There Are No Free Steak Knives

 

By Lynda Bourne

A conversation with a clerk in a HR department looking to procure a training program and the passing of English actor George Cole in early August made me start thinking about the art of the deal.

Cole’s defining role was “Arfur” Daley, the devious “spiv” on TV’s Minder. Arfur was always offering deals that were too good to refuse. The deals were rarely outright crooked, but Arfur regularly needed his minder’s help to get out of trouble.

My recent conversation with the HR clerk (and time spent watching TV shopping channels) suggests the Arfur Daley approach to creating a deal that is too good to refuse is still very much part of modern business.

The reason for this post is to help project team members tasked with purchasing goods or recommending the preferred supplier cut through the communication hype to see the real value in a proposition. There is no such thing as a free set of steak knives!

The first step in making the best buying decision is to remember that only two elements really matter: acquiring the goods or services you need and the price you pay.

The second step is to be really clear about what you need. Defining the appropriate quality and quantity for tangible goods is easy. It’s much more difficult to work out what represents a good training option or the best value consultancy service.

Then there’s the price! What’s the better deal: a $600 product with a special discount of 25 percent or its $500 competitor with a discount of only 10 percent?  

Then one of your colleagues suggests talking to a local business. Its rack price is $440, but they don’t offer discounts. Is this a better option? Assuming all other factors are equal, what matters is the final price you pay, not the discount. It’s fairly easy to work out once you ignore the spin.

$600 minus 25% = $450
$500 minus 10% = $450
$440 minus 0% = $440

Moving beyond price, the inducements to make you buy from a particular business are many. The challenge is applying discipline to your decision-making process. The problem with most of the “fantastic free offers” and “no-cost extras” is that they are only valuable if you actually need them and can use them.

Remember that all “free” offers are priced into the cost of the goods or services. Most organisations who run training courses (including us) advertise that every trainee receives free access to on-line revision tools or practice questions.

But when we are setting the price of the course, the $50 we pay for the on-line licence is included, along with the “free” coffee and all the other expenses we have to cover before we can start making a profit. The course price includes all our costs plus a profit margin. If it didn’t, we would quickly be bankrupt.

The challenge with the free extras and other inclusions is deciding if they are of any value to you, since you will be paying for them anyway. For example, one PMP training course costs $2,000. The other costs $3,000 but includes free access to online training in four Microsoft Office programs, each “valued at $500.” Superficially the $2,000 in free extras makes the more expensive course seem a better value. But is it? Ask yourself:

1. Who can use the training—just the PMP candidate or anyone?
2. Do the people who can access the free training actually need it? If the training was really needed, why have we not already organized it?
3. What is the real value of the extra free courses? If you can buy a full set of Microsoft Office training courses for $800, that’s the value, not the 4 x $500 advertised by the seller.
4. What discount will the vendor offer if you opt out of the free courses? This is usually much less than the nominal values.

The reason this type of free offer is so common is that it’s cheap to deliver and most people never use the free offer anyway, even if they intend to.

You also need to be aware of the anchoring effect. If at the start of your investigation, you were told the typical cost of a PMP course was between $4,000 and $5,000, this price anchors your expectations. The $3,000 price will seem like great value and the $2,000 price too cheap to be viable. The anchoring effect is an innate bias that changes our perceptions of value, and the Arfurs of this world know how to use it to their advantage!

All of these sales tactics can be used legitimately. From the seller’s perspective, the purpose of “free” extras is to offer things that are of genuine value to the buyer but cost very little to deliver. But as the buyer, you must learn to ignore the headline price of the free extras and consider what the final package is really worth to you. If you don’t need something, its real value to you is always $0.00!

The factors that make a real difference to most service deliveries are much harder to compare. You will generally pay more for a more experienced consultant or a better quality trainer. Buying this type of service on price alone is rarely the best approach—a basic rule of business is you tend to get what you pay for.

The challenge then is to set up a decision matrix that looks at the elements that really matter in your buying decisions and then make an informed decision. Some of these factors may be measureable. Others, such as cultural fit, are critically important but entirely subjective.

The bottom line here is that before you can get to the serious decision-making, you need to clear away the confusion of the special offers and discounts. The Arfurs of this world are always looking to make you an offer you can’t refuse.

How do you approach your buying decisions?