Andrew R. Thomas. Photo credit: Rami DaudIn his international business class, Andrew R. Thomas has some students who run their own landscaping businesses. One particular student came to Thomas talking about how he couldn’t wait to sign a contract to do the landscaping and snow removal work for a bank and a number of its branches. Not to be a killjoy, but Thomas gave a warning to the young entrepreneur – be careful what you wish for.
“Sure enough he got the deal and like a week after he signed the contract for both snow removal and landscaping for the upcoming year, they said, “Well, we need to renegotiate the price already,” says Thomas, assistant professor of International Business and associate director of the Taylor Institute for Direct Marketing at The University of Akron.
Thomas writes about similar situations in his book called, “The Distribution Trap: Keeping Your Innovations from Becoming Commodities.” Companies become enticed by selling to a big distributor like Walmart or Best Buy, and become handcuffed by the relationship. Eventually, the big-box store wants you to give them a price cut because they can find someone else who makes your product for 20 percent less. That means, you either take a loss at the bottom line or start to take short cuts in manufacturing your product.
“It really comes down to the kinds of customers,” he says. “And as we say, even on the consumer product side or business to business products, the belief is that volume is more. That if we are selling more or cutting more lawns, or we are doing more landscaping services that somehow that translates directly to profits. But people miss that reality a lot of times that it’s not true.”
Lawn & Landscape spoke with Thomas about why the big customer isn’t always your best customer.
What did you tell the student after he signed his big deal?
I said, “Don’t let these guys become more than 10 percent of your business.” And that’s what we talk about in the book is the 10 percent rule. No customer should be more than 10 percent of your business. I said don’t go out and buy all this equipment and hire all these guys and do all this stuff assuming that everything is going to be hunky-dory with these guys. I said it may be very wonderful this winter.
But then you get into this trap as time goes on where you become more dependent on them. They become 20, 30, 40 percent of your business. And then one day, they just decide that, “We’re going to pay half. If you don’t like it, then we’ll find somebody else to do it.” Then you are really in a bad spot. You’ve got all this equipment, you’ve got all these bank loans, you’ve got all these people and you don’t want to lay them off. And that happens time and time again. And that happens in business. Whether it’s a landscaper, or you are selling to Walmart, the principle remains the same.
So, should you reject a company that wants to give you a lot of business?
No, but you have to be very, very careful and you have to monitor that relationship in the sense that if they have an opportunity to get out or hurt you that you are prepared for that. You need to know going in what you are up against. I guess that’s probably the better advice. That’s what I tell a lot of kids who have these businesses. I say don’t go in there just thinking, “Hey, they’re giving me a three-year contract and everything is going to be great.” They could renegotiate tomorrow. You need to know that. If you become dependent on them but they’re really not dependent upon you, you are really putting yourself in a very dangerous place.
But I have to imagine it’s hard to say no when you have that golden nugget dangling in front of you.
It’s tempting as hell. I’m sure there are guys who read your publication, who got into that situation where they ramped up because of a big deal and only got burned later on with too much equipment, too many trucks, they hired too many guys, and things went bad with that deal.
If you asked them again if they’d do it, they’d say no. I’d rather just build slow but sure with good customers, with those strategic ones. Over time, as I buy equipment, I know it’s going to be around, the people I’m going to hire are going to stay because there’s going to be work for them from the best possible customers.
Size doesn’t matter. We think it does. The bigger the account, the more volume, whatever it is, somehow that translates into profits. But we’ve learned in the last 30 years, that’s not the case. In fact the opposite is more likely to be true.
Can you convince a customer you are worth the price when they come back and try to renegotiate?
In that business, because the service is the service, everybody pretty much does the same thing. You have to ask yourself what it is you bring to the table that others may not. And I think especially from a corporate perspective, and this is from somebody who’s owned businesses myself and hired landscaping guys, what I want our people who are going to save me time.
From a business perspective, it’s not just cutting grass and pulling the weeds. It’s also, how are you going to invoice me? How can I pay you? What is the process in terms of being able to execute the transaction that’s going to make it easy for me?
Where do you draw the line if a customer wants a discount?
I find that very tough. The cost of business is going up. The cost of their business is going up. If somebody is coming back to me saying you have to cut the price simply because everybody else is doing it, then you don’t have a strong relationship there.
And those are the kind of people that scare me. Because, on one hand, they’ll tell you, “Oh, you’re wonderful, we’re faithful, we’re loyal to you, what a great relationship we have,” and then the next comment is, “20 percent off.” If people really value you, if they are buying from you, and they’re doing business with you because of the quality, the experience and the value, they’re not going to bitch about price.
Is it OK to give a temporary price cut?
You can. But fuel prices are going back up. Health care costs are going up again. Once they do business with you because of price, that’s that slippery slope. Once that gets thrown into the mix; maybe offer them some more services.
Say, instead of giving you 10 percent off, I’ll work a little bit more for you. We’ll do more raking in the fall season or prune some more trees for you.
The author is an associate editor at Lawn & Landscape. He can be reached at firstname.lastname@example.org.