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 company’s gross profit, but its net profit after operating and occupancy costs, to prospective clients.
He says it’s simply a better, more honest way to do business.
“It’s 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 didn’t like all the deceitfulness and all the hidden agendas. People are spending hundreds of thousands of dollars and they don’t know why. It’s intentional that they don’t 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 they’re being more open on the cost of furniture.
“It could get sticky if [customers] want to question different markups,” Valentine cautions. “Any time you’re exposing the cost, I think it’s an advantage to the end user. I think you’re 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, you’re going to be fighting and arguing with somebody.”
By breaking down his company’s 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 order’s price went toward reimbursing Excel for purchasing products from the manufacturer, how much went toward Excel’s 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 we’re not embarrassed to show it to [them].”
Excel’s pricing even takes into account the cost of collecting on an account that’s more than 30 days old and specifically outlines the customer’s timetable for delivery and installation. Penalties can also be built into Excel’s part of the contract in case the project doesn’t get finished on time, but Warren is quick to point out, “I’ve 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, it’s 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.
“I’ve been in purchasing and buying for 12 years and working in inventory and I’ve never, ever seen anything like that,” Crowley says. “I think it’s a great idea. When you’re dealing with people, trust is a great part of doing business. When you know they’re 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 Excel’s for about a year, and in that time, has purchased a couple hundred thousand dollars worth of products from the company.
“It’s 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 Excel’s competitors, Mike Gorman, president of Thomas W. Ruff & Co. in Grandview Heights, also compares Warren’s 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 don’t believe any of that stuff. I think it’s just a smoke-and-mirrors marketing and sales ploy. The marketplace dictates the price.
“Customers don’t need to make a decision based on what our markup is, what our efficiencies are. It’s the product. It’s 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 can’t say it any better than that.”
A harder sell
Warren’s extremely detailed pricing approach has created at least one significant challenge for Excel. It’s 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. Excel’s 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.
“They’ve 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 we’re going to upset the process because we’re 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 Excel’s 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 they’ll say, ‘What is this?’” Crowley says. “I’m sure it will take a little getting used to. I think it’s 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 wasn’t sure what the reaction was going to be,” he says.
Warren’s 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. “They’re in huge industries that, after all these years, are changing how they distribute products. It gave us some confidence.”
When Warren rolled out Excel’s line-by-line pricing structure, however, he quickly learned he couldn’t 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 they’re 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. “I’m 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 it’s good for people to actually see all the components of what’s 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, there’s a cost involved in all of that. It’s good when you can see the nuts and bolts of all of it. It’s amazing to me he’s going to take this step and disclose this.”
“It’s obviously not the standard,” adds Valentine.
Still waiting
So has exposing Excel’s financials been a good move for Warren’s youthful furniture company? He says it’s still too early to tell.
Company revenues haven’t increased — or decreased, for that matter — due to the new system, he says, but he’s 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 year’s $10 million performance, despite an office move that disrupted business. “It’s not about growing sales each year,” he says. “We wanted to make an impact.”
That’s exactly what Valentine figures Excel is trying to do. “They’re fascinating to watch because they’re really trying to position themselves apart from other dealers,” he says.
This move may accomplish that, since Gorman says Excel’s willingness to disclose profit margins and operating costs won’t change the way Thomas W. Ruff & Co. does business.
“We’re 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 don’t get it. I don’t think it’s relevant to the customer.”
Warren insists disclosure is, in fact, important to customers. And he’s determined to make his new pricing system a success — despite the initial obstacles.
“It’s hard to sell this way because it’s different,” he says. “You have a lot more explaining to do. People are resistant to change. But I know we’re trendsetters.”
Nancy Byron ([email protected]) is editor of SBN Columbus.