business dilemma

[belgian]

Hi folks, I would like your comments on a business situation described below... I realize every business is different and there are a lot of strategy guru’s out there, but the opinion of a self made tree climber or landscaper with good common sense is maybe more of value to me. The situation described is a real one, based upon a friend’s experience (no tree servicing cy). So here goes.

Suppose you’re a leading tree care service in your region, and your customer base comprises 3 big customers (A, B & C), representing 70% of your business ($), a few middle size customers representing 20 % of your business and a number of small ones counting for 10 %. Your company is doing well, especially with the 3 biggest customers, and you have invested quite some money in equipment (loans) and labour to serve them.

Customer A is your biggest customer (30%), customer B (20%) and C counts for 20% also.
You have provided excellent service for customer A during many years, and pricing, margins are to be considered as satisfactory.

Now customer A acquires the business of customer B, and hence becomes all of the sudden 50 % of your business. Customer A appoints immediately a new hot shot general manager, eager to create a high ROI and tells you that prices are way too high and immediately request a significant discount on your services (to a point where you are left with little margin). If you don’t comply with their request, they threaten with creating their own tree service crew, who might also focus on other customers of yours.

My questions :

How would you react ?
What would be your short term and medium term strategy ?

Please fire away. We all might learn from this one, hehe ..;

 

[Husky137]

My initial reaction would be to call his bluff and diversify my customer base in case that doesn't work. If the "hotshot" is truly interested in ROI then starting an in-house tree service is the wrong step and he's doomed. Don't most profitable companies "outsource" to increase profits? It certainly doesn't make sense to lower my prices to no profit simply so the majority of my work can be done to pay for equipment and increase his profits. It should certainly be a wake-up call that the present business strategy is a poor one. Never a good idea to put all your eggs in one basket and an especially poor idea to buy a specialized basket for that one client. I don't envy the hypothetical decision that needs to be made.

 

[belgian]

My initial reaction would be to call his bluff and diversify my customer base in case that doesn't work. If the "hotshot" is truly interested in ROI then starting an in-house tree service is the wrong step and he's doomed. Don't most profitable companies "outsource" to increase profits? It certainly doesn't make sense to lower my prices to no profit simply so the majority of my work can be done to pay for equipment and increase his profits. It should certainly be a wake-up call that the present business strategy is a poor one. Never a good idea to put all your eggs in one basket and an especially poor idea to buy a specialized basket for that one client. I don't envy the hypothetical decision that needs to be made.

I hear you say that it's the tree cy's fault to be in the situation they are in right now..., but :

- customer A acquiring cy B is an event out of their control, and very unfortunate because they suddenly represent 50% now of their business. It may be very risky to take an attitude towards customer A and gambling with the volume, taking into account that you have bills to pay;

- I agree with you that diversifying or broadening the customer base is certainly needed (medium term solution), but that takes time and effort and does not represent a solution for the imminent problem...

- outsourcing is indeed very sexy for non-core business activities, but cy A is determined to grow in the future. An own tree service crew might fit into that strategy, so there's always a risk...

opcorn: opcorn:

 

[splittah]

It would seem to me that if this is indeed the case he in effect has issued you an ultimatum.

If that is the case you will need to come around at least to some degree as he will save face even if he scores only a small concession on your part.

Say he wants a 20 or worse yet a 25% reduction in prices, reduce a small percentage, say 10% with the amounts charged to be revisited in a year. That gives him bragging rights and gives you a year to build more diversified customer base which you should have been doing anyways due to the 3 large holders of your business future and in a year you get that 10% back with 5% on top and put yourself in the drivers seat. If he lets you go (which I seriously doubt he will because it would then make him look like a fool for not doing it a year earlier) at leats by then you have hopefully through effective marketing built your business with multiple clients.

Yeah you only make a 5% increase in 2 years but you potentially save a large client. And at such a large client 5% increase is probably good cash anyways.

Just my 2 cents

 

[treeman82]

I'd go talk with the boss, not the little peon. If the boss(es) were throwing so much work the way of the tree co before the buy-out.. then obviously everyone knows eachother. The little schmuck who wants to save money doesn't know anybody... and I'd go have it out with the boss (prior contacts) if I was in that position.

 

[af7850]

Can you tell me a little more about the situation?

I'd like to know:

1. Customer A, B, C, are in what industry? (landscaping, prop management, etc)
2. How long have A, B, and C been customers?
3. How would you rate the current pricing structure offered to Company A (high retail, discount retail, wholesale, etc)?
4. How much margin exists within the current pricing structure?
5. What are the three greatest expenses associated with the servicing of Customer A's account?
6. Are each of these expenses scalable (directly related to servicing Customer A) or global (exist regardless of having Customer A's business)?
7. MOST IMPORTANT: Does Customer A know that they account for 50% of the company's business?

Overall, if you're saying that the discount requested would virtually eliminate profit margin, then I'd assume that the current total profit margin is between 25-30%. Of course pricing is market-specific, but in my market that would already represent discount pricing.

Please reply with this info, and anything else you think could help. I'm certain that we, as a group, can help you find a beneficial solution.

 

[belgian]

this is a public forum, so I will try to provide you with the necessare info, but real figures are a bit sensitive. Please treat my dilemma as a business excercise. The tree service cy was chosen as example to make it easier for you guys, but it's not quite comparable. My intention was mainly to assess the commercial options.

Can you tell me a little more about the situation?

I'd like to know:

1. Customer A, B, C, are in what industry? (landscaping, prop management, etc)

1. Let's say it's a typical service providing activity; f.ex. you adapt your customer's products and return them.
   
   

   [*]How long have A, B, and C been customers?

   for more than 30 years
   
   

   [*]How would you rate the current pricing structure offered to Company A (high retail, discount retail, wholesale, etc)?

   
   they have a discounted retail price, in proportion to volume (so, they have the best price already)
   
   

   [*]How much margin exists within the current pricing structure?

   
   let's say 20% gross margin.
   
   

   [*]What are the three greatest expenses associated with the servicing of Customer A's account?

   
   labour and energy. But loosing this customer could have a big impact on your production efficiency (high fixed cost)
   
   

   [*]Are each of these expenses scalable (directly related to servicing Customer A) or global (exist regardless of having Customer A's business)?

   
   this is related to variable and fixed cost (good question) : the volume of customer A is important to cover fixed (global) costs, and production efficiency.
   
   

   [*]MOST IMPORTANT: Does Customer A know that they account for 50% of the company's business?

yes, they sure do. The hotshot knows this and is using that fact to his benefit.

Overall, if you're saying that the discount requested would virtually eliminate profit margin, then I'd assume that the current total profit margin is between 25-30%. Of course pricing is market-specific, but in my market that would already represent discount pricing.

Please reply with this info, and anything else you think could help. I'm certain that we, as a group, can help you find a beneficial solution.

Splittah hit the nail concerning the strategy that I proposed to this cy. Basically, it is already decided to find a compromise with customer A in the short term, while proposing a 3 year "service agreement" to them, along with a discounted pricing scheme. It will allow the cy to continue it's operations, ensure a (reduced) positive cash flow, reduce debts, and allow for implementing a medium term strategy, which is to diversify its customer base. The latter is not easy, since A is a huge player and indirectly also supplies to other, smaller customers.

 

[af7850]

Being that our subject is dependent on Company A in an overextended fashion, I suppose there's little choice in working out a short-term compromise. I like the idea of a service contract, that is an excellent idea.

The next thing to look at is our new contact's true objective. Is he really interested in continuing on with this business relationship? Or is he genuinely interested in looking for an excuse to take his company in another direction? The way I see it, he is either:

1. Primarily interested in lowering his company's expenses, and is proposing lower rates as a means to that objective
2. Primarily interested in moving this contract to another provider (who he knows, likes more, is more familiar with etc) and is proposing lower rates in hopes that you will not concede, giving him justification to look elsewhere
3. Primarily interested in developing an in-house solution, and proposing lower rates in hopes that you will not concede, giving him the ability to create a proposal for his superiors which can show a projected savings by creating an in-house solution

We want to negotiate the best deal possible, but at the same time we do not want to "push too hard" and lose the deal altogether. Knowing, or intelligently deducing, his true goals will tell us just how strongly he is committed to this process, thereby being a central issue in developing our own negotiation strategy.

If he is truly interested in making a deal that will facilitate a longer-term future relationship, then a main objective for you will be to develop an agreement that will work for you, and to your benefit, increasingly over time.

If his true aim is to go with some other solution (#2 or #3), then you have less leverage. Your objectives will be more geared toward

• Creating a deal that doesn't slit your throat, while not pushing so hard as to give him an excuse to kill the deal
• Presenting your solution in such a way as to show that it is comparably superior to his other (favored) solution, to gain leverage

It will also be important to find out who the final decision-maker will be, and also who they report to in the company. This is especially important in the event that he desires to go elsewhere. By showing your solution as being superior to both the decision maker and his superior, you gain leverage; if he chooses the decidedly inferior option, then his superiors may lose confidence in his management abilities. So, you're kind-of "peer pressuring" him into making what is popularly seen as the superior decision.

 

[lxt]

This is the bad thing with large accounts especially ones like this, 30yrs you served them & Im assuming done a fine job(or you wouldnt have 30yrs), Now the new guy(I call em head hunters) comes in and is gonna cut the fat so to speak, he knows all about you!!! you need to know all about him, touch base with a contact(mentioned above) get some leverage of your own or help!!

50% is a large chunk to have go away, but in my opinion thats whats gonna happen sooner or later, you need to acquire a base to offset this loss if it should/does happen, then you wont have to concede anything!!! once you give something up.......you`ll never get it back, it will be take, take, take, untill you say enough, by that time you just set up the next guys starting point!!

Good luck

LXT..............

 

[belgian]

Being that our subject is dependent on Company A in an overextended fashion, I suppose there's little choice in working out a short-term compromise. I like the idea of a service contract, that is an excellent idea.

thanks. I think it's good to negotiate and try to obtain a win-win situation. In the end, that's what has been achieved for both parties.

The next thing to look at is our new contact's true objective.

We want to negotiate the best deal possible, but at the same time we do not want to "push too hard" and lose the deal altogether. Knowing, or intelligently deducing, his true goals will tell us just how strongly he is committed to this process, thereby being a central issue in developing our own negotiation strategy.

If he is truly interested in making a deal that will facilitate a longer-term future relationship, then a main objective for you will be to develop an agreement that will work for you, and to your benefit, increasingly over time.

Good strategy imo. The perception throughout the deal was that the new GM aimed mainly to negotiate a better deal for them out of the new dominant position, and not to start his own service company. The fact that they were open to enter into a longer term agreement did show that.

It will also be important to find out who the final decision-maker will be, and also who they report to in the company. This is especially important in the event that he desires to go elsewhere. By showing your solution as being superior to both the decision maker and his superior, you gain leverage; if he chooses the decidedly inferior option, then his superiors may lose confidence in his management abilities. So, you're kind-of "peer pressuring" him into making what is popularly seen as the superior decision

This is open for debate. Your solution is OK if you really know you have the superior solution for them, but that's not always the case. That's why it is very important to understand the business of your customer and your competition.

Bypassing the man who leads the negotiation from their side can also turn against you. I have experienced a case with my previous employer where we used this tactic; we were able to save part of a nearly lost business, but ...man..., the guy in charge made life very difficult for us in many ways.

 

[belgian]

This is the bad thing with large accounts especially ones like this, 30yrs you served them & Im assuming done a fine job(or you wouldnt have 30yrs), Now the new guy(I call em head hunters) comes in and is gonna cut the fat so to speak, he knows all about you!!! you need to know all about him, touch base with a contact(mentioned above) get some leverage of your own or help!!

I agree with you that in todays business, there's very little room for sentiment and respect for traditional values such as customer friendliness, service, and historical relationship, especially with large industries as the automotive, etc. It comes all down to price most of the time ; quality and good service are taken most of time as "normal" and for granted.

That's why you have to be on the look out for new customers all the time, as your most loyal customers can disappear in the future.

 

[af7850]

Bypassing the man who leads the negotiation from their side can also turn against you. I have experienced a case with my previous employer where we used this tactic; we were able to save part of a nearly lost business, but ...man..., the guy in charge made life very difficult for us in many ways.

Oh, don't do that! I would not bypass your new contact; I think that you want to include others in your dialog, if even only as spectators.

Before I was in this industry, I was involved in a business which had long sales cycles, and required participation from multiple parties to close deals. On one particular deal, one of the buyer's representatives was extremely uncooperative, and I couldn't get him "on board" through normal diplomatic means.

Well, just as I was sitting there trying to come up with a suitable strategy, I received an email from his boss! What really happened was that my contact had forwarded an email from me to his supervisor, and upon replying the supervisor accidentally sent the reply to both of us.

Well, from that day forward, I BCC'd all of our communications to the supervisor. I maintained my position, and politely articulated the benefits of doing things my way, and it worked. My contact was so bullheaded that he wouldn't work with me, and his supervisor saw that. The supervisor wrote me, telling me that he would now be handling this account personally, and that he wanted to move forward specifically according to my plan.

 

[belgian]

Oh, don't do that! I would not bypass your new contact; I think that you want to include others in your dialog, if even only as spectators.

I agree with you that in case your contact is not being fair or absolutely uncoorperative, it's totally legitimate and wise wise to bring in other spectators..., but as I mentioned before, only in that stage.

 

[ponderosatree]

Hi folks, I would like your comments on a business situation described below... I realize every business is different and there are a lot of strategy guru’s out there, but the opinion of a self made tree climber or landscaper with good common sense is maybe more of value to me. The situation described is a real one, based upon a friend’s experience (no tree servicing cy). So here goes.

Suppose you’re a leading tree care service in your region, and your customer base comprises 3 big customers (A, B & C), representing 70% of your business ($), a few middle size customers representing 20 % of your business and a number of small ones counting for 10 %. Your company is doing well, especially with the 3 biggest customers, and you have invested quite some money in equipment (loans) and labour to serve them.

Customer A is your biggest customer (30%), customer B (20%) and C counts for 20% also.
You have provided excellent service for customer A during many years, and pricing, margins are to be considered as satisfactory.

Now customer A acquires the business of customer B, and hence becomes all of the sudden 50 % of your business. Customer A appoints immediately a new hot shot general manager, eager to create a high ROI and tells you that prices are way too high and immediately request a significant discount on your services (to a point where you are left with little margin). If you don’t comply with their request, they threaten with creating their own tree service crew, who might also focus on other customers of yours.

My questions :

How would you react ?
What would be your short term and medium term strategy ?

Please fire away. We all might learn from this one, hehe ..;

First thing I would do is determine how much this client is costing you and, if you lose them, what would your new bottomline be. Seems like you could let some workers go and further reduce your bottomline. I don't know if that's acceptable to you but at least you know what your numbers are.

If you offer exceptionally high quality services I would have a meeting and explain that to him. He probably doesn't understand the tree business and may end up with some yahoo's that will butcher his trees. Explain that it's important to be fully insured and to have skilled workers and that all this costs money. He needs to understand the VALUE of a good tree service and that tree service is an INVESTMENT and similar to investing in the stock market a novice may be better off going with a mutual fund instead of going it alone. There's also the issue of equipment, equipment maintenance, workers comp, administration costs, etc. The million-and-one details that it takes to run a tree company. It's not simply climbing a tree and cutting branches. Push the fact that one bad hack job can ruin a tree for life.