The total cost approach is a powerful tool for any seller under price pressure. In our last discussion we used the example of selling tires to demonstrate the total cost approach. It would be helpful to illustrate its use in another way. My company conducts seminars in luxury hotels. To do so we have to reserve a large conference room for several days, rent one or two 25” television sets and a VCR. Also necessary are blackboards, flipcharts, microphones and hotel rooms for those who present the programs.
In addition, we make arrangements with hotel catering to provide a fine lunch and refreshments for morning and afternoon breaks. The hotel bill for two days often exceeds $10,000 in many cities.
The hotel which won the contract in New York and Chicago was not the one with the lowest price. What they did was smart. They analyzed our total annual requirement. They studied, in detail, what we had to do to put on a seminar. Before they were through they understood our needs and costs perhaps as well as we did.
What won the order for them was a total cost package. They suggested that we purchase our own television sets, blackboards, and microphones. The hotel allowed us to store this equipment in a controlled area on their premises. The saving in rental costs alone came to $80,000 a year in just five major cities. There are more cities to come.
The hotel also made special billing arrangements, allowing us to audit invoices quickly and easily. These total cost accommodations not only assured that hotel billing would be accurate but reduced accounting expenses as well. By working with their computer people, we were able to predict and communicate lunch requirements promptly and accurately at additional savings.
The hotel succeeded in capturing our business not because it thought in terms of offering a low price but because they thought in terms of reducing our total cost. This approach allowed them to maintain their profit margins. To this day we are both well satisfied.