Understanding Price and Value for Service Related Purchases

What if I told you I could sell you a car for $500?  Most of you would immediately ask “what is wrong with it?”.  It’s typically easier for most of us to understand the relationship between price and value when it comes to tangible goods.  Most of us realize that if you are only paying $500 for a car it will most likely be in poor condition and need a lot of work.  It won’t function to get you from point a to point b (value).  However, when it comes to service related purchases, this relationship between price and value becomes a bit more hazey.  As the owner of a Utah property management company, I have the opportunity to speak to potential clients frequently and it’s surprising how many of them only want to discuss price and nothing else.  In this article I hope to offer some insight that will help you evaluate the value you are receiving from service related purchases.

Evaluate Beyond Price

You will most likely be very disappointed if you are looking to hire a company or individual to perform a  service and all you do is call three companies and ask what do you charge for X.

It will greatly benefit you to take some time, before calling and asking for pricing, to create a list of items that are important to you and then come up with questions to evaluate the company based on your needs.  Let’s use the example of hiring a contractor to finish the basement in your home.

Needs/Wants For Basement Project

1. We want the basement to look good.

2. We need it to be completed within a reasonable time frame (2 months).

3. We need it to be finished in compliance with local building codes.

4. We want the bid to be all inclusive and understand what it will cost if we change something after approving the bid.

If the above list is what we want to accomplish then we will have to determine a line of questioning that will help us discover if the contractors we are considering can help us achieve these items.

We want the basement to look good.

We can’t just ask prospective contractors if their work looks good as they will all say “yes” and this is a very subjective question.  However we could ask questions such as:

1. Have you recently finished any basements in my area and do you have photos showing your completed project?

2. Do you have 2 or 3 customers that I could call as references?

3. How many years have you been a contractor and how many basements do you finish each year?

These types of questions can help us determine if we think the contractors we are considering would make our basement look good.

We need it to be completed within 2 months.

Again, we can’t just ask the contractors if they can finish in two months as they will all say “yes”.  We have to ask additional questions.

1. Based on the scope of work we have described to you how long do you anticipate the project taking? (This open ended question will allow us to see what the contractor believes is an acceptable time frame without us leading him).

2. Does the bid or contract have a start and completion date?

3. Do you offer any guarantee or price decrease if the project is not completed on time?

By asking more in depth questions we can start to get a feel for the type of individual or company we will be working with.  It will also be a good idea to talk to references about how the contractor performed concerning completing the project on time.

We need the basement to be in compliance with local building codes.

This objective is pretty straight forward, but there still may be a few questions we can ask to understand how the contractor adheres to local building codes.

1. Do you apply for the permit with the city or would you require us to do that?

2. Do you you schedule the various inspections with the city?

3. Typically how many inspections must the city do on a project like this?

4. If there is an issue with something not complying with building code do you cover the expense to fix it?

We want the bid to be all inclusive and understand what it will cost if we change something after approving the bid.

Now we are getting into questions that deal with pricing, but only after we have established that the contractor can help us achieve our other needs.

1. Will your bid include everything to complete the basement including flooring and finishing work?

2. Is there anything that we would be required to pay above and beyond your initial bid?

3. How do you handle change orders and how do you inform us of price changes due to a change order?

4. Do you require any portion of the bid upfront? If so, what percentage?

5. When is final payment due and do you complete a walk through with us prior to requiring final payment?

As you can see from our list of questions there are many things to discuss with a service related purchase other than price.  If you take the time to understand that you realistically have other needs than the lowest price, you can properly evaluate and screen service providers.

Experience Matters

When looking at hiring a service professional, whether it be a property manager, attorney, contractor, etc., experience matters.  You will most likely find that as experience and credibility of a company or individual increases so does the price they charge.  Think about your own profession or career.  Chances are that if you have worked in the same field for a number of years you don’t make the same now as your first year in the profession.  This is because you are more knowledgeable and proficient at what you do and you add more value to the company for which you work.

When hiring a service related professional or company make sure you understand what type of experience they have dealing with your specific situation.  You don’t want a criminal defense attorney handling your divorce as you would most likely pay a much higher rate and they wouldn’t necessarily have the expertise for which you are looking.  This is also true for real estate agents and property managers.  How many years have they been selling or managing and what types of properties or geographic areas do they specialize in?

Your Time Has Value

If you are looking to hire a service professional it is because you either lack the expertise or you don’t have the time to do it yourself.  As a property manager  I hear a lot of landlords complain that they are worn out and don’t want to deal with their rental properties anymore, but don’t want to sell them.  We usually move quickly to discussing the price I charge for my services and then I typically hear something like “That’s too expensive, it doesn’t cost me anything to manage my rentals myself”.  It only cost you nothing. to do a job yourself, if your time has no value.

Before looking to hire a service professional you need to ask two questions:

1 – Do I have the expertise to do this myself?

2 – What will I be giving up if I decide to do it myself?

If you have the expertise and you are ok with giving up your time that could be spent doing something else, then it may not make sense for you to hire someone for the job.  However, if you don’t have the expertise and/or you don’t want to give up your valuable time, then maybe you should consider hiring someone who can help you.

Remember, first understand what you need and then start your evaluation.  Nine times out of ten your greatest need is not the cheapest price.