When crazy meets brilliant…

I had lunch today with one of the most creative people I’ve ever met. But this post is not about creativity, unless you think of it as creative decision-making. I want to share an anecdote he told me over that lunch, in the hope that it resonates with you in the same way it did me.

negotiating a price
The story is a true one but I’ll maintain anonymity. It concerns a particular manufacturer that regularly purchased a certain widget as part of their production process. They procured this widget from a supplier that was situated about 50 miles from their own factory.

On a number of occasions the Managing Director of our manufacturer saw the owner of the supplying company arrive at the premises – let’s call him John. Curiosity drove him to ask one of his staff why John was such a frequent visitor. He was told that John made the trip every week to the factory in order to personally collect the cheque as payment against his latest invoice.

This was strange behaviour so he instructed one of his team to do a little bit of research on the widget. The unit price they were currently paying John for the widget was around £1.80. But the research unearthed a startling truth. The cheapest they could procure this widget from any other supplier was in the region of £8 per unit. They were effectively paying around one quarter of the best market price. Yet there was nothing inferior about John’s product – its quality and functionality was more than satisfactory.

Now I have a question to ask at this point. What would you do in this situation? Count your self very fortunate to be getting such a great deal and walk on merrily? I have to say that’s probably what I would have done. But it isn’t what our Managing Director did.

The next time John arrived at the factory the Managing Director met him personally and took him into his office. He asked John why he made the trip each week to collect the cheque: couldn’t they post it – or at least send a junior member of staff? John explained that their business was very important to his company and therefore he wanted to ensure the relationship remained strong. He was then asked how business was going. John paused and admitted that business “could be better” but they were “surviving”.

The Managing Director explained that he wanted to speak with him directly about the price of the widget. A discernable look of pain was evident across John’s face. He was expecting the worst – a re-negotiation downwards.

What he was in fact told was that he must double the price of the widget from immediate effect. John was naturally incredulous but from that point on the price of the widget doubled. Today, both are still in business and John’s company still supplies their widgets.

Now, why in this cut-throat world, did our guy make the decision he did? Was he mad? A poor businessman? Was he just a warm-hearted and altruistic guy? No, the truth is that he was a realist. When business owners make a 100 mile round trip each week just to collect a single cheque, they are struggling to make ends meet. No matter how they package it up, they are struggling. And if his company went under, what would happen? They would then be faced with a unit price of £8 for a component they are currently paying £1.80 for. Was this a risk he wanted to take? No – far better to settle for a price that is still £4.40 cheaper per unit than the market price. It was simply good business sense.

Can you imagine many business owners seeing the situation in those terms? Greed is a very powerful force – just look at our supermarkets for evidence of that. They squeeze and squeeze their suppliers, safe in the knowledge that if they buckle, there are plenty of other suppliers desperate for a slice of the cake.

I credit this post to the creative genius that narrated it to me. His name is Dave Savage and his business is Mako Creative. I would recommend him to anybody for graphic design services and just incredible creative inspiration.

 

 

2 Comments

  1. That Dave Savage – a real drama queen!

  2. Very amusing if it wasnt true!! I am not surprised as I have experienced many incidents where companies do not understand how to calculate a selling price that includes fixed costs, overhead costs and margin!!

    The action was also correct, working with the supplier is always the best option if a long and fruitful relationship is planned.

    john

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