The Cost to Quality Fallacy

[rockstar.esq]

The other day I was reading a forum on estimating where the majority of the posts repeated some fundamentally flawed concepts.  The most common are variations of "Low price means bad quality".  This concept gets applied to everything from material substitutions to subcontractor selection because everyone's worried about the risk of making the wrong choice.

Photo by Geir Tonnessen

A lot of time is spent on minor differences that obscure bigger problems

When all choices are based on risk-aversion, there's little reason to believe the outcomes will deliver quality, value, strategy or ingenuity.  I think this concept leads to a mindset that perceives any low bid as a veritable trap to the unwary.   If unchecked, the role of an estimator can devolve into little more than subcontractor selection.  On the surface, it may seem like the General Contractor (GC) does little more than hire subcontractors (subs) to actually perform the work.  If this were actually the case, clients would simply hire subs directly and dispense with the cost of hiring a GC altogether.

The GC's role is to be responsible for the entire project which constitutes a great deal of risk.  GC's mitigate some of the risk by dividing the project scope among subcontractors.  The remainder of the risk is mitigated by expert leadership, communication, negotiation, scheduling, accounting, and management which all fall under the heading of "Construction Management".  All of which is to say that successful Construction Management is a whole lot more than just picking the right subs.

The fixation on avoiding low-priced work for fear it's a trap is deeply ingrained in many construction professionals.   We often hear stories about how a sub bid low to secure the job, then pursued exorbitant change orders to restore their profitability.  The implication is that a sub was able to not only bluff their way into a contract award, but they were able to get paid change order rates for work that should have been in their original bid.

When we ask how it's possible that a GC would write a subcontract that didn't include the necessary scope of work for that sub, it becomes obvious that the GC relies on their bidders to define the project scope for them.  Put simply, if the GC isn't actually estimating the project, they're not able to tell whether the subs proposals include all that they should.

One obvious sign that this is happening is when a GC estimator demands breakout prices of their bidders so they might "prove" whether the sub knows what they're doing.  These demands are like asking the sub to furnish the ammunition so their own proposal can be shot down.

Lets imagine we were in a restaurant looking over the menu.  If an item seems under priced, we wouldn't demand a cost breakdown for all the ingredients of the dish because we have no idea what those breakdowns should be.

Photo by Moyan Brenn

Demanding breakouts to save money, is like collecting watches to save time.

What we do know is what we're hoping to get.  That's why asking about the portion sizes, or the freshness of the ingredients will go much further towards making an informed decision.

GC estimator's should know the project scope they're seeking to subcontract before the bid.  Moreover, GC estimator's should know the going rate for the work they're intending to subcontract so they have a frame of reference to compare the bids against.  There's no guarantee that they will receive enough bids to draw statistical certainty of anything on bid day.  Bluffing and bullying are poor substitutes for estimating fundamentals.

The importance of context

Bid day can be very stressful, with little time available to give full consideration to every proposal.  It naturally follows that the estimator must prioritize on those proposals which have the potential to reduce their risk, or increase their odds of winning the contract.

Most GC's consider proposals from trusted subs to be reduced risk.  In some cases, the GC's limit their bid lists to only trusted subs which naturally reduces competition.  These GC's are trading their ability to win contracts, for reduced risk in hiring subs.

The most expensive, and least valuable work occurs wherever competition is discouraged or prevented.   GC estimator's with bid lists that never change may go their entire career without ever seeing a market-leading subs proposal.  It's therefore natural that those few who receive a market-leading sub proposal immediately say it's scary low.

Is it them, or is it me?

Mistakes happen and it's incumbent on the GC estimator to watch for signs that something's amiss with a bid.  Once again, best practices in estimating are the ideal means to determine what you're looking at.  GC estimators should build their estimates so that they can quickly output a checklist of inclusions, alternates, unit prices, etc. to send to a sub for scope review.  If everything checks out but the price is still worryingly low, the GC estimator can share their in-house pricing to see how their estimate compares to the bidder's.  This alleviates any ethical issues pertaining to comparisons against their competition.  By volunteering the GC estimators understanding of the costs, the sub can show the GC where their estimate differed and why, without feeling as though they will be disqualified.  Presenting a  focus  on retaining a winning edge with a valued colleague is more likely to deliver good information.  .

But what about overpriced change orders?

There is hardly a more contentious issue in construction than the high price of change orders.  While there are a great many factors involved, the cost to quality fallacy plays a huge role in the animosity surrounding them.  Earlier I wrote that the most expensive and least valuable work occurs wherever competition is discouraged or prevented.  Obviously when applied to a project that's under contract, there's no competition to keep the price of additional work down.  We might take that to mean that the contractor is overcharging, and in some cases, they are.

We must consider the root of the additional work as well.  Changes to the project scope often come from the design team after the bid.  The terms of contract award are set out in the Request For Proposal (RFP) at the announcement of the bid.  The bidders are expected to include all scope defined in the Construction Documents (CD's) at the time of the bid deadline.  Design teams can, and do, make significant changes to the CD's via Addendum, RFI, or Bid directives before the deadline so those items will be competitively priced.  Anything that's omitted in the design after the deadline, is a liability for the client.

In most cases anything that's changed or added after the project has started must be accomplished in the remaining time of the original contract.  Changes that require completed work to be removed and replaced may result in a situation where production rates must be doubled, tripled, or quadrupled in order to maintain the completion schedule.  Materials and equipment may require expedited shipping to facilitate the changes within compressed schedules.

Experienced contractors know that pricing requests for change orders often lead to protracted delays while the Owner, Architect, and Contractor (OAC) discuss options, bicker over prices, etc.  I've encountered situations where 8 hours worth of change order work became 80+ hours of pricing exercises.  Meanwhile the window of opportunity to efficiently perform the change order work was closing fast.

Photo by simczuk

Artistic rendering of a project with a change order dispute

When a contractor loses a bid, they're free to pursue other opportunities with no further obligation to the client.  Change order price disputes can become a significant burden for contractors who are unable to efficiently proceed without a decision.

The fixation on the cost to quality fallacy leads many clients and design professionals to overlook the root causes of their situation.   Clients who commit to timely decision-making will reduce the contractors risk.  If the change order is too expensive, clients can request a Value Engineering (VE) solution that meets their budget for the necessary work.

Clients should expect timely and accurate estimates for changes from their owner's rep to provide meaningful comparison to the contractors prices.  It's not enough to merely complain about overpriced change orders.  Owner's representatives should provide a means-tested estimate of the additional scope of work, in order to protect their clients interests.   Sharing this information with the contractors gives them a better understanding of the client's position, and it provides the target price for change order approval.

The highest art in being the lowest bidder

While we're on the topic of fallacies relating cost to value, it's absolutely vital to get some clarity on our purpose as estimators.  Estimators exist to secure profitable work.  We achieve this aim by controlling risk in all its forms.  Pretending that absolutely every estimating risk is a function of forgetting to add something, or hiring the wrong sub is not only wrong, it's antithetical to our profession.

There are dire consequences for any company that can't land a contract for profitable work.  The purpose of estimating is not to obviate the need for construction management.  Again, if this were truly possible,  clients wouldn't hire GC's at all.

It's therefore a delicate balancing-act to deliver a market-leading price for work the firm can profitably complete.  The necessary skills, knowledge, relationships, resources, and fortitude to be the lowest bidder can hardly be overstated.   As an industry, we need to move past this fallacy as it reflects poorly on all of us.  As estimators our entire profession exists to harness the competitive market to deliver quality construction projects.

The best deal

Often the best deal has an inverse relationship between cost and quality.  The best deal (for the buyer) is achieved wherever we can get the highest quality at the lowest price.  To the buyer, the value of the money spent, is less than the value of the quality achieved.  They are getting more  value for their money.

I've heard a lot of GC estimators making excuses for losing a bid.  One of the most common is to claim they are "best value" because they're delivering a higher level of quality or performance than their competitors.

It's entirely possible that one contractor may in fact deliver a more professional project because they  are operating at a higher level than another.  This is especially common in "cattle call" or "open" RFPs which accepts bids from any GC willing to submit a proposal on the job.

The extent to which this happens is directly proportional to how selective the individual GC's are about the jobs they pursue.  A continuously successful business requires a balance where both sides are getting a good deal.

Contractors that are optimized to perform a specific type of work will find they are market leaders capable of offering higher quality, at higher profitability,  and lower prices than their less-optimal competition.  Aligning the company to the right opportunities is the most important part of winning profitable work.

The high price of a bad deal

Bottom of the market work is always plentiful.  Experienced estimators will see that underfunded clients and unprofessional design teams are constant companions.  Higher risk, lower profitability, and more competition all align to make these jobs a bad deal for the majority of contractors.

There are jobs that are a bad deal at virtually any price because the risks to the contractor are so severe.  Incomplete plans, indecisive clients, difficult phasing requirements,  site logistics, etc. can all hurt productivity.  In some extreme cases, the GC can be penalized for delays they had no way to work around.   When the project presents a bad deal, the cost isn't driven by the required quality, it's driven by the risk.

There are incompetent design teams with specifications explicitly written to defend against change orders from their shoddy plans.  These firms find regular employment with the clients most likely to demand a bad deal of their contractors.  The focus on blocking change orders becomes a higher priority  than accurately contracting the complete scope of work.  If greater effort was applied to the latter, the former wouldn't be an issue.  Lax professional standards generate systemic risk and higher costs for everyone involved.

Attempting to gauge quality by its cost alone will do nothing to reveal the features that matter most.  The cost to quality fallacy has no place in the estimators playbook because it's only useful for making excuses.

 

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© Anton Takken 2016 all rights reserved

 

 

[Jackdawg]

 

The Quality you get, is the quality you accept. The Quality you accept becomes the new standard for the next project.

 

[Frosty]

The second sentence in your latest post sums up one of my pricing strategies beautifully. Low price = low quality = low value. The world if full of people who know the price of everything but the value of nothing. It's not hard to use this perceived value system in your favor.

If your product isn't moving at a demo, bazaar, home show, or whatever, double your prices when nobody is looking. Seriously. Folk walking by browsing will see a wall hook you've priced at $10.00 ($ picked for discussion's sake.) Well, Mr. and Mrs. prospective commissioner give each other the look that says. 'Nice but we can get one like it at Pier 1 for $7.50', and move on.

No, you are NOT going to "educate the public" about why YOU'RE labor is worth 25% more than someone in the 3rd. world. And NO the public can't be educated into thinking your labor is worth more because you refuse to use efficient production methods. (read "traditional")

I've told this little story before but here it is again. In '95 I was sharing booth space putting on the blacksmith demo at the AK state fair. My main demo project if someone didn't ask e to make them something is the oh so common leaf coat hook. When I was in condition I could make one from putting the 3/8" sq stock in the fire to finish brushing and waxing in about 7 minutes WHILE maintaining a patter, answering questions, showing tools, etc. I'm a natural talker and it helps. The coat hooks had a veined leaf finial against the wall, twisted shaft, long tapered hook with a finial scroll straight or reverse and 2 punched counter sunk screw holes.

7 minutes +/-  about1 min. I was pricing them at $9.95 ea. and a set of four $34.95. If I sold a couple a day I was surprised but I was there for fun and got to take breaks. Well, the . . . . person who I'll not name I was renting shop space from and sharing the booth with kept telling me I was asking way too much they weren't worth more than $4.50. He was trying unsuccessfully to sell great big knives for a whole bunch.

I got tired of hearing it and while they were getting something to eat I flipped over the price card I had on my little steel table and changed them to $19.95 ea. and a set of four $74.95. When they got back all the hooks I'd made in the last couple days were gone and there were a couple people standing there waiting for me to finish their hooks.Most people wanted at least 2 and several a day bought sets.

Darned fun had turned into a full time job! Then again I was knocking down almost $2.75 per minute but it was exhausting.

You can use the perception that price = value to your advantage IF you have the quality to back it up. A large part of niche markets like blacksmith products is bragging rights. Folk who want to talk about how cheap their home furnishings are don't buy hand made, shop  2nd hand, garage sales and such.

Folk who buy in niche markets are looking for things they can show off and brag about, cater to these folk, they have the money to spend. It isn't about educating THEM it's about educating YOURSELF about what sells and why.

Frosty The Lucky.

[notownkid]

The quality  you wish vs the quality you can afford = the quality you get. 

[rockstar.esq]

23 hours ago, Jackdawg said:

 

The Quality you get, is the quality you accept. The Quality you accept becomes the new standard for the next project.

 

Jackdawg, that's a very concise explanation.  Knowing what standard to uphold is essential to knowing what you're looking at.

 

Frosty,  I can appreciate how you've capitalized on the cost to quality fallacy.  The quality of your work didn't change with the price.  The cost of the production didn't change either because it didn't take you any longer or consume any extra material when you raised the price.  This illustrates a very significant part of where people go wrong as buyers.  They don't question "the going rate" when it's high because they assume it's higher quality.  Yet they'll spend tons of time thrashing over minor differences when something is cheap. 

My point is that cost doesn't cause quality.  Cost barely correlates to quality most of the time.  In my considered opinion, there are more examples of high cost correlating to low quality than the other way around.  We have all kinds of terms to describe how that happens; fads, politics, insurance, marketing, faith, etc.  In every case, it's critical to obscure any tangible measures of quality so you're only able to consider the price against an idea or an emotion. 

As a businessperson, I think you've got a couple of choices on how to proceed.  You can master the illusion per Frosty's example.  There's lots to recommend this approach when it's working.  The problem is that it's awfully hard to make it work when money is tight, or when your competition's pitch has the bigger audience.  There's not a lot of incentive for such a business to improve their operation or their product. 

Your other choice is to deliver the same quality at a lower price.  This works whether you're in a recession or in a boom.  Unfortunately, it has the tendency to minimize your profitability because it takes typically requires significant investments to make inexpensive things of quality.

 

 

 

[Frosty]

Hey, I'll have you know I'm a proud purveyor of ONLY the highest quality braggin rights available anywhere!

Just ask me.

Frosty The Lucky.

[rockstar.esq]

That many buyers can't be wrong!

[Frosty]

So long as their money is good.

Frosty The Lucky.

[Jackdawg]

On 10/13/2016 at 9:09 PM, Frosty said:

Hey, I'll have you know I'm a proud purveyor of ONLY the highest quality braggin rights available anywhere!

Just ask me.

Frosty The Lucky.

We have a saying in Australia for a certain type of tedious gentlemen that you find everywhere.

we call them FIGJAM's

stands for XXXXXXX   I'm Good, Just Ask Me

 

 

[Charles R. Stevens]

Love those who think their ton of horse manure is worth more than my ton of horse feed, just because their horse "processed" it. 

[Frank Turley]

Charles, A little off topic. Jim Keith of Tucumcari, said this, "Extrusion; how a horse processes grain."

[Marc1]

The first long post in relation to cost in the building industry or manufacturing environment has little relevance to a boutique operation like a blacksmiths shop is today.  When the price in any transaction is ruled by offer and demand (among other things), the offer and demand in a large competitive market is more obvious and well known, then it can possibly be for one off hand made goods in a weekend market.  

In Forsty's post, this becomes clear. The price was not set right, not at the intersection of offer and demand. The market at that point in time was prepared to pay a premium for this particular product. There is no point in judging the buyer because he is associating right or wrongly high price with high quality. Only accept it as fact and experience will tell the top possible price that can be asked for a hook in that environment.  

A much more interesting topic would be to talk about how different people work out their cost, and decide if they have made a profit or a loss.

The perception of value is inextricable from it's price. Talk to a doctor that works in two surgeries, one where he does not charge and another where he charges $100 per consultation. The value his patients give to the medical advise dispensed will be completely different. 

 

[rockstar.esq]

Marc1

I'm not sure I understand what you mean by "offer and demand".  I suspect you are referring to economic laws of supply and demand. 

Less supply to meet the demand increases prices, conversely, a surplus of supply against a reduced demand decreases prices.

If we look at Frosty's example, the supply didn't change during the day.  He was always the only supplier in that micro-market which means his price is always the going rate. He didn't start selling more of them until he raised the price.  If people didn't buy into the cost-to-quality fallacy, the sales patterns would be reversed.

My entire post is about how people incorrectly use cost as an indicator of quality to asses value.  I disagree that the perception of value is inextricable from it's price.  People value things like emotions, memories, faith, friendship, and loyalty in ways that have nothing to do with price. I believe that's what you were getting at with the Doctor example. 

For example, if a person is paying more than a given thing is objectively worth for an emotional reason, it's not honest to define the quality in terms of it's price.  People follow other peoples examples, and this is one of the most durable business fallacies I see. 

It leads people to irrationally discard the best value, which undermines the market forces that would maintain pressure on companies to deliver better value than their competitors. 

You mentioned how it

On 10/26/2016 at 11:52 PM, Marc1 said:

A much more interesting topic would be to talk about how different people work out their cost, and decide if they have made a profit or a loss.

 

Several of my blog's posts are copied into this section of IFI, I've written at length about everything you mentioned.  It's been my experience that estimating principles apply to all business.

I decided to start blogging after I was able to help a software development firm that was struggling to meet its deadlines.  I came to realize that estimating is among the least understood skill sets in business today.  It's much more than counting beans, or collecting bids. Most of the business people I meet are unable to accurately define what they're good at in terms of profitability, or comparative value to their customer.

That's not intended as an insult to them, it's simply that very few people are willing to learn what measures matter, before deciding how they stack up. 

[Marc1]

I agree, yet the purpose of the seller is to achieve the best possible price at that point in time without affecting the demand. Too low or too high a price, the demand will be compromised. Reach the optimum price and the demand will be maximised at the highest possible price. That is a change in the offer or if you prefer, the supply.

However when the supplier is a person and that person is not just a merchant but an artist or an artisan, he will be handicapped by a long string of bias and preconceived notions of what is "right" and what is "wrong" and this will most likely influence his choice of price, and sabotage the outcome.

The buyer's bias that cheap is bad and expensive is good is part of the market idiosyncrasy and should be noted every time rather then interpreted as buyer's stupidity. It's a fact of life, the result of a culture, mass media advertising and a lot of other factors that work in the seller's favour. No one should feel he is cheating the buyer, rather understand that the buyer appreciates what he is receiving and pays what he believes to be good value. That is all it matters.

My comment about cost, again in the context of this forum that seems to be mainly about individual artisan workshops, is important because many time someone may feel bad about charging $20 or $200 for a lump of steel forged for a few minutes or perhaps an hour. The cost of the bit of steel, the coal used and the time is only one aspect of the true cost of the item. What is the cost of a painting worth $1000,000? $500,000? Hardly, only a few dollars of canvas and a bit of paint. The price is the result of the unique talent that is required to produce the painting or the forged item in question or a particularly clever software, and that can not be measured easily but the creator should always be willing to get paid what people are prepared to pay without feeling guilty about it.

[gote]

My cousin who was a jeweller told me that there is an optimum price for costume jewellery. His cost was unimportant. the design was fairly unmportant. The price was the deciding factor. If he priced above the optimum he sold less if he priced below he also sold less. This is Frosty's experience in a different branch.

My experience on largish jobs is that it is important to tell the customer WHY you are ceaper or more expensive. There should be a reason why you are in the business at all. More experience, patents, low overheads, own production facilities... you name it. If you have no edge over the competition, perhaps you should not be in this kind of business at all.

 

My mother who was an artist painted very rapidly. Her answer to people who asked her how long time a painting had taken was on the lines: Well I started at sixteen and now I am sixtysix so it has taken me half a century to get where I am.

[Marc1]

Yes and yes. Yes to the builder/machinist/manufacturer/tradesman who explains and itemises his quote in the hope of getting the job.

Absolutely yes to the artist who understands that his speed in producing good quality work is the result of a lifetime of trial and error, failure, dismay and starting again and again.

Charge like a roaring bull every time you get the chance and don't let the "money is dirty" anti-value creep in your mind.

[John McPherson]

Not to totally derail the topic, but to lend a little perspective: Real Estate values and tool values.

Real Estate (the land and improvements upon it) can be valued in different ways for different purposes. Real estate agents deal in current market value: what will it sell for today? Do the the improvements help or hinder a sale? Do they need a coat of paint, a total makeover, structural repairs, or a bulldozer? What is the neighborhood like: gentrifying or ghettoizing? Current lending climate, school situation, employment outlook, etc.? Your insurance company wants to know a reproduction cost: what would it cost to build it back, minus depreciation. The highway right-of-way agent wants to know replacement cost: what it will take to set you up in a house of similar utility when this one is taken by the state for the by-pass.

To all of the above, it is just business. To you, it is home. You have built it, modified it to suit, raised your kids there and planned to be carried out feet first. You have an emotional attachment, which is worth $-0- to those folks.

Tools, on the other hand, are transient. They come and go, bought and sold, stolen and traded, worn out and junked. it may take you years to get the perfect shop set up, only to lose it all to a twist of fate. We are living in the wreckage of an industrial age, where used anvils and leg vises are going for a mere fraction of what a new replacement would be. Still, we quibble about how we could have gotten it cheaper last year, before all the newbs and flippers ruined it for us.

[notownkid]

4 hours ago, John McPherson said:

Real Estate (the land and improvements upon it) can be valued in different ways for different purposes.

We are selling a small CT farm and the appraiser from the bank is  telling us and the buyer that a 30'x36' 2 story horse barn in nice shape is worth the same a 3 - 8'x16' sheds at Home Depot ($9,000)  and 18 acres of land has little value.    One has to wonder where these folks get their credentials.  He spent a total of 14 min. (telling our realtor he hates doing anything outside the city) looking over the farm never looked at the land. 

I know this isn't Blacksmith value of work but it is a mind set today. 

 

[JHCC]

Following the conversation down the appraisal rabbit hole, I have to deal with questions of value all the time, in my professional work as a fundraiser: the question of determining the monetary value of a gift-in-kind (that is, a gift of some thing, such as real estate, artwork, musical instruments, etc, as opposed to a gift of money) comes up all the time, especially when the IRS gets involved.

notownkid asks:

12 minutes ago, notownkid said:

One has to wonder where these folks get their credentials.

In the case of one (really, really valuable) instrument donation I worked on, the appraiser spent a good chunk of the written appraisal detailing his qualifications: X number of years in the business, Y number of years as a member and/or officer of various appraisal societies, which firms he had worked for, what other appraisals he'd done, etc. The appraisal itself was a pretty detailed description not only of the instrument itself, but of recent sales of other instruments by the same maker, the current state of the fine instrument market, the current state of the market for cellos specifically (this was for a cello), and so on. The combination of all this information was basically to say, "This is what I think the instrument is worth, this is why I think that, this is why my opinion should be taken seriously." All in all, a pretty impressive document.

[rockstar.esq]

Marc,

I think you perceive the difficulties of the "artisan" shop to be unique, which leads you to believe it's irrelevant that people assume cost causes quality.

Arguing over the quality of materials in a work of art intentionally overlooks that which drives it's true value.

There are only a few ways to consistently outsell your competition;

Monopoly, Lower Price/ higher quality , Better timing, or a Better story.

Being an artist virtually assures a monopoly in your market.  Being a good artist that nobody's heard of is sadly, a common fate.

Lower prices take a lot of hard work.  Finding cheaper or better materials, making better production, tooling up, better planning, all of that is difficult work that won't be at all possible if a businessperson isn't willing to divorce their thinking from cost-to-quality fallacies. 

Hard work, skill, and talent are admirable qualities that won't make a bit of difference without timing and opportunity.  Here again, if a businessperson can't objectively define both the quality and the cost of their market's buyers, they will fall short of your potential.

It's been my experience that informed buyers are repeat customers.  Every business I've ever worked for paid their bills on the revenue of repeat customers.  Without a reliable income, it's difficult to plan ahead, or even tread water.  Feast and famine revenue can leave a business destitute even if the total income would seem like it's enough.  The rush of income goes to paying down the debt of slow times.

The real-estate examples are great illustrations of how much work goes into separating what qualities are worth paying for.  Realtors would have us believe that short-term sales trends are the most significant variable.   Compare that to Insurance companies who would focus on replacement costs and likelihood of claims.

If homes traded on replacement cost, it would be much harder to create real estate bubbles.  Simple solutions are often ignored when they provide insufficient opportunities for graft. 

The reason it's a fallacy, is because it's something that seems true when it's really false.  There are lots of examples of marketing campaigns that collapsed when their customers felt betrayed.  How many people feel like homes are fairly priced right now?

Being the best value to your customers is a solid strategy that works in all markets.  It's harder for competitors to poach your business, and it builds loyalty with customers that outlives marketing hype.

 

 

[Marc1]

I agree with everything you say, yet the only reason I replied is because you called the relationship between price and quality a fallacy.

All you say about business strategy are obvious truth and not in dispute.

Dealing with the perception of value (not cost) is what I think is missing.

What is the value of a red car?

Beside the known fact that red cars go faster , red paint or blue, green or yellow make no difference to the quality of a car. 

It is the perception that a red car is ... nicer/more visible/goes faster/you name it ...  that makes it more valuable in the buyer's eyes, and that given some circumstances someone may pay more for a red car than for a white one.

We can come up with many examples of perceived value from the buyer's point of view that govern a particular market. When you are talking about a workshop that produces goods that are clearly non essential, the seller has to know in detail what drives the buyer and must include this that you call a fallacy and that I call perceived value in great detail to place the price at the right level.

Fallacy has a negative connotation, implies ignorance, stupidity or something on those lines, and that is the wrong approach when dealing with closing a deal or many deals.

People in advertising know a great lot about this and exploit it to the max. Correct pricing of one's own work is probably the most difficult task that the artisan can face, for many reasons, one being the misguided idea that making a lot of money is somehow wrong.

It is entirely different if a shop is offering gates at $110 to compete with shop2 that has gates at $115. If a market has a large number of suppliers and there is a consensus of what sells at what price, then all your business strategies and considerations come into play.

I like the post above describing the arduous job of a valuer, that takes time not only to do his valuation but to explain why his opinion must be ... valued.

The customer is the ultimate valuer, and when closing  a deal. the only valuer that matters. He/she decides if the objet is value for money in his own opinion. To understand the process the buyer goes through to make this determination is very important and makes or breaks a business.

How many restaurants have to close their doors because the chef thinks he has to "educate" the patrons?

[rockstar.esq]

Marc,

A fallacy is a mistaken belief based on an unsound argument. Cost does not cause or reduce quality.  Yet how often do we hear; "You get what you pay for"? 

Frosty's example perfectly illustrates how the crowds perception of value was influenced by nothing other than the increased cost.

Your observation about the implications of calling it a fallacy is fair.  People do illogical things for a variety of reasons.  That includes sole-proprietors feeling guilty about asking a profitable sum for their work.

In 2016 just about everyone has competition in their market.  It's never been easier for a client to find a second opinion on what the going rate should be.

I cringe at the term "artisan" because it's often applied to arcane skills that are currently trendy to justify inflated prices on whatever non-essential items they produce.

I know people who happily pay twice as much for "artisinal" cheese.  While I doubt they've ever met a person working the curds and whey at the cheese works. Those same people think an Electrician's time diagnosing their problem should be free. 

People are remarkably capable of understanding the qualities that make something valuable.  I've  explained to such clients that it takes many years to become a skilled tradesman and we pay commensurate to their abilities.  Less skilled tradesman take longer to diagnose problems, and tend to be less successful at resolving them completely.

It's easier to disprove a competitors balderdash by being honest about what goes into your work.  Your chef example is a very astute point.  Professionalism involves a fair amount of performance in one way or another. 

 

[Marc1]

Yes, some words vary slightly in their meaning from one country to the next, but I think that for practical purposes, a discussion that involves price setting and understanding your customers can be very useful.

I don't presume to be an expert even when I have about 40 years of business experience as a fabricator, service provider and manufacturer in different stages of my life. However all that would be zip, without the opportunity I had to listen to business people vent their different points of view in a personal development course we run for some 10 years. It was an eye opener and I would have done it for free if need be, since I took home way more than I could possible give.

I found among other things that the business that did best were those who tried to understand their customers without any value judgement, no contempt towards the "stupid" one, no fear about the powerful ones.

Small business is a fascinating journey and should be a source of personal enrichment and not only a job. From the little I have read on this pages, it is abundantly clear that the vast majority seems to enjoy what they do. 

Hooroo

Marc

 

[rockstar.esq]

Marc,

I see where you're coming from and I certainly appreciate how your experience shaped your perspective.

I'm not suggesting that anyone should look down on a client who's operating under false assumptions.  It's going to be a rare situation where the client knows more about the intricacies of making something than the firm making it.  That obvious knowledge gap is why sales pitches exist in the first place.  There's nothing disrespectful or prejudiced about providing a potential client with your best insights on the matter.  You are absolutely correct that listening to, and understanding where your client is coming from is vital to success.

I believe that honesty is the best policy because it's basis of a trusting relationship.  Call it whatever you want, but playing on a customers misconception, misunderstanding, or fallacious conclusion is dishonest.  Acting dishonestly has always been profitable for some at the cost of many.

My business classes on "soft skills" focused on studiously avoiding anything like a consistent approach.  The fear of being seen as judgmental was considered a greater threat than acting without good judgment.  In my work, I see people studiously avoiding anything that would provide accountability and transparency.  These same people go on and on about the importance of "relationships".  Well over 90% of my business's revenue comes from repeat customers.  Many of those customers initially struggled to believe that a higher quality option could cost less.  I'm not a salesman so I don't have a practiced pitch to nudge a client's decision.  What I do have, it the ability to provide a client with measureable qualities so they can make an informed comparison.  Often, that will require that I address a misconception or two.  The cost to quality fallacy being the most common.  Rewarding the clients intelligence with honest information has consistently worked for me.

[Marc1]

There is a chap that emails me from time to time, I believe based in Singapore that is a consultant for customer service mainly larger firms. Has a website aptly named "upyourservice.com" His stories and advise are always interesting and remind anyone reading it what not to do as well as what to do. 

He also does well for himself. It is a fascinating market and a neglected one where many think they know better at their own peril. 

It was nice having this exchange and we must do it again sometime ...