Appropriate Valuation Breeds Loyalty… Or Does It?

Aug 20, 2010

When I was interviewing for my last job (prior to joining ERE), my soon-to-be boss and I started discussing compensation. At that time, the position I was interviewing for was a contract role, and thus my compensation would be at an hourly rate. I shared where I was compensation-wise in my most recent job, which was a salaried position, and we worked out where that would be hourly. My soon-to-be boss then told me something that stuck in my head – paraphrased, he said:

“I’m going to get you as close to your current compensation level as possible. I know lots of employers will low-ball a job offer and then attempt to meet you halfway, but I don’t play that game. I think it starts the new relationship off on the wrong foot to haggle the cost of hiring someone whom you know you want to work with. That being said, whatever hourly rate I come back to you with is going to be the highest amount I’m able to get approved… cool?”

Two important factors need to be considered here of course:

  1. I knew my soon-to-be boss prior to this process, so there was an existing trusting relationship there. I already knew he was a guy who would be true to his word.
  2. I was honest with the amount I shared with him. I didn’t inflate where I currently was compensation-wise, and he knew that.

The amount he came back to me with was more than acceptable to me. In fact, it was a slight increase to where I had been previously. I like to believe that honesty played a huge role in the end outcome for that job, and the trust between us meant that everyone ended up happy.

Last week, Seth Godin posted an article on his blog called “The right price the first time“. The opening line of this post states:

“The way you price expensive transactions is going to train your partners and customers in how to behave.”

Compensation is an expensive transaction. Placement fees are also expensive transactions. The examples Seth uses can be applied to our business as well. When we price our fees, are we pricing for a single transaction or for a long-lasting relationship? And – are we communicating our pricing structure appropriately to our customers? How can we combine these two efforts to instill a sense of trust and loyalty in our new clients?

…consider the real estate developer who calls up an electrician to re-wire a building. She uses this electrician often, and the estimate comes back at $18,000. The developer shops around and finds a similarly talented electrician for $14,000. Loyalty is great, but that’s a huge difference. She switches to the higher value choice. Indignant, the original electrician says, “why didn’t you tell me! I could have beaten that price.”

The answer, of course, is, “well, why didn’t you quote me that price in the first place?”

In this example, I see a few causes for the business being given to a new service provider:

  1. The electrician was under the belief that the customer would not ‘shop around’ – he perceived a loyal customer based on the fact that she had used his services often in the past.
  2. The real estate developer may have used the electrician often, but cost was a greater determining factor. Loyalty was a secondary consideration here.
  3. There clearly was a lack of communication between the electrician and the real estate developer from the beginning, since business was awarded to a new firm before the electrician had an opportunity to match or lower his price.
  4. If the business was awarded to a ‘similarly talented electrician’, the first electrician hadn’t done a good enough job detailing what he provided in additional quality and/or service to justify his higher estimate.

In the movie Glengarry Glen Ross, the character of Moss says, “Don’t sell a guy one car. Sell him five cars over fifteen years.” What he is talking about is customer loyalty, as mentioned in Seth’s post. But until people understand that “cost” includes more than a monetary amount (things like value, quality, experience, customer service, follow-up, etc. all factor into the ‘cost’ of a produce/service), customers will almost always look at a dollar amount first.

Trust and loyalty are tricky – they can take years to build, and yet they take seconds to destroy. Helping your new clients to understand that you’re in this for the long haul will help to build that trust. If they understand that your desire is to partner with them, and not just to transact one placement, they will warm to you quickly. A good way to demonstrate your value and build trust is to provide candidate references – especially candidates you’ve placed who have become hiring managers and continue to use your services. (no need to provide last name or company info to them – I know what you’re thinking!) Client references are also a great way to show how you can be a trusted partner. (again, just a first name!) Another simple way to show this is to demonstrate the depth of your industry knowledge – if they understand that you know their industry, they will be more willing to trust (and invest) in that knowledge and expertise.

When you’re talking to potential clients about your fees, how do you differentiate yourself? Do you share with them that the industry standard fee is somewhere between 15-30% of the candidates’ first year compensation? (depending on your industry/focus area, of course) Do you explain to them, in reference to recruiters who discount fees below industry standards, that you get what you pay for? Do you offer incentives to long-term clients with whom you’ve developed a trusting relationship? How do you detail your fee structure to potential clients, and thus begin the process of developing a trusting partnership that will grow over the years?

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