Profit margins are not guarded secrets at Excel Business Systems. In fact, President Mike Warren is so confident he runs a lean operation that he freely shows not just his companys gross profit, but its net profit after operating and occupancy costs, to prospective clients.
He says its simply a better, more honest way to do business.
Its such a shell game how we price in this industry, says Warren, whose Grandview Heights-based company has been selling office furniture for five years. I didnt like all the deceitfulness and all the hidden agendas. People are spending hundreds of thousands of dollars and they dont know why. Its intentional that they dont know why ... I think the customer has a right to know those things. We have nothing to hide.
Maybe so, but will customers embrace or even understand this tell-all pricing strategy?
It would not influence me, says Bob Valentine, president of Design Collective Inc. in Columbus, who negotiates furniture deals for heavy-hitting corporate clients including Sterling Commerce and Cameron Mitchell Restaurants. But it probably would appeal to a first-time buyer. They might get the impression that theyre being more open on the cost of furniture.
It could get sticky if [customers] want to question different markups, Valentine cautions. Any time youre exposing the cost, I think its an advantage to the end user. I think youre making yourself kind of vulnerable.
Bucking the system
A desire to sleep better at night and enjoy his work during the day led Warren to explore open-book pricing for his business.
Furniture sales is just so adversarial, he says. At some point in the day, youre going to be fighting and arguing with somebody.
By breaking down his companys costs and desired profit margin, Warren found the pricing game became much less abstract and less confrontational. He could plainly show clients how much of an orders price went toward reimbursing Excel for purchasing products from the manufacturer, how much went toward Excels office and administrative expenses, how much went toward rent, utilities and insurance, and exactly how much fell to the bottom line.
We can figure up our cost, not to the penny, but to the dollar, Warren says. Our customers know we need to make a profit and were not embarrassed to show it to [them].
Excels pricing even takes into account the cost of collecting on an account thats more than 30 days old and specifically outlines the customers timetable for delivery and installation. Penalties can also be built into Excels part of the contract in case the project doesnt get finished on time, but Warren is quick to point out, Ive never had to pay one.
By having conversations about expectations, and how long it takes to pay, it makes the end of the project go smoother, Warren says. Besides, he adds, its fairer to get everything out in the open from the beginning.
Dan Crowley, division senior buyer for Time Warner Communications in Columbus, seems to agree.
Ive been in purchasing and buying for 12 years and working in inventory and Ive never, ever seen anything like that, Crowley says. I think its a great idea. When youre dealing with people, trust is a great part of doing business. When you know theyre disclosing that sort of information and laying it right on the table for you, it takes out part of the mystery of doing business with people.
Time Warner has been a customer of Excels for about a year, and in that time, has purchased a couple hundred thousand dollars worth of products from the company.
Its like buying a car, Crowley says. Do you really know if you got the best deal? This takes some of the guesswork out of it.
One of Excels competitors, Mike Gorman, president of Thomas W. Ruff & Co. in Grandview Heights, also compares Warrens lay-it-on-the-line pricing strategy to the car-buying experience but in a whole different way.
Do you believe $1 over invoice? Gorman asks. Do you believe $100 over invoice? You dont believe any of that stuff. I think its just a smoke-and-mirrors marketing and sales ploy. The marketplace dictates the price.
Customers dont need to make a decision based on what our markup is, what our efficiencies are. Its the product. Its the right stuff at the right price with the right processes around it. Free enterprise and competition bring the best value to the customer. I cant say it any better than that.
A harder sell
Warrens extremely detailed pricing approach has created at least one significant challenge for Excel. Its harder to work with office managers and junior purchasing executives wanting to gather price quotes for their bosses, who ultimately are going to make the buying decisions. Excels system simply is too different and sometimes confusing for lower-level executives to grasp.
We need to be in front of decision makers, people who are used to looking at profit/loss statements, Warren says.
He points to a recent bid request from Ricart Ford.
Theyve been talking to Thomas Ruff and Continental [Office Furniture] about this project for a while, Warren says. Now they have two bids from large dealerships and were going to upset the process because were going about it in a different way.
Even as an existing customer, Crowley sees the potential for initial apprehension by his higher-ups at Time Warner when trying to compare costs under Excels radically different system.
When I present it to my supervisors for approval along with other quotes, I think their eyes will open up a little wider and theyll say, What is this? Crowley says. Im sure it will take a little getting used to. I think its going to be a selling [job] on my part, too.
But in the long run, I think people will become more accustomed to having that relationship; people will be more accepting to it over time.
Warren began practicing his new pricing method on select Excel projects in August 1998, and only started using it on a more widespread basis in January.
I wasnt sure what the reaction was going to be, he says.
Warrens decision to try open-book pricing came easier once he spoke with other companies who have tried bucking traditional systems within their own industries. These trendsetters included Saturn Corp., the Spring Hill, Tenn.-based subsidiary of General Motors, and Gateway2000 Inc., the South Dakota-based computer retailer.
There were some parallels, Warren says. Theyre in huge industries that, after all these years, are changing how they distribute products. It gave us some confidence.
When Warren rolled out Excels line-by-line pricing structure, however, he quickly learned he couldnt convert everyone to the new system.
Not everybody wants to do it this way, he admits. Some people still want a bid. We have to do what the customer wants us to do ... but theyre crazy not to do it this way.
Gorman begs to differ.
Would I feel any better buying a copy machine from IKON if they told me, This is what I paid Toshiba for it and this is how much money I want to get from you for it? Gorman asks. Im still going to compare it to a Canon. A customer ought to question, Why do you need that much money? and Is this the right price from the manufacturer?
He could inflate any of those numbers as well, Valentine agrees.
All the same, Crowley remains fascinated by the whole concept.
I think its good for people to actually see all the components of whats involved in a business arriving at a price for an item: payroll, delivery, actual cost of the item, he says. Every step involved in getting the item to the customer, theres a cost involved in all of that. Its good when you can see the nuts and bolts of all of it. Its amazing to me hes going to take this step and disclose this.
Its obviously not the standard, adds Valentine.
So has exposing Excels financials been a good move for Warrens youthful furniture company? He says its still too early to tell.
Company revenues havent increased or decreased, for that matter due to the new system, he says, but hes getting more project work rather than single-item orders. That, he says, is a step in the right direction. In addition, Excel is on track to repeat last years $10 million performance, despite an office move that disrupted business. Its not about growing sales each year, he says. We wanted to make an impact.
Thats exactly what Valentine figures Excel is trying to do. Theyre fascinating to watch because theyre really trying to position themselves apart from other dealers, he says.
This move may accomplish that, since Gorman says Excels willingness to disclose profit margins and operating costs wont change the way Thomas W. Ruff & Co. does business.
Were not at all embarrassed by our efficiencies or by the prices we charge customers, Gorman says. I wish him a lot of luck ... but I just dont get it. I dont think its relevant to the customer.
Warren insists disclosure is, in fact, important to customers. And hes determined to make his new pricing system a success despite the initial obstacles.
Its hard to sell this way because its different, he says. You have a lot more explaining to do. People are resistant to change. But I know were trendsetters.
Nancy Byron (firstname.lastname@example.org) is editor of SBN Columbus.