BENCHMARKING YOUR BUSINESS: Fair or Fair Market Value?

Individuals often question whether a cost in a bid or a price for a job is fair. “Is it fair to charge $4,500 for a 300-square-foot brick patio?” Put another way, “Is it fair to charge $4,500 for this patio installed in rural Pennsylvania but $6,000 to install it for a homeowner in downtown Manhattan?”

What is fair, or the concept of fairness, is a pretty subjective and slippery idea. Like beauty, it is in the eye of the beholder. When it comes to estimating costs, bidding work and pricing services, I try to wipe out the very idea of what is fair. It has no place in a free and open market. You could argue that I’m being ruthless and capitalistic, and you may be right. But hear me out.
 
In the business process, we want to eliminate mystery and subjectivity. Over the last 200 years, Wall Street and our financial markets have sought to eliminate wild fluctuations in the marketplace and replace them with stability and predictability. Given all of the complex forces, the supply-demand issues, the questionable motives of some; the marketplace has the concept of fair market value (FMV) to cut through all of this mumbo-jumbo.

Whenever I hear the nebulous term, fair, I quickly replace it with fair market value. I don’t know what fair is. However, fair market value is something I can wrap my arms around. It rescues us from our subjectivity and forces us to face the reality of the marketplace.
 
Barron’s Dictionary of Business Terms defines fair market value as a “price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts.”

THREE FMV PRICE BREAKS. There are three fair market value price breaks, or benchmarks, every entrepreneur, estimator and manager should thoroughly understand. 

• Wholesale price: This is the price at which a supplier or vendor buys their products from a grower or manufacturer. For example, a grower sells a plant to a nursery for $5.
• Re-wholesale or list price: This is the price that a contractor pays a supplier or vendor for their supplies. A re-wholesale vendor will normally mark up their costs 30 to 60 percent to cover their handling, general and administrative costs and net profit. They will normally charge a contractor $6.50 to $8 for the plant that costs them $5.
• Retail price: This is the price a homeowner or the general public pays for a service or product. A retail nursery or vendor will normally mark up their costs 100 percent or more when selling materials to a homeowner. They would generally charge the homeowner $10 or more for a plant that costs them $5.

These price breaks aren’t fair market value because they’re fair, they’re fair because they are fair market value. There’s a big difference. They reflect reasonable costs and profit margins.
 
Should a landscape contractor charge more for the patio installed in Manhattan? Absolutely! Not just because clients there can afford it, but because the cost of doing business there is much higher. If the client doesn’t want to pay the price, then they can shop around for a better one or do without the patio.
 
It has nothing to do with what is fair. It has everything to do with what is fair market value.

The author is president of J.R. Huston Enterprises, a Denver-based green industry consulting firm. Reach him at  800/451-5588, benchmarking@gie.net or via www.jrhuston.biz.