Best price is not always best way to compete

We talk from time to time about relationships. How do we do this business at a higher level—and a higher fee? My answer is twofold: “build better relationships” and, of course, be a better professional. Both pieces are important, yet we have all seen real estate agents who sell lots of homes who are terrible at relationships, and we have seen agents who are great at building relationships but terrible at selling real estate.

Here’s what I think is a relevant example of what’s happening in the investment world, provided this past week by Matt Levine from Bloomberg.

Traditionally, investment banks acted as dealers who both made markets (buying and selling securities at different prices to profit from the spread) and provided customer service (building relationships, providing research, and entertaining clients). Modern financial markets have unbundled these services, with specialized electronic trading firms like Jane Street and Citadel Securities focusing exclusively on efficient market-making through technology, while other firms maintain customer relationships without holding inventory themselves. These electronic traders compete by displaying their quotes on screens, where the primary differentiator is simply who can offer the cheapest price the fastest, eliminating the need for the relationship-building activities and customer service that were once central to the business.

Levine goes on to say:

“Still, there is a reason that the old model existed. I mean, some of it is just historical path dependency, but some of it is the obvious intuitive reasoning that, if you take the customers out for drinks, they will send you better trades. If you are an anonymous electronic quote on a screen, customers will only trade with you if your quote is better than all the other anonymous electronic quotes. If you build warm client relationships, your customers might call you first and trade without shopping around.” [emphasis mine]

I would frame the last sentence as, “If you build trusted customer relationships, those clients will more often than not call you first and hire you at your full fee.”

Isn’t that what you want?

So why are you:

• Messing around with leads
• Chasing people who don’t know you
• Avoiding past clients
• Not building warmer relationships
• Discounting your fee to the people who trust you the most
• Not taking the action you need to take on a daily and weekly basis

Maybe that’s not you today - but yesterday that was you. Or maybe you will be tempted tomorrow to do those things and get away from the standards you know you need to stick to.

“A professional is someone who can do his best work when he doesn’t feel like it.” - Alistair Cooke

Competing on price is a terrible way to differentiate yourself. Competing with others who are competing on price is also probably not the way to go. The way to go is being better at what you do and being better at building trusted relationships.