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Wednesday
Mar282007

Aggravation Pricing

How to Solve Problems Before They Start

We all have had to do business with them – customers, clients, vendors, buyers or sellers that we know will be difficult to deal with. Maybe it's their attitude? Maybe it's unreasonable expectations? Whatever it is, you know that if you do business with them, there will be problems. What do you do?

The answer is simple. Factor the potential for difficulty into the price you charge or the price you are willing to pay. That way, it is worth your while to do business even if there are problems. I call this Aggravation Pricing.

Perhaps a few examples will help illustrate what I mean.

Case Study 1: Food Processor Client. A client produced a high-quality, premium food product. The team was excited when they landed a big-box store account. After a couple of months, the big-box retailer was back-charging for returns. This concerned the producer because they had never had quality issues. They asked what were the problems and can we inspect some of the returned product? The reply from the big-box retailer was "do you want to do business with us or not?"

Did the big-box retailer simply allow anyone to return anything at any time for any reason or was this a hidden price squeeze? The inability to produce even a single returned package led the producer to believe it was the latter. My advice was to recognize that there was a hidden cost to doing business. In this instance, it was about 20%. I suggested that they simply increase their margins by this cost plus a little more so as to make it worth their while to continue doing business with the big-box retailer.

Since the retailer probably would not have agreed to a 20% plus price increase on the same product, they discontinued the package size they had been selling, repackaged the product in a new size along with a new price. It worked.

I then alerted other clients seeking to do business with this same retailer of its policies and suggested that they too factor this cost into their price structure. This is Aggravation Pricing.

Case Study 2: Commercial Service Client. Another client was pleased to negotiate an agreement to do business with a giant international manufacturer that had just located in our community. Although they had to give in significantly on price, it still was a good customer to have. They were shocked, however, that after agreeing on terms, they were then told that they had to meet with one more person. This new person's sole job was to extract another 11% in concessions. Once again, we alerted other clients that sought to do business with this manufacturer to factor this additional concession into their pricing and negotiation strategy. This is Aggravation Pricing.

Case Study 3: HVAC Contractor. A neighbor that was an estimator for a heating and air conditioning installer asked about an attorney that was requesting a bid. He was correct, the attorney is known for being extremely difficult and at times unreasonable. He asked if I thought he should refuse to bid the job. I said, no, I wouldn't tell him to do that, but  if he did make a bid, he should pad it to cover the cost of dealing with that attorney. That way, if he lost the bid, that would be fine. If he got the bid, it would be worth his while. After the job was finished, he came back to thank me. He said he got the project, the attorney was a disaster and they had used up every penny of extra margin. If he had bid it normally, they would have lost their shirts. This is Aggravation Pricing.

Case Study 4: Commercial Tenant Client. Currently, we are working with a client on a commercial lease. The landlord is known to be extremely difficult. The client asked "do I even want to rent from these people?" Once again, my reply was figure out what financial terms would be very attractive, even if problems with the landlord occurred. Then, do not agree to anything that exceeds those favorable terms. If it does not work out, look at other properties. If it does work out and there are problems, remember the problems are the reasons for the favorable terms. This is Aggravation Pricing.

Don't get me wrong, in any transaction, there needs to be trust. If there is no trust, it is not worth doing the deal. On the other hand, if you know there could be problems, price it accordingly.

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