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Ted’s Blog: Discussing critical industry issuesThe Garrison Report #2007-4
The Psychology in Preparing Construction Bids - Part 2: Use Scarcity to Your Benefit
Listen to the audio version of this report here
Last month, based on Dr. Robert Cialdini book, Influence, I discussing how scarcity can cause contractors to respond to bids on an emotional basis instead of a logical basis. For example, in a tight market, the acquiring of the project becomes the goal instead of acquiring a profitable project. If you take a project without sufficient profit, you can often do your company more harm than if you had just walked away. But how can the contractor use the principle of scarcity to its advantage?
Any good book on the sales process states that one of the first steps must to be to qualify the buyer. These factors usually include the financial resources to buy and the need for the product or service. However, the value-driven provider must be sure her prospects understand the importance of value. In other words, the valued contractor must qualify prospects on the basis of selecting contractors based on value instead of price.
Of course, price is always a factor in determining value, but examining price in a vacuum is meaningless. For example, when someone complains that the price of gasoline is ridiculous at $3.00 per gallon, ask him if he would rather walk 20 miles to save the three dollars. Of course, the answer will be no. In the first situation, the buyer was comparing the price to his expectations of what he thought the price should be, while in the second situation, he focused on the value received.
Since not everyone is ready to accept the value concept in construction, the contractor must find a way to differentiate its prospects. The impact of determining which prospects select contractors based on the value received can have a major impact on your business. For example, roofing contractor Wattle and Daub obtains contracts on more than 90 percent of its proposals. In fact, the contractor earns a higher profit margin than its competitors yet must still turn down work because it can't handle it all.
What would happen to your business if you were awarded more than 90 percent of your bid proposals at higher profit margins? But how do you do that?
When I asked Thom Tisthammer, president of Wattle and Daub, that question, he told me that he identifies prospects that are value driven and avoids the rest. Many of his prospects had poor experiences on prior roofing projects when the contractor was selected based on low price. Tisthammer recognizes this as an opportunity to educate the prospect about selecting contractors based on value instead of merely low price. He differentiates his business by measuring its performance. This prepares him to talk to prospects about the problems they have had on earlier projects. When he's challenged by the prospect, he is able to ask, "When you consider the cost and inconveniences of prior problems, did you really save money by selecting the lowest-priced contractor?" When you find prospects that are primed for a new approach, you need to drive the point home.
Further, why not use the scarcity principle to your benefit instead of the clients'? In this situation, the contractor differentiates its performance based on measurement, thus proving it can avoid the problems the prospect experienced during its previous projects. If the prospect isn't convinced, ask him if he has seen the performance records of other potential bidders. In other words, get him to focus on the performance or value received, not just the price.
At this point he may nod his head in what appears to be agreement. However, you should be asking yourself, Is he just appearing to agree in order for me to turn in a price? Since virtually all contractors say they will do a good job, he may figure you are no different, so he simply needs to get your price and see if you are the low bidder. That would probably be a waste of time for both of you.
Instead, here is where you can turn the tables on the prospect. When a prospect asks, "Can you give us a proposal?" You respond with the following comment, "I'm not sure that we want to bid on your project unless we are convinced that you are committed to selecting the contractor that offers the best value instead of the lowest price." In fact, you might want to add, "We aren't usually the cheapest contractor because we make sure we include everything necessary to perform the work correctly in order to eliminate all the problems and inconveniences for the owner." In fact, Cialdini recommends that you admit a shortcoming, such as not being the cheapest, prior to mentioning your strongest point because it gives you credibility.
The prospects who want value will understand. Those who care only about price will remain skeptical and will disqualify themselves from further consideration on your part. Many skeptics are people who believe they are forced to accept the lowest bid. In some cases this is true; however, the majority have other options if they really want to pursue value.
I believe that it's best to not waste your time trying to change the skeptics or the dinosaurs who want to stick with the low-price approach. In essence, use this process to identify those who believe in the best-value proposition. The reality is that up to 73 percent of consumers will purchase based on value if they understand the value. By hinting that you will take your offer off the table, you create scarcity and make value-conscious prospects want your services even more.
Suddenly you are in the driver's seat, and instead of begging for work, you have a prospect who wants to buy your services. This is an advantage because people would rather buy than be sold.
It's important to understand that it's difficult to convert nonbelievers, but those who are ready to take a serious look at value instead of just low price will be drawn in when you make your services scarcer. This isn't manipulation; you are merely qualifying prospects to determine which are truly interested in what you offer. You are creating a win-win situation. If another contractor provides better value, they deserve the job. That's only fair. What contractors need to avoid is losing projects to low-performing contractors who offer less for less. This would be like selecting your basketball team's center based solely on height instead of looking at his ability to play the game. The shorter center may actually be a more valuable player.
The key to establishing value is measurement by the contractor. Therefore, next month I will discuss how the contractor can differentiate itself from its competitors by measuring its performance.
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