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Consumers Despise Middlemen

I needed a new computer for my home recording studio (I run ProTools), so I worked with a consultant at Guitar Center who was more than happy to sell me an iMac.

Integrators Should Rely on Exclusive and Assembled Offerings as Often as Possible

Ira Friedman is the CEO of Bay Audio, a manufacturer of custom speaker solutions. He holds an MBA from the Harvard Business School. I needed a new computer for my home recording studio (I run ProTools), so I worked with a consultant at Guitar Center who was more than happy to sell me an iMac.

Guitar Center sells iMacs at the same price as the Apple Store. And yet, I was ambivalent about buying the iMac there. Instead, I chose to buy it from the online Apple store. Why? Because Guitar Center adds no value to the iMac, and yet Guitar Center earns a slight profit on it. I begrudge them this small profit, and choose to give my money directly to Apple. I think most buyers, like me, prefer to give money directly to manufacturers, not to middlemen.

Suppose Guitar Center sold the iMac for $10 more than Apple. Now my ambivalence goes away. I will certainly not buy from Guitar Center, because they’re earning excess profit. Even if Guitar Center sold the iMac for $10 less than Apple I might give pause, and still buy from the Apple store. I don’t think a $10 savings is enough to make me feel better about Guitar Center.

Rest assured, the $10 is not swaying my opinion. The $10 added price, in the grand scheme of things, is irrelevant. My feelings toward Guitar Center are relevant, however, and I want to feel good about giving them my money–regardless of how much money it is. And it’s hard to feel good about giving money to a company that adds no noticeable value to a product.

Guitar Center is caught in the trap of “agency,” a concept deeply embedded in our psyches. Buyers despise agency– the act of facilitating access to a product without enhancing its utility. Guitar Center doesn’t make the iMac better.

Here’s another example. My hotel room has bottled water in the mini fridge for $2 each. That seems excessive, and petty, and it makes me angry. I can buy bottled waters from Costco for about 40 cents each. Seeing the $2 price in my hotel room is insulting. So I choose to go without water.

And yet, if asked the question, “Do you believe it’s worth $2 to stay hydrated?” I’d answer yes. It’s not the $2 that’s hanging me up. It’s the feeling I have about this hotel, and their greedy management. I don’t want to be taken advantage of. And I’ll dry out my throat just to prove this point.

It’s Rarely About Price

The psychology about pricing is rarely about price. It’s about the buying decision. It’s about feeling good about purchasing. The $1.60 upcharge for the water and the $10 upcharge for the iMac seem painful. These are miniscule amounts we’re talking about, and yet, they stop us from buying.

Custom integrators wrongly believe that their clients are concerned about price. They aren’t. They are concerned about agency and fairness. And more importantly, clients assign agency and value differently to various offerings in the CI channel.

Integrators sell three types of products. Those they add no value to (televisions, routers). Those they offer with some degree of exclusivity (customized speaker systems, customized networks, customized lighting and shades packages). And those they “assemble” themselves (systems requiring programming, custom lifts, mounts, and enclosures). Clients see these three offerings clearly, and do not presuppose that they should follow the same pricing strategy. Clients feel taken advantage of when a “no-value” product–a product marketed directly to consumers, with established market pricing, that is available on the internet–is priced above market. That’s where the agency issue comes in, and it’s why clients fixate on TV pricing.

An integrator can add value by “assembling” virtually every product. Even televisions. Clients are more lenient with pricing of exclusive products, since the issues of agency begin to evaporate. Exclusive products are hard to find on the internet, don’t have established market prices, and are typically not marketed directly to consumers. Higher end products in networking, audio, and automation fit this category.

And clients are willing–yes willing–to pay a fair price for “assembled” products because the integrator takes on the role of manufacturer, and is no longer an agent. Being the middleman is bad, and integrators should find every reason to assemble the products they sell to increase client buying confidence.

How to Add Value

An integrator can add value by “assembling” virtually every product. Even televisions. Savvy integrators present a “high-definition 60-inch flat-panel display, flush-mounted, and calibrated,” not a Samsung UN60ES6100. These same integrators configure and present “proprietary” networking systems that are engineered, tested, and standardized. And most importantly, these integrators remove agency from as many offerings as possible by becoming a high-value assembler.