complain again after we've quoted prices and received approval, we'll talk to them and recommend they call someone else who can better satisfy their needs."

Vince DiFilippo of DiFilippo's Service Co. doesn't like the idea of devaluing service and giving it away in order to retain customers. "Compromise is fine when you have a client for whom you have done work for a long time," he said. "The key here is not to do it all the time. A good client will appreciate the gesture of compromising, and it goes a long way towards locking in the client for years to come. Giving in all the time will put you out of business.

"If you are delivering top-quality service, flat-rate pricing, super warranties, certified technicians, and doing it on time, there is no need to give it away. I don't care if there are other divisions to feed. The service department is not a nonprofit organization. This is the main reason people think of service as a necessary evil, and they don't make any money in it. They give it away, and that devalues the service."

Kevin Comerford of Service Champions believes that compromise should be looked at on a case-by-case basis. "My feeling about the art of compromise is that it does happen, and you have to take each situation one at a time and look at why you are giving money back," he said.

"Analyze why we did not build value on the call. Is it a certain tech? Does the tech need training on building value? Regardless of how much training we provide, it does happen occasionally that you get a client who doesn't see the value. My suggestion is rather than always giving money back, offer a free one-year maintenance agreement, two years of extended warranty - something that has a perceived value at not so large of a cost."

Roger Grochmal of Atlas Air/ClimateCare said he has had to part ways with a few customers over billing disputes.

"Every customer has the right to make a legitimate complaint," he noted. "Any concession you give them must be related to a service deficiency (real or perceived). Otherwise, you are just admitting that your prices are too high.

"In our company, we make a note in the customer master file that we have done this. We have a separate warranty account for customer concessions. This allows us to budget for a certain amount of these concessions and build it in to our pricing. If a customer starts to develop a track record of complaining about our service or invoices on a regular basis (two or three times) we stop the music.

"Maybe about three or four times a year, we have to fire a customer for this reason."

Sidebar: A Case Study In Compromise

By Russ Donnici

As businessmen, we all use the art of compromise with clients, vendors and employees. Hopefully, the compromise is equal or close to equal for each party. Sometimes it's not, but life isn't always equal or fair. Sometimes a compromise in favor of a client is just a cost of doing business.

The key is to remember that if you are always compromising with a certain client, then you have trained the client to ask for discounts. You must take a stand and stick with it; everyone on the team has to understand. It obviously is more difficult with a large client.

We recently had this exact experience. This has been a good client for over 15 years with a very demanding and sometimes difficult to work with facility manager. The client is a public company, and a few months ago a new CFO came in.

All contracts were put out to bid and a competitor came in with a lower perceived price. The customer called a meeting with me and the hard-nosed facility manager was actually on our side. He said he liked us and that he got excellent service from us, but the company needed to cut costs and asked what I could do.

I made some minor compromises on the two maintenance contracts we have with them. We didn't match the other lower price, but we kept the contracts and the client.

Last Monday the CFO called me to get a discount on a server room system we had recently quoted. He said he needed to shave $800 off of the $7,200 quote. I reminded him of the recent discounts that we had given them and the good service we had provided over so many years and said that we cannot continue to give discounts whenever they are asked for. He said he needed the $800 discount or he would have to go out to bid on the job.

I talked it over with our second-generation management team (I don't make unilateral decisions without their input) and we agreed to offer a $200 discount and that was it. I told the client that was the best we could do. He called the next day and sent the contract over at the revised price.

In reality he didn't get a discount. We had quoted the price at a not to exceed (NTE) $7,200 and now it's a fixed $7,000. Over 90 percent of the time we beat our NTE price and we would have on this job, too. Now he is paying a fixed price because he insisted on a discount.

Russ Donnici is owner of Mechanical Air Service Inc. in San Jose, Calif.

Publication date: 06/06/2005

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