My Pitch to Clients: Go Ahead, Look Inside Our Books -- As told to Peter McDougall

 

June 25, 2010

CBS Moneywatch

My Pitch to Clients: Go Ahead, Look Inside Our Books -- As told to Peter McDougall

I believe that absolute transparency is essential for successful relationships. As such, we show prospective clients our costs, our overhead -- even what we make as profit. We are completely open book, and I think that's played a huge role in our success.

My company manufactures industrial products for other companies. Most players in this industry are pretty tight-lipped about their costs and pricing. All of the secrecy was really frustrating to work with, and I felt it was getting in the way of honest and open business dealings. So I decided to take a different route and just lay our cards on the table.

We're all trying to make a profit - When we court clients, we try to persuade them that we can do what they do for less money. We also have to convince them that the quality of our products will be the same as the products they make themselves, if not better.

It can be a tough sell -- but the sales job gets even harder when there's a lack of information. Some of our prospective clients have no idea what it costs them to make their own products. So how can they know if we're quoting a fair price?

I'm the only salesperson in my 35-employee business, and I found it exhausting to deal with all of the guessing at what other people are thinking and try to beat other guy in the haggling game. So about three years ago we started testing an open-book process with some key clients -- showing them exactly what we spend on materials, labor, and overhead for a given project and, most importantly, how much profit we make on it.

I was kind of uncomfortable with the idea at first, in part because it was so new. I was also concerned that a lot of our clients didn't want to show their margins, and I didn't know how our margins stacked up against theirs -- it's not something you can get by picking up the phone and calling their accounting department. I worried they might be put off if ours were higher than theirs.

I started getting comfortable with the transparency idea when I laid out the numbers for one of our long-term clients. When I showed him the quote, I expected the negotiations to start -- I knew him pretty well, and that was how he worked. But instead of laying into me he turned and said, "Listen, you have to make a profit and we have to make a profit. If you go down we lose too. So if you say this is where you need to set your margins, then that works for us." This came as a huge relief -- it was vindication that this kind of approach wasn't crazy after all. Ever since that conversation it became a lot easier to talk about profit to clients.

Too much information can be a good thing - Laying everything out in black and white makes my job of selling our services a lot easier. It also provides a safety net for when we miss on a quote.

In one case, we worked up a quote on a new product. We priced out one of the parts -- a computer chip -- based on what we could find online and from some of our normal suppliers. When we showed the quote to the client, he asked why we were paying $100 for a part he could get for $20. He then proceeded to give me the name and number of his supplier, and said he'd get in touch to make sure we got the same pricing he did.

If we hadn't opened our books, the client would have never spotted that opportunity to save a lot of money. He would have assumed we were just padding our margin and probably wouldn't have given us his business.

Customer retention is key - The downside of transparency is that it takes an awful lot of effort. We need a whole team of people to really bear down on the costs of manufacturing a product, so it can take five or six times longer than it used to. We don't have the luxury of being off a little bit here and a little bit there and assuming it will all even out in the wash.

The proposal process itself is very lengthy. It can take one to two years to court a new client, which isn't that much longer than what it was when we were keeping our profits to ourselves. Most of the time is spent building a relationship and making sure the partnership is a good fit for everyone. With the new approach, the length of the process helps because we're investing so much time and energy in developing a quote that we want to make sure they really are on board.

 We tell prospects up front that we'll open our books, but I don't think they really believe us until we present the proposal in the 11th hour. We've never had anyone push back against this approach, and we have yet to lose a customer -- we have 18 clients and about 160 product lines. I think the open-book approach has played a large role in our company's growth. We had revenues of $5.6 million in 2009 and we're on track to reach $7 million this year.

Transparency takes down all the barriers. We feel like we can talk about anything and clients feel they can talk about anything. That makes for a really powerful partnership.

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